Creating a Public Option

In all of the talk about a public option for health care, there has been precious little information about exactly what this would consist of or how it would be set up. As Ross Perot observed in 1992, the devil is in the details.

Supporters of the public option insist that it will be separate from Medicare (it had better be - Medicare is about to go broke), that it will not receive public funds, and that it will be more efficient than private insurance. This means a new government agency. This also makes it impossible to say that the new agency will not get government funding.

First, let's assume that it starts modestly. The Democrats has given figures of anywhere between 30 and 48 million. Let's assume the lower figure and go with 30 million. Let's also assume that the public option is competitive and offers prices in line with other insurance companies so we will give them 20% of the uninsured and none of the people who are already insured. That's 6 million people. That's a good number for a state but not so good for the entire nation. To put it in perspective, Blue Cross f Western Pennsylvania has 1 million enrolled. Even so, it would have an income in the billions.

So, we now have an agency that insures 6 million people across the entire country. Except we don't have an agency yet. We have to hire people and open offices. That's going to be a minimum of one office per state, probably more if big states. Then there will be one main office, probably in the greater DC area. The new company will need actuaries, adjusters, computers, web sites, clerks, and lots of bureaucrats. That's before it gets its first premium in.

Normally you start companies small by attracting investors. The successful ones grow. The unsuccessful ones go out of business. Not this one. Our hypothetical government agency will start moderately large but too small to cover its expenses. On the other hand it can't fail. The government will not let it.

This will take a big infusion of capitol. The new agency will have to buy everything that it needs and have enough cash reserves to start making payouts the day it goes into operation (remember, no exclusions for pre-existing conditions).

Some of the undefined details become very important here. Will this new agency be expected to repay the government the money that was used to start it? Will it use its revenues to create its own fund for paying benefits? Will it be held to the same standards that private insurance companies are? If it loses money then will the federal government cover its losses?

If any of these questions are answered no then the administration is lying when it says that the new agency will not be taxpayer-funded. This is a slippery question because repaying the money used to create this agency will raise its costs and make it harder to compete. The natural inclination for the bureaucrats will be to have over a pile of money with vague promises about repaying it in the future, promises that will never be fulfilled.

Even if you believe that non-profit government agencies are more efficient because they don't have to pay out profits, a new agency like this would be expected to lose money for years before it stabilized. If the public option is created then it will be a decade or two before we really know what we got for our money.

There is also the question of how the government will handle it if this agency makes money. Will it simply roll over the surplus and lower rates the next year? Will it add the profits to its reserve? Will the profits go to paying back the startup costs? Or will the money go into the general fund?

A related question is how the agency's reserve fund will be handled? All insurance agencies are required to have one by law. This is used for payoffs when claims are higher than premiums. Our new agency will start with a reserve provided by the taxpayers but after that the amount will fluctuate. Will it simply keep the reserve as cash or will it try to invest any excess? Keep in mind that government agencies don't invest, they buy bonds which can only be redeemed through taxes (or by printing money). Social Security and Medicare have deeply "invested" in bonds and paying them back is a crisis waiting to happen.

One of the iron-clad laws of government is that once an agency comes into existence it cannot be abolished. By the time we've determined if this will be a good investment or not it will be far too late to remove.