Thursday, January 21, 2010

Subsidizing the Public Option

In her comment to my post on what the results of the Massachusetts Senate race really tell us, Blue Lyon quoted part of my post and responded to it thusly:

To address another part of your post, you wrote: when it came time to run the numbers no one could figure out how to have a public option that could match private insurance company premiums without a subsidy from the taxpayers

This is what really got me...The private insurers will get taxpayer subsidies (no loss to profits), but the public option was supposed to exist on premiums alone (with no taxpayer subsidies). How would that be creating an even (and competitive) playing field?

I think we’re talking about two different kinds of subsidies here. I’ve written about this in an earlier post but I want to walk through it again to get it clear in my own mind. (Yes, I know the current versions of health care reform are dead but they’ll rise from the grave at some point - and the idea of a Public Option is popular.)

The Feds set up an Exchange. Every insurance company can participate and anyone who wants to can buy insurance from a company on the Exchange. Every company in the Exchange has to (I’m pretty sure) offer at least three different policies - Bronze, Silver, Gold - and can offer a fourth - Platinum. The Feds define what must be covered under each policy level with Bronze being the most basic and Platinum being super-duper. The insurance companies then post their premiums for each policy level. So assuming we’re looking at annual premiums for each of the four levels we might see something like:

Aetna: 10,000 / 12,000 / 15,000 / 20,000
BCBS: 9,000 / 11,000 / 14,000 / 19,000
UHC: 11,000 / 12,500 / 15,000 / 22,000

The Feds look at these numbers and find the cheapest policy: in this case, the BCBS Bronze policy for $9,000. They then look at your income - let’s say $50,000 a year - and decide you shouldn’t ever have to pay more than $5,000 per year for health insurance. Therefore they will subsidize your purchase of health insurance by $4,000 per year - the difference between what the cheapest policy will cost you and the maximum health insurance “should” cost you. If you choose to take that $4,000 and put it with more than $5,000 of your money to buy Aetna’s Bronze policy at $10,000 or UHC’s Gold policy at $15,000 that’s up to you.

Now let’s say the Public Option starts up; we’ll call it Public Option Health Care or POHC. It competes in the Exchange just like all the other insurance companies which means it has to set rates just like all the other insurance companies. Under the terms of the House bill I looked at in my previous post, POHC must live off its premiums just like all the other insurance companies do. That means it must set its premium rates high enough to cover it’s administrative costs and its payouts to claimants just like all the other insurance companies do. It will get a “loan” from the Feds for start-up costs but it must repay that loan which will add costs that are not dissimilar to those of a for-profit private insurance company which must keep its shareholders happy. So now if we look at the Exchange we would see:

Aetna: 10,000 / 12,000 / 15,000 / 20,000
BCBS: 9,000 / 11,000 / 14,000 / 19,000
UHC: 11,000 / 12,500 / 15,000 / 22,000
POHC: 10,500 / 11,500 / 14,500 / 20,000

There is no reason to believe that POHC’s premiums will be any lower than those of the private for-profit companies and - given that loan to repay - they may well be higher than the premiums charged by private non-profits. You can still take your $4,000 subsidy from the government and use it to buy a policy from POHC if you wanted so in that sense the Public Option is eligible for exactly the same subsidy as all the other insurance companies. This is the subsidy I think Blue Lyon is talking about and, if so, I disagree with her: the Public Option is eligible for this type of subsidy. However, this is not the type of subsidy I was talking about in my post.

The subsidy I was talking about is funding POHC on an ongoing basis using tax revenues. If that happened, POHC would be getting two revenue streams: premiums and taxpayer funding. POHC would no longer have to live on its premiums alone and would be able to charge premiums below those needed to cover administrative costs and payouts to claimants. This is the subsidy that the Public Option would need to be less expensive than private companies - at least private non-profits - and this is the subsidy that would blow the budget on health care. And this, I suspect, is why the Public Option is not on the table: no one could make the numbers work out. Either we created a Public Option that was more expensive than some private insurers or we used taxpayer money to keep premiums down and that took care of deficit neutrality.



All Greg Mankiw:

What's the point of a public option?

CBO and I agree

Thaler on the Public Option

The Arbiter of Ignorance - Which I’m including because I enjoy the utter yet civil viciousness but others may find more interesting as a way to access Paul Krugman’s thoughts on the matter

1 comment:

Anonymous said...

Admirably clear. There's a big difference between a subsidy to taxpayers, which is applicable whether they buy a private or a public policy, and a foregone conclusion that taxpayer funds will be used to subsidize the public option, which is exactly what will happen as soon as the public option begins to lose money by undercutting the prices charged by private insurers.

-- Texan99