Economists Debate 'Public Option' On Health Care

Princeton economist and professor Uwe Reinhardt has spent his life giving out grades. So much so that he gives them out by instinct, even to things that don't usually get grades. And last week when President Obama gave his big speech to Congress on health care overhaul, Reinhardt took out a pencil and paper as he listened. Overall, he thought, the speech was impressive: A-. But then Obama brought up that idea of a "public option" — a government-run insurance plan to compete with other insurers.

"It could provide a good deal for consumers, and would also keep pressure on private insurers to keep their policies affordable and treat their customers better," Obama said.

Reinhardt gives Obama a C+ for that part of the speech.

"With all due respect for this brilliant president, I do not share, as an economist, his theory that a public plan would be a splendid instrument of cost control," Reinhardt says.

The idea that it would keep costs down by adding a competitor made no sense to him.

The Public Plan As Price Control

The pitch for a public plan is that somehow it will be able to put the brakes on health care costs. Right now health care spending is rising so fast that Medicare and Medicaid are on pace to cripple the federal budget.

Jacob Hacker, a political scientist at Yale — known as the "father of the public option" idea — says it could cut costs.

Here's how a public option would work, Hacker says: People who don't get insurance through their employer could shop for a plan on what's called an "insurance exchange." Basically those people would get a menu that would list some private health plan options and one offered by the government, the public option.

"It's really important to understand the public plan is not some plan that swoops in and sucks people up like some spaceship. It's only available to people in the exchange. And you always have a choice of private insurance plans beside it," he says.

Hacker says that the public option would drive down costs in a couple ways. It would have lower administrative expenses than private insurers. And it would have the power to bargain for lower prices.

"This public plan will call out the private plans and keep them 'honest,' as President Obama has put it," says Hacker.

Can We Really Keep Costs Down?

Hacker argues that Medicare — run by the government — has done better than private insurers at bargaining for lower prices.

Reinhardt says that may be so, but it misses the point. The big source of waste in the system is not high prices. It's volume; entirely unnecessary treatments, tests, and procedures.

Reinhardt says eliminating those is very difficult for any insurance company — whether it's for-profit, not-for-profit, or something run by the government, like Medicare.

"They can control prices, but they cannot control volume," he says.

Hacker agrees overtreatment is a big problem. There are ideas for how to reduce it, by paying doctors and hospitals differently. If the government had a public plan, it could try those out.

"But the truth is you're getting to the most difficult question in health care reform. The public plan is not a magic solution to this problem. But there are no magic solutions," Hacker says.

Reinhardt, though he gave Obama's presentation of the public option a C+, actually supports the idea. He thinks it would be simple, and allow workers to move around without losing their insurance. Reinhardt just doesn't buy the claim that it will fix the bigger problem of rising costs.

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