The Public Option Rides Again

Like a gambler who doesn’t know when to quit, Democrats are doubling down on their favorite losing bet — Obamacare.

Hit by multimillion-dollar losses — UnitedHealthcare, for instance, expects to lose $850 million this year alone – insurers are pulling out of the exchanges. All but six of Obamacare’s 23 government-chartered nonprofit health insurance CO-OPs are bankrupt and out of business.

Rather than cutting their losses and admitting that Obamacare is broken, a group of over 30 Democratic senators is pushing a resolution to create a “public option” — a government-run health plan that would compete against private insurers on the state and federal exchanges — in a desperate bid to rescue the president’s health reform law.

It won’t work. A public option would kill competition on the exchanges. In so doing, it would drive our nation’s health costs upward and undermine the very existence of private health insurance.

Early versions of Obamacare included a public option, but it was jettisoned in the final Senate version after moderate Democrats deemed it so radical and expensive that it would jeopardize the law’s passage.

Now, with Obamacare falling apart, lawmakers on the left are bringing the public option back from the dead. It’s baaack!

Sen. Jeff Merkley, D-Ore., who introduced the new Senate resolution, claims that the public option “is critical to bringing more competition and accountability to the insurance market.”
Since a federally-run plan wouldn’t have to show a profit or advertise, the argument goes, it could set premiums well below what private insurers are currently charging. That would force private insurers to cut their own costs to keep up — and thus save consumers money.

Merkley and his allies call this competition. Really, it’s an attempt to rig the game. There isn’t a health insurer in the country with pockets as deep as the federal government’s. Unable to match the public option’s artificially low rates, private providers would be forced from the market in short order.

This kind of “crowd-out” of private coverage is precisely what happened after the government introduced the Children’s Health Insurance Program in 2007. According to an analysis by Jonathan Gruber — one of the chief architects of Obamacare — 60 percent of new CHIP enrollees dropped their private coverage to sign up for the heavily subsidized government alternative.

What’s more, the notion that for-profit insurers need to be held “accountable” for the fact that there’s little competition on the exchanges is absurd.

Some insurers are withdrawing from the exchanges because the federal government effectively reneged on the taxpayer-funded bailout it promised them under the risk corridor and risk adjustment programs if they lost too much money on the exchange marketplaces.

Under the terms of this risk corridor program, insurers with lower-than-expected claims were to pay into a fund whose proceeds would go to insurers with higher-than-expected claims. These risk corridors were a sweetener — or a bribe — designed to entice insurers into the exchanges during their first three years.

Of course, profitable insurers on Obamacare’s exchanges are about as common as unicorns, so risk-corridor funds have been less than plentiful. And since Republicans — in a brilliant legislative gambit —tweaked the program in 2014, requiring it to be budget-neutral, federal officials haven’t been able to dip into public coffers to bail out the insurance industry.

The result to date is that insurers have had to eat their exchange-plan losses. In 2014, only 12.6 percent of the funds insurers requested from the risk corridor program were paid out. Many CO-OPs — including those in Illinois, Maine, Maryland, Massachusetts, New Mexico, and Oregon — have blamed the lack of this bailout for their financial woes.
Several co-ops and private insurers have launched lawsuits against the federal government in the hopes of getting paid eventually. And the administration has been looking for legal loopholes so that it can ignore the budget-neutral provision and throw more taxpayer money to these coverage providers.

But even a bailout of the size originally promised by Obamacare would fail to make these insurers whole. Aetna is pulling out of 70 percent of the counties where it currently sells exchange plans, citing losses of more than $430 million since 2014. Blue Cross Blue Shield lost close to that amount on its North Carolina plans alone. With total losses on its exchange business at $1.3 billion, UnitedHealthcare is exiting all but three state marketplaces in 2017.

A public option would face the same cost pressures that have handicapped private insurers and CO-OPs. When the public option suffers financial losses — as it inevitably will — taxpayers will have to foot the bill. And that bill will be a whole lot larger than the one private insurers have had to pay. And as these losses mount, consumers will see their coverage benefits dwindle.

Curing our nation’s healthcare crisis requires fundamental changes in the incentives and cost structures that govern our health sector. Having the federal government pick up the tab will do nothing to make health care more affordable or accessible. Policymakers need to foster true competition in our insurance market — not gamble on a government monopoly.

Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is The Way Out of Obamacare(Encounter 2016).

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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