The Public Option Tipping Points

If the public option were stronger there would be little doubt in my mind that it would be a success. If it were tied to Medicare rates for the first few years, it would have a significant pricing advantage and quickly become a significant player on the exchange. Conversely, if the public option were forced to pay negotiated rates, but were open to all individuals and employers, I don't doubt that it would quickly get the large market share needed to stay competitive, hold down costs, and force other insurers to adopt some of its innovations. As it stands, I can't say I'm 100% confident in the success of a negotiated rates public option limited to only the new exchange. What I see is that the public option will reach several important tipping points in the first few years that will determine its long term success or failure.

Total Failure – Extinction
The public option is too small, too restricted, and not evil enough to survive.

Scenario: The public option would only be available on the new health insurance exchange. People are reluctant to try this new insurance entity. In the first few years, only 10-15% of people on the exchange select the public option, so it has only a few million customers. The small customer base prevents the public option from being able to negotiate good deals with providers. The new exchange is unlikely to have robust enough risk adjustment mechanisms, and its regulations could easily be insufficient. As a result, the exchange is only a mild improvement on our current individual markets in some of the better regulated states. The private insurance companies still engage in all sorts of activities to drive way less profitable, unhealthy customers that the public option would not. This would end up increasing premiums for the public option due to adverse selection.

This scenario could result in the public option tipping into two possible “failures.” One would be “extinction.” This is an endless cycle of higher premiums, leading to a less healthy customer base, resulting in higher premiums, etc. The end result would be the public option slowly shrinking until it only operates in a handful of markets or dies completely.

Near Complete Failure – Last Resort Option
The other possible failure is similar to the previous scenario. The difference is here the private insurance companies realize that it would be to their financial and/or political benefit to make sure a weak, small public option survives.

Scenario: The private insurers agree to not fight putting in place a decent but insufficient risk adjustment mechanisms. Equally, Washington sees that they created a failed reform system and accept the overwhelming need to use a risk adjuster to maintain the public option as a safety net for the really sick. It is enough to keep the public option viable, but with noticeably more expensive premiums. The public option's less hassle, lower overhead, better coverage, but higher premiums would make it a preferred choice for people with chronic health problems. It would become known as the best “last resort option” mainly just for people with medical conditions.

I can definitely picture a set of circumstances where the private insurance companies conclude that it's worth some effort by them to keep the public option viable enough to soak up most of the unwanted customers. Even if the public option became the “last resort option,” it would still have done some good for the few million customers it would have. Without it, the insurance companies would still have gamed the system to drive away individuals with medical problems, except they would have nowhere else to go. If the public option only helps a few million people in need to get decent, albeit somewhat more expensive, health insurance, that is still a positive, but far short of its potential. It still leaves us with a very dysfunction health care system.

Partial Success For the Public Option - Failure For The Exchange
I think the most likely result if the House bill were the final bill is that the public option would be a success, but hampered by a failed exchange. I think the public option will easily get significant plurality of the customers on the exchange. While the CBO concluded that only 20% of people on the exchange would choose the public option, I believe that number will be much higher. A Quinnipiac poll in August found 25% of Americans would sign up for the public option, while an Emory poll from a few days ago found 41% would choose the public option. These polls ask all Americans about sign up for the public option. The people who would be eligible for the new exchange (self-employed, uninsured, small business) tend to have a lower approval of private insurance, and should be more likely to sign up for a public option compared to the entire population.

Scenario: The public option becomes the default insurance choice in people's minds. It could easily end up being selected by 40-70% of all the people on the exchange. This large risk pool makes the lack of a proper risk adjustment on the exchange less consequential for the public option. The huge customer base allows it to negotiate good rates with providers, lower its premiums, and, in turn, attract more customers. The public option is the dominant player on the exchange with a noticeable percentage of people choosing slightly cheaper, more restricted, private HMO plans, and a small percentage selecting high-cost plans with more expansive coverage. The public option is strong enough and provides coverage for such low overhead that it forces some improvement in plans off and on the exchange.

