No Option At All

by Pejman Yousefzadeh on June 28, 2009

I commend to readers Greg Mankiw’s excellent editorial against the creation of a public option in health care reform. Read the whole thing, but the case against the public option is nicely dissected in the following passage:

Even if one accepts the president’s broader goals of wider access to health care and cost containment, his economic logic regarding the public option is hard to follow. Consumer choice and honest competition are indeed the foundation of a successful market system, but they are usually achieved without a public provider. We don’t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices.

An important question about any public provider of health insurance is whether it would have access to taxpayer funds. If not, the public plan would have to stand on its own financially, as private plans do, covering all expenses with premiums from those who signed up for it.

But if such a plan were desirable and feasible, nothing would stop someone from setting it up right now. In essence, a public plan without taxpayer support would be yet another nonprofit company offering health insurance. The fundamental viability of the enterprise does not depend on whether the employees are called “nonprofit administrators” or “civil servants.”

In practice, however, if a public option is available, it will probably enjoy taxpayer subsidies. Indeed, even if the initial legislation rejected them, such subsidies would be hard to avoid in the long run. Fannie Mae and Freddie Mac, the mortgage giants created by federal law, were once private companies. Yet many investors believed — correctly, as it turned out — that the federal government would stand behind Fannie’s and Freddie’s debts, and this perception gave these companies access to cheap credit. Similarly, a public health insurance plan would enjoy the presumption of a government backstop.

Such explicit or implicit subsidies would prevent a public plan from providing honest competition for private suppliers of health insurance. Instead, the public plan would likely undercut private firms and get an undue share of the market.

As Mankiw writes, expanding government involvement in health care is a bizarre idea in light of the havoc wreaked upon entitlements by Medicare and Medicaid. While the public option promises to dramatically lower costs, it will do so at the expense of having more medical personnel, and significantly less access to health care. Indeed, health care will be rationed. As for the public option itself, President Obama has pointed out that if he had the chance to design the health care system all over again, he would have opted for a single-payer structure from the very beginning. Recall this post, and you will see why it is that I think the public option is a Trojan horse for the eventual enactment of a single-payer system.

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