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The Dangers of the Public Plan

Paul Starr has an important column today on the dangers of a badly designed public plan. The issue essentially comes down to adverse selection. If the public plan becomes a dumping ground for the sick and the old, it will be too costly for the young and the healthy. Rates will go up, and conservatives will point to the plans as costing X percent more than private insurance, thus proving the inefficiency of the government. Starr explains how this might go:

Entry into the public plan for the eligible employed would be a two-stage process. First, employers would choose between paying into the exchange and buying insurance directly to cover their workers. Unless the exchange is such a good deal that nearly all employers take it, firms with a young, healthy work force would tend to buy insurance on their own, while those with higher-cost employees would go into the exchange's pool. As a result, the pool would suffer "adverse selection" -- it would get stuck with a higher-risk population.

Second, within the exchange, the government-run plan would compete against private insurers, yet it would likely abstain from the marketing strategies used by private plans to avoid high-risk enrollees. This double jeopardy of adverse selection could then more than nullify the advantage the public plan derives from its lower overhead (as a result of less money going for salaries, profits, and marketing).

[...]Over-constrained, the public plan could go into a death spiral itself as it becomes a dumping ground for high-risk enrollees, its rates rise, and it loses its appeal to the public at large. Creating a fair system of public-private competition -- giving the public plan just enough power to offset its likely higher risks -- wouldn't be easy even if it were up to neutral experts, which it isn't.

This, incidentally, has been a storied part of the history of American health reform. The reason the government provides health insurance to nearly all of the old and the bulk of the poor is that insurance companies found these segments of the population unprofitable to insure. So the government took them on. But Medicare and Medicaid largely dominate their markets. The public plan, however, is supposed to compete in its market. That's an entirely different approach, and it's not at all hard to see insurers quickly gaming it to their advantage.

By Ezra Klein  |  June 24, 2009; 3:50 PM ET
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I get the logic, but I'm a little confused. Don't the old already go to Medicare? And the less healthy poor go to Medicaid? And don't those already compete with private insurance in terms of costs?

Posted by: NicholasWarino | June 24, 2009 4:13 PM | Report abuse

There are supposed to be subsidies set up to counter dumping - into the public or into private plans. Hacker talks about it. I don't have time to find a link right now but it's out there.

Posted by: eRobin1 | June 24, 2009 4:24 PM | Report abuse

P.S. If you find corroboration of what I wrote, I hope you feature it b/c it's an important point and shouldn't go unsaid. If I'm wrong, then mea culpa.

Posted by: eRobin1 | June 24, 2009 4:25 PM | Report abuse

I don't get this post. It's been clear from the beginning that the public plan would be subsidized from tax revenue so that it its premiums could be priced below market. That's the whole point; if it's not priced cheaper than private insurance there's no reason for it to exist.

Posted by: tomtildrum | June 24, 2009 5:24 PM | Report abuse

Dear Ezra: Do you have any regret, like Baucus, about bad mouthing and essentially banning/ignoring single payer discussion ever since you got into the health blogging business. First you finally acknowledge the complete disengenuousness of the other side. Now you acknowledge Starr's essay which of course has been one of the arguments by single payer folks about the problem of public option for years (since Hacker adapted what had been the conservative think tank idea of Mandates by adding public option.

Posted by: DrSteveB | June 24, 2009 6:09 PM | Report abuse

It's been clear from the beginning that the public plan would be subsidized from tax revenue so that it its premiums could be priced below market.

That's not the idea. The subsidies would be available to all plans to avoid dumping.

Ezra: There seems to be a need for a post that explains what's being discussed re: the public health insurance plan option.

Posted by: eRobin1 | June 24, 2009 6:25 PM | Report abuse

Thinking about this for a while, I dont see this as a very bad possibility per se. Ofcourse ideal insurance coverage would cover everyone under same policy thus giving the benefits to relatively smaller premiums to the not so healthy folks too. In this case the population would essentially be divided into 2 parts - the healthy/young folks paying smaller premiums to private firms but also probably paying higher taxes through stable jobs and the poor/old folks being covered through a public plan with possibly subsidized premiums. This would be way better than the current situation of the second group essentially being without insurance at all.

Posted by: calvinav | June 24, 2009 8:05 PM | Report abuse

"Medicare and Medicaid largely dominate their markets"

medicare - market? medicaid - market?

we have a three sphere health system at the moment

the for profit sphere that speaks the language of markets and has converted the not for profit health care sector like blue cross/blue shield into profit entities or for/not for profit hybrids
speaks of profits, covered lives,
consumers, medical necessity, choice(?)

the government support sphere of medicaid and medicare that speaks the language of health and patients and costs and is exploited by for profit health insurers, pharmas, device companies, and providers who provide equipment, drugs, and services to medicare and medicaid while getting their congressional allies to limit/restrict/hinder government administrators ability to negotiate prices and manage costs

the working people who have no insurance, have no government support who use their own cash to buy drugs and health services and speak the universal languauge of the politically disenfranchised

Posted by: jamesoneill | June 25, 2009 9:44 AM | Report abuse

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