I was recently involved in a Facebook conversation that involved ardent supporters of the “public option.” The reasoning was, as I expected, overly simplistic and highly optimistic that the government, by offering a public option, would simply provide one more “free market” option to a myriad of other existing options, thus stimulating competition and bringing down “absurdly high rates” (as one public option hopeful put it). When I asked specifically how adding this option to 1,300+ existing options would stimulate competition and bring down rates, there was no reply. Basically, I think those who support a public option have squishy good feelings about it, but lack an understanding of what a public option would entail, and other than knowing that premiums must be paid, have little understanding of how insurance works. For starters, a public option doesn’t have to compete, because it has the coercive power of the federal government to decide how much it will confiscate from the public through taxes to subsidize the option it is offering. Health insurance companies don’t have this luxury. They must offer a competitively priced product to consumers based on calculated risk and cost, which is purchased on a voluntary basis, and make a decent profit for shareholders (for the record, there is no truth to reported “record profits”). Furthermore, the taxes they pay provide the funds the government will use to subsidize its public option in order to compete against the insurance companies. If public option supporters don’t see that as a rigged system, then their ignorance is indeed not so bliss.
At this point, it would be instructive to offer a short primer on insurance as as a means to rebut the demonization of the industry by legislators and special interests promoting the public option. Wikipedia provides an excellent definition of insurance as “the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss.” Insurance is a form of risk management, based on statistics and probability, that pools together the premiums of the many insured, with the premiums used to fund accounts reserved for later payment of claims—in theory for a relatively few claimants—and for overhead costs. As long as an insurer maintains adequate funds set aside for anticipated losses (reserves), the remaining margin is an insurer's profit. The Wikipedia article sites seven principles of insurance, but I will focus on three that are germane to this discussion. First, the larger the pool, the greater the probability that actual results will meet with expected results, due to the “law of large numbers.” Basically, you need similar risk spread out over a large number of people in order to have a reasonable assurance that the number and amount of claims will meet the expected distribution, allowing the pool to maintain integrity.
Second, premiums must be affordable. If the premium is so large relative to the amount of protection offered, then it is not likely anyone will buy insurance. The premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. This demonstrates that insurers are engaging in calculated but warranted risk. The premium is not solely based on charging as much as the market will bear in order to maximum profits, though the insurance company must obviously turn a profit which is in their interest as well as the insured who expect there will be enough reserves to ensure payment of claims. Finally, there must be limited risk of catastrophically large losses. In this case, if the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. So insurers must limit their exposure to a loss from a single event to a small amount of the insured. A classic example of this is earthquake insurance. With respect to health insurance, this may apply to people with the propensity for certain types of diseases that could produce exceptionally large claims. There are some that may take issue with this principle, but again, it is in place in order to maintain the integrity of the risk pool for the benefit of the insurance company and the insured.
Now there are some insurance providers that do unethical things such as: 1) dropping the insured who become sick and thus expensive, even though their premiums adequately reflect the risk for bringing that person into the pool, 2) refusing someone coverage for a predisposition to a disease they don't have now, when they have statistical room to bring that person into the pool without putting the pool at risk, and 3) refusing people with pre-existing conditions that could be brought into the pool with reasonable actuarial risk. This is where I think government does need to step in to ensure win-win scenarios, and no further. In the first example, this is clearly a win-lose proposition, while the last two are “judgment calls” that all too often deny coverage based ostensibly on maximizing profits. Yet many of those in favor of the public option believe government should force insurance companies to take all of those with pre-existing conditions and also cap premiums to some arbitrary multiplier, not considering how disastrous this would be for all the other members in the pool. This would further encourage people to purchase insurance after they get sick instead of getting into a pool as early as possible which would be in accord with the first principle of large numbers discussed above. Moreover, there would be no incentive for anyone to live a responsible and healthy lifestyle if they could simply acquire insurance at a an arbitrary, government-forced premium whenever they get sick, and then drop it when they get well.
Regarding the public option, there is already Medicare, Medicaid, and SCHIP coverage for children. So we already cover the truly needy, and a good number of the "47 million uninsured" are eligible for this coverage. So I believe society is already extending great compassion. It is arguable, though, just how many of the uninsured can afford to be insured but choose not to purchase coverage. There are myriads of choices that people make on a day to day basis that determine their ability to get coverage, so I would argue the best thing we can do is to look for ways that we can make coverage more affordable and accessible without resorting to a public option that will only bring the inefficiency, bureaucracy, and politicization that will be endemic to a government-run option. There are several commonsense reform proposals advanced by Republicans in Congress such as equalization of tax treatment between corporations and individuals or small businesses, wellness programs that will lower costs by avoiding disease, tort reform, medical-saving accounts, and allowing insurance pools to cross state lines. Against the rhetoric of President Obama, no one is suggesting that nothing be done. It simply makes more sense to implement sensible reforms to the existing market-based system than to create another government program.
A strong argument for not creating another government program is that there are few things the federal government can do effectively and efficiently. The military is one thing the government does effectively, but hardly efficiently. Other examples are the Postal Service, Amtrak, Fannie Mae and Freddie Mac (who played a key role in the current economic crisis), Medicare, and Social Security. Medicare will be exhausted (i.e., bankrupt) by 2019. It's not actuarially sound, and neither is Social Security, which is a glorified Ponzi scheme that will begin paying out more than it receives in 2017, ultimately going bankrupt in 2041. As I stated previously, the government doesn't have any pressure to be competitive, efficient, or actuarially sound because it has the power to tax. At this time, government should be spending its time fixing Medicare and Social Security, whose total unfunded liability is over $100 trillion, instead of trying to get in the game of a public insurance option when it has failed miserably at these two programs. The public options offered by the states of Massachusetts and Tennessee have not brought down costs, but costs have ballooned instead. So if the public option hasn't proven efficacious at the state level, why would we want to pursue this at the national level where there is no recourse if the result is bad? At least in the case of a state program, one would have the option to move to another state.
When one compares how we live today in America to the way we lived 100 years ago, the differences are astounding. Our capitalist system has provided us with transportation for virtually everyone, air conditioning, refrigerators, jet travel, vacations, including life-saving medicines and procedures. Yet we complain so much about what we don’t have as if we were meant to have everything we think we deserve, and believe we have an entitlement to the latest advances in medicine and technology simply because they exist. I don't understand it. We are truly blessed, yet when we can't get what we want, we automatically think that government can solve our problems when it simply can't. We must realize that everything that government gives is taken from people who could better deploy capital in a more efficient manner that helps themselves, their families, and their communities. That includes those who take the risk to start and run private insurance companies, which have provided outstanding, market-based solutions that have vastly improved our quality of life. Yes, there is much room for improvement of the current healthcare system, but it is something we should celebrate as a true blessing, instead of a scourge on society, while implementing measures that would provide lower costs and broader accessibility for all.
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