The biggest hindrance to the public option is that it is restricted to a failed exchange. The problem is the exchange is seen by most of the public as a not very desirable place to get insurance. In many areas of the country only a few plans would be offered. Because of a short sighted decision by Congress, most plans on the exchange are fairly bare bones with relatively high deductibles. The single biggest issue with the exchange is that it generally has a higher-cost risk pool. This problem is made worse by small- and middle-sized businesses that are eligible to get coverage through the exchange. Those businesses with young, healthy employees choose to buy group coverage, but those with older, sicker employees give them vouchers to use on the exchange. The net result is that coverage on the exchange is relatively high compared to many employer plans.

Even though the public option and other plans on the exchange may provide more cost effective insurance, they still need to charge higher premiums because of the risk pool. Most people don't want to use the exchange, and, as a result, there is no political pressure to open up the exchange. Equally, the private insurers push hard to prevent the exchange from being open to protect their market share from the public option. The public option is a successful at what it does. It has 40-70% of the market, but it is limited by being stuck in small exchange. The result is the fairly powerful public option with 25 million customers.

Real Success
Similarly, the public option is successful and manages to become one of the largest insurers on the new exchange. The added benefit is that the exchange is also successful, and rapidly grows as a result.

Scenario: The public option manages to become the dominant force on the exchange and drives down premiums. As a result, almost all qualified businesses (those with 100 or fewer employees) choose to provide their employees coverage on the exchange because it is cheaper. This much larger exchange leeds to even greater reductions in premiums. The exchange is seen a good place to get insurance.

This creates pressure on the Secretary of HHS to open exchange eligibility to all employers. It may even create pressure on Congress or state legislatures to expand access to the exchange in other manners. There ends up being some financial inverse point for large business. Most companies with 700 or fewer employees find it cheaper to use the exchange while most above would save money so stay with group plans. The exchange would be used by roughly 120 million Americans, and about 65 million would choose the public option. Since so many people are using the exchange, it puts even more pressure on Congress to improve things like the risk adjustment mechanisms and regulations. Both the exchange and public option snowball.

This would be the ideal scenario for the public option. It would have enough market share to really drive down costs and keep private insurance companies on their toes. It would be available to most Americans, who would see it as the default choice for health insurance. The public option would be like the Toyota Camry of health insurance. A very reliable, well-designed, no frills, standard plan at a good value. It would still face competition from private insurers, but they would mainly try to compete by offering low cost plans with highly integrated HMOs, or higher cost, more inclusive insurance.

Of all these scenarios, I think the third is the most likely outcome. The public option will succeed but the poorly designed and executed exchange will fail. In the end, the saving grace for the public option, I believe, will be a combination of laziness and hatred for the private insurance companies. The exchange is probably going to be a confusing marketplace, and a large number of people are going to select the public option because they will see it as the safe, standard, “default” plan. There are also plenty of people in the current individual and small-group market that just hate private insurance companies. Other insurance exchanges have shown that once people sign up for the public option, they are unlikely to ever change. Regardless of how weak the public option is, I have a hard time not picturing people flocking to it in droves. I suspect the public option would easily sign up the bulk, if not the majority, of customers on the exchange. The large customer base will make it a success in spite of what Washington tried to do to water it down.

I have always seen the limited exchange as the problem. The first years of the exchange will likely be made up of millions of uninsured and people who were literally too sick to afford private insurance before. It will be a group that put off needed medical treatments. The exchange will have a very expensive risk pool, and, as a result, have high premiums. It will not be great place to buy insurance, so small business, for the most part, will shun it. Private insurance companies will fear an expanding exchange, so they will try to keep premiums low to stop business migration over to the exchange. The result is that the exchange will grow, but only slowly. The saving grace of this halfhearted reform measure will be the public option with roughly 25 million costumers, large enough to affect the whole insurance system. It will keep coverage decent and more affordable for those on the exchange, and the fear of expanding the reach of the public option will force private insurance companies to improve. The public option will greatly improve our health care system, but will not likely reach its full potential. Of course, once the public option is in place and working, the goal of progressives should be to allow it to also compete in the large group market. If that happened, it could really shine.