In the last dozen years the term “Public Option” has been thrown around quite a bit and even more so since the 2016 elections.  While sounding “reasonable”, the fundamental underlying economic assumptions are fallacious and would create far more problems than they would solve.

The below March 12th, 2019 article, written by Cassidy Morrison in the Washington Times, shares a report on why the Hospitals are not keen on seeing it come to fruition.  A similar article could have been written about the rest of the healthcare industry including pharma, the doctors, etc.

My analysis continues below the article

Hospitals warn Medicare public option would be an $800 billion hit to industry

by Cassidy Morrison

| March 12, 2019 05:19 PM

The American Hospital Association and the Federation of American Hospitals published a report concluding that allowing the public to buy in to Medicare plans at cost would not only contribute to massive budget cuts to hospitals nationwide but would also jeopardize patients’ access to care.

Democrats have several proposals for extending Medicare. The most aggressive option, the Medicare for All Act introduced last Congress by Sen. Bernie Sanders, I-Vt., would enroll everyone in an expanded government-financed healthcare plan. Another less ambitious proposal would turn Medicare into a public option, allowing others beside seniors to buy into it.

The hospitals are prepared to fight the measures.

“It is not practical to disrupt coverage provided through employer-sponsored plans that already cover more than 150 million Americans,” Tom Nickels, AHA executive vice president, said in a press release. “America’s hospitals and health systems remain committed to working together with policymakers to help expand coverage and reduce costs for all Americans. However, a ‘Medicare for All’ approach would impede, not advance, our shared goals.”

The FAH study specifically examines the Medicare-X Choice Act, a proposal brought forth by Sens. Michael Bennet, D-Colo., and Tim Kaine, D-Va. Medicare-X would permit all Americans to the option of buying a public plan, which would cost less than private insurance. This plan is less sweeping than a single-payer system as it fits into existing healthcare system and would not mandate that all Americans can only select a public plan.

Kaine and Bennet envisioned Medicare-X being phased in incrementally and gradually so that the plan could be rolled out smoothly and would not disturb the marketplace as drastically as a single-payer initiative would. Hospital systems and healthcare providers disagree that the plan would work without trouble and are prepared to fight it.

According to the FAH study, Medicare-X would exacerbate problems that hospitals already face. It says that public programs, Medicare included, consistently reimburse healthcare providers at much lower rates than the costs of the health services administered. A shift of millions to a public option, the report says, would destabilize insurance markets and compound hospital expenses.

The ‘Public Option’ as it is frequently described has never actually existed anywhere before and like water, the argument takes the shape of it whatever political container (or politician) is holding it while having no real form of its own.  It is a mixed bag of ideas that individually sound good, but together do not form a coherent system.

For those touting it, it usually comes in two stripes.  The first is that Medicare should be either extended to everyone or in the more common version, those 50 or older.  The second variation is that the government should just create its own insurance company and offer products in the market just like you can buy now from private carriers.  Both of these ideas ignore how the free market works and would radically distort the rest of the health care industry to accommodate a narrow segment of the population.

The first big problem is that Medicare was never intended to cover the entire population.  It is for people 65 and older (and later extended to those who are permanently disabled) and could not be insured by a private market.  By effectively lowering the retirement age to 50, a Public Option would both increase the tax burden on the workforce while cannibalizing the number of people paying into the system.  In other words, there would be more people in the wagon and fewer people pulling it.

The second major issue is that Medicare generally pays providers substantially less than private insurance (hence the hospital’s beef).  This cost shifting in effect, creates a subsidy that that keeps Medicare viable but like a water balloon, if you step on it in one place it will bulge out in another.  By radically increasing the number of Medicare beneficiaries, it would make this disparity even worse resulting in increased insurance premiums for the rest of the private population.

The third big problem is the most pernicious.  If the government were to form its own insurance company, it would have a grossly unfair advantage over the private carriers resulting in anti-competitive pressures.  The government has an undue influence negotiating with providers because they are simultaneously regulating them.  This would artificially lower their prices do to rent seeking thereby driving its competitors out of the market.

Furthermore, the government can run at a deficit, something which private carriers absolutely cannot do for any length of time.  It would end up being like a modern day Standard Oil, where the where the private competitors would end up throwing in the towel leaving the surviving American Beauty (Public Option) to raise prices at will.

So there you have it.