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It's Time to Give Up On the Public Option

By Steven Pearlstein
Wednesday, August 19, 2009

Enough already with the public option!

It is not the be-all and end-all of health-care reform. It is not the long-awaited safety net for the uninsured. And if, as many liberals hope, it turns out to be nothing more than Medicare for All, it won't do anything to hold down long-term growth in health spending.

The public option is nothing more than a political litmus test imposed on the debate by left-wing politicians and pundits who don't want to be bothered with the real-life dynamics of the health-care market. It is the Maginot Line of health-care policy, and just like those stubborn French generals, liberal Democrats have vowed to defend it even if it means losing the war.

So there was Howard Dean, the former Democratic Party chairman, over the weekend declaring that health reform without a public option simply isn't worth doing. My colleague Ezra Klein pointed out on his must-read blog that Dr. Dean's fascination with a public option is rather recent since it was nowhere to be found in the reform plan he proposed when running for president in 2004.

Or how about MSNBC's Rachel Maddow, who opined that the failure to deliver on a public option would represent nothing less than the "collapse of political ambition" for American liberalism?

The public option has become for the left what "death panels" have become for the right -- an easily understood metaphor that can be used to wage an ideological war over the issue of Big Government, and mostly a sideshow.

The case for a public option begins with the unassailable observation that our system of private health care and health insurance has not been effective in restraining the growth of medical expenditures.

Some of that cost growth has to do with an aging population and technological gains that have dramatically increased the number of cures and treatments. But those same cost drivers can be found in other advanced countries, including those with government-run health-care systems.

Liberals have a point when they argue that the price competition in our private markets is something less than robust.

Because consumers don't pay out of pocket for much of their health care, they don't shop around for bargains the way they do for cars or toilet paper. Nor is it clear that people would flock to the heart surgeon in town who advertises bargain-basement rates.

Competition is also imperfect because many regions of the country have dominant hospital chains that can virtually dictate rates to private insurers. You simply could not offer a competitive insurance product in Northern Virginia, for example, if Inova's Fairfax Hospital weren't in your network. And in many rural communities, there's only one hospital.

Drug companies have monopoly pricing power for drugs under patent for which there is no substitute. Ditto for medical-equipment makers with the latest imaging machines or artificial hip joints.

One goal of health-care reform is to begin to address these market imperfections. But there's no particular evidence that a government-run insurance plan will be any more successful than what we currently get from big private insurers -- unless, of course, the government-run plan is so big or so powerful that it can dictate prices to providers, as Medicare now does. Proposing that, however, would immediately unite doctors, hospitals and drug companies in opposing reform.

You also hear the argument that government-run insurance would have lower costs because it wouldn't have to generate a profit (that's true) and would be more efficient than private insurers (that isn't). The evidence of greater efficiency is Medicare, which spends about 2 to 3 percent of its budget on administration. But if a government-run plan had to spend its own money to collect premiums, market itself to customers, maintain a reserve, and manage care in a way that lowers costs and raises quality -- none of which Medicare now does -- then you can be sure its administrative costs would be nowhere near 2 or 3 percent.

In sum, there is nothing about having one government-owned health insurance company that is likely to change the competitive dynamic and bring costs under control.

That's not to say there aren't other things we could do -- many fixes are already included in bills before Congress. These include the government-sponsored health-care exchanges that would bring national insurance companies to nearly every market in the country and proposals to begin paying doctors and hospitals for the quality of the health care they provide rather than the quantity. There is also a provision requiring that companies participating in the new insurance exchanges use no more than 15 cents of each premium dollar for administrative costs and profits.

Finally, there are the government-chartered cooperatives that key members of the Senate Finance Committee are pushing. Although public-option enthusiasts scoff at the idea, the experiences of a number of communities show that cooperatives could significantly contain costs, provided the cooperatives are big enough and built around networks of hospitals and physician practices that accept a fixed, annual fee for treating patients rather than billing for every procedure. The key isn't that the cooperatives would be not-for-profit, but that the annual payments would give doctors and hospitals a financial incentive to control costs, better coordinate care, and eliminate procedures with little or no benefit.

A few other ideas not in any bill but worth considering: To address the pricing power of the big hospital chains, the government could require that they offer the same set of prices to all private insurers. Congress could also toughen antitrust laws to make it more difficult for hospitals in the same region to merge and require the breakup of chains that charge rates that are significantly higher than in other markets.

To bring down drug prices, Medicare could cap what it is willing to pay for any drug at 150 percent of the average price paid by other industrialized countries, where governments negotiate prices that are significantly lower. That would become a new benchmark for what private-pharmacy benefit managers would pay.

Such approaches would not only be better policy than a public option, they'd also be better politics. By insisting on a government-run plan, liberals have played right into the hands of Republicans who aim to defeat any reform by mischaracterizing it as a government takeover.

If there is anything that's been made clear over the last two weeks, it is that the public option is a political non-starter that threatens the entire reform effort. It's time to let it go.

Steven Pearlstein will host a Web discussion today at 11 a.m. at washingtonpost.com. He can be reached at pearlsteins@washpost.com.

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