The beginnings of an idea: as health care reform discussions heat up in the Senate, policy makers will have to consider how a "public option" will interact in a market place with a number of smaller private plans. It struck me this morning, in reading about the continued woes of the California public university system, that higher education provides an example of an arena in which public and private options compete with each other. Are there lessons that can be drawn from this example?
I think the differences are most instructive, with two differences in finances being most critical. In the education field, the private entities compete most effectively with the public options when they build up large endowments through philanthropy. I don't see this happening to the same degree in health care, and then only around providers like hospitals and not the insurance companies.
In the education field, the public entities are subjected to pretty severe budget discipline -- California's universities are getting squeezed now because their subsidy from the state is part of the state's annual budgeting process. I don't think there will be anything like that in the public option being considered, primarily because it will be operated at the federal level. Private insurers aren't worried about competition from Medicaid -- operated on a no-frills basis out of state budgets that have pressure for budget balance -- but I think they would be worried about direct competition from Medicare. The latter is operated at the federal level with very little regard to its budgetary impact -- it is an entitlement, after all, with even premiums from Part B & D designed to cover only a quarter of the costs of those programs.
I am not particularly against public insurance plans -- I have not seen anyone reconcile the problem of individuals excluded from large risk pools in their absence. But I am very concerned, given the way our federal government operates, about expanding public options and public financing there. I would sooner fashion universal coverage out of a combination of a means-tested expansion of state-level Medicaid, a zero-subsidy buy-in for older workers into Medicare, and a zero-subsidy buy-in to state employee health insurance plans for other workers.
Public Private Education Options
A public private option allows for price discrimination, creates disparate benefits, create social classes and raises prices.
The public option in education allowed the double the inflation rate tuition increases in private institutions. The public/private option allowed price discrimination. The more price sensitive parents and students switched to public universities with their lower tuition. The price insensitive students kept going to private universities and universities found that they could further increase prices without negative revenue effects.
Without the existence of any public educational institutions, the price sensitive students would have to go to private universities and tuition increases would result in loss revenue to private institutions. Private schools would not have been able to afford tuition rebates (financial aid) to all the students in public universities. Completely undeserving the price sensitive population is politically and publicly impossible. Without public educational institutions, private universities could not raise their tuitions as much as they did without suffering a negative financial impact and without a political and a public backlash.
A similar effect is possible with the introduction of the public health insurance option. Health insurance price insensitive consumers will buy an expensive private health insurance with extra bells and whistles. The public option will be cheaper (either by forced price controls, subsidies, fewer benefits, rationing, longer delays, denials, etc.) but it will not have the bells and whistles (or maybe just prestige) of the private option.
In this price discrimination situation, there will be two different goals. The public option will want to be as low cost as possible and it will curtail benefits as much as it served population will allow. The private option will want to distance itself from the public option as much as possible, adding many additional benefits and pricing itself as high as it served population will allow and that will maximize profits. Over time, the low cost public option users will want the better benefits of the private option and force the government to try to increase benefits or deal with an increasing dissatisfaction among the electorate using the public option. The result of a public private option is class distinction based on the source of the benefits, a public education versus an elite private education or a public health plan versus an elite private health plan.
Furthermore, it would not be surprising to see geographical segregation based on expected health costs in attempts to increase benefits. Lower expected medical costs groups could band together, most likely geographically, and asked for private insurance based on their lower expected medical costs. Since premiums are the observable metric in medical insurance, benefits (the return to the consumer) will increase without lowering premiums. Subtle housing discrimination could develop based on medical cost profiling further solidifying the class distinctions based on expected medical insurance costs and public versus private insurance.