A large part of the country believes that the public option is only hope to reduce health care costs. A public option is basically a government run health insurance company. Basically, the debate is whether the government should go into health care insurance business. So, we are going to discuss how this public option is supposed to work, and if it could reduce health care prices.

The Theory of the Public Option

The first thing to realize is that the public option is different than European health care. European health care works on what is called a single payer system. In a European system, the government pays all health care costs for everyone. A public option looks and works like a private insurance company with some important differences.

How would a public option reduce health insurances costs? Public option supporters point to administrative costs. Medicaid runs very low administrative costs compared to private companies. The government could then provide a low-cost option because it has lower administrative costs. Private insurance would need to innovate to stay in business with a low cost alternative. So, would it work?

Price Fixing; Not Competition

The reason why the public option won’t work is because people don’t understand how competition works. Medicare doesn’t negotiate its lower costs. It sets reimbursement rates. Basically, it sets the price. In a place like Oregon, the Medicare reimbursement rate doesn’t cover the cost of the actual procedure. The impact is that unpaid additional costs from Medicare patients gets passed onto private insurance.

The problem for the government is you can’t regulate savings. The savings in competitive markets doesn’t come from regulation. The price savings comes from innovation and hard work. One company learns how to provide the service better than the next company. Google is a great example of this at work. When I was in college, Google was run out of a garage. Google began to provide its search engine service better than every other company. Look to see where it is now.

The public option would allow the government to set prices. When the government can set prices, they can artificially lower the price in the market. Private companies may not be able achieve the price. For example, Washington may want heart transplants done for less than $15,000, but that price just isn’t realistic. This is the same principle as rent-control in a big city. If you can find an apartment, you are very happy, but a majority of people have trouble finding apartments

Any health reform bill with the public option protects the government from lawsuits for price-fixing. Since Theodore Roosevelt, the US has broken up companies for exactly this type of behavior. We know that price-fixing is bad for competition and the consumer. Standard Oil, AT&T, and Microsoft were all investigated for this behavior. These companies have been investigated for both lowering and raising prices. If the public option was a privately run company, the Justice Department would take the company to court, and people may go to jail. If it isn’t okay for a private company, why would it be okay for the US government?

Choices are always better than a Choice.

The public option doesn’t address the lack of insurance companies in the market. Competition needs to have companies in the market competing. Currently, insurance companies can’t sell their policies across state lines. As an Oregonian, you can’t purchase a South Carolinian health plan. The company in South Carolina would need to create a new pool in Oregon. The plan would very expensive until enough people joined to spread the costs around It will be tough for the public option to drive down prices if there is very few people to compete against. Additionally, would it really be fair to allow the public option to be sold across state lines, but private insurance not to be sold across state lines?

Could the Public Option cost jobs?

I want to use Pacific Source as an example to show the impact of the public option on a local level. According to their LinkedIn site, they have 375 employees. Since the public option relies on unfair competition, a company like Pacific Source can expect to struggle to stay in business. In this climate of economic hardship, a public option means the loss of jobs for small town insurers.

Conclusion

Democrats want to lower health care costs, and they understand the hardship that health care costs are causing people. But, the belief in the public option has made them blind to the economic realities of the market place. You simply can’t drive down health care prices without letting more firms into the market. Don’t give people the choice of the public option. Give them choices between competing insurance companies, and let’s see what happens.