Ezra Klein: Health Care Reform for Beginners: The Many Flavors of the Public Plan

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Health Care Reform for Beginners: The Many Flavors of the Public Plan

For most of you, this is the big one. The inclusion of a strong public insurance option has become, for most observers I know, the single most recognizable marker for victory. If the public plan exists, liberals have won. If it's eliminated, or neutered, then conservatives have triumphed.

The public plan has a very particular political lineage: The lesson liberals took from the 1994 health reform fight was that you couldn't threaten the insurance coverage individuals already had. For many policy wonks, the central problem in health care was the existence of private insurance coverage. For most Americans, however, the central problem was that they could lose their private insurance coverage, and be left with something they didn't like, or nothing at all. This effectively ruled out something like single-payer, or even Bill Clinton's managed-care-within-managed-competition model. It ruled out anything that began by changing the health care coverage of those who wanted to keep their current policies.

But that political insight didn't cancel out the policy insight: The private insurance market is a mess. It's supposed to cover the sick and instead competes to insure the well. It employs platoons of adjusters whose sole job is to get out of paying for needed health care services that members thought were covered.

Moreover, public insurance is simply more efficient. Medicare holds costs down better than private health insurance. The substantially public systems employed by every other industrialized nation cost less and cover more than the American model. So the question became how to marry the policy need for public insurance with the political need to preserve the status quo.

Enter the public insurance option. It doesn't replace the insurance individuals already rely on. But it provides an alternative. It lets them make the decision. It's the health care equivalent of being pro-choice. And it thus serves two purposes. The first is to act as a public insurer. To use market share to bargain down the prices of services, much as Medicare does. To lower administrative costs. To operate outside the need for profit, and quarterly results. The Commonwealth Fund estimated that this would result in savings of 20%-30% over traditional private insurance.

The second is to apply competitive pressure to the rest of the insurance industry. If the public plan is ruthlessly lowering its administrative costs and garnering a reputation for decent, good-faith service, it will take market share from the private insurers. The private insurers will have to respond in kind to retain their customers. If they fail to adapt, the system could become something resembling a single-payer structure.

But that's not the most likely outcome. Rather, the theory here is simple: If you can't replace them, convert them. If the public plan works, then private insurance will work better as well. In this telling, the simple existence of the public plan forces a more honest insurance market: Private insurers need to offer premiums closer to their marginal cost, and they have to cut administrative costs, and they have to work on their reputation for cruelty and capriciousness. The existence of another option changes the market. Individuals will have access to private insurers, but they'll no longer be stuck with them.

Private insurers, of course, don't want to face that kind of competition. And they have enlisted many members of Congress to help protect them from the public insurer. In recent weeks, however, the Obama administration has put some muscle into the preservation of the public option. Most observers now think that some form of public plan will survive in the final bill. The question is what form of private plan?

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