As I was raised in Canada, I do not have the usual grounding in "How a Bill becomes a Law," which every school child in the U.S. gets. One would think, though, that having worked in public policy since 1995, that I would have grasped the process by now. The technical stuff (voting procedures, signatures, and committees) is easy. But what is *really* going on? How do people's opinions crystallize into ideas, form into language, and ultimately get incorporated into legislation? It is a baffling process, and in spite of having hurled myself under the bus of this process for some years in an attempt to change its course, I understand it no better.
Influencing legislation often seems to be mostly a matter of having the good luck to have one's idea come to the attention of the right person at the right time. Personal connections, favor, and chance association still, by and large, seems to be the way things get done, as if we were still living in Elizabethan times, as if all our formalities and process did not matter at all. One recent illustration of this is the "public option" for health care insurance, proffered in recent legislation.What is behind this idea, and where did it come from?
At a superficial level, the "public option" for health care is both appealing and puzzling. From a competition policy standpoint, the entry into the market of a subsidized competitor offering a wide array of benefits certainly might put downward pressure on prices as well as easing humanitarian concerns about access. Equally obvious, though, are objections. What mechanism of accountability would exist to ensure that this subsidized entity is well run? It cannot be allowed to go bankrupt; nor is it likely that unhappy customers would have much leeway in suing it. How would it avoid driving private insurers out of the market for low-end service entirely? How much of a subsidy would it get, and how is this to be funded?
Since the party and administration that sponsored this proposal are associated with the intelligentsia, however, people hoping to improve the health care system probably felt entitled to trust that these questions had good answers. Somewhere, someone deep in the bowels of the brain trust had considered these issues. Curious about this, I found myself reading one of the more serious works to address the public option, a paper by Randall D. Cebul, James B. Rebitzer, Lowell J. Taylor and Mark E. Votruba entitled, "Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance," identified as NBER Working Paper No. 14455, from October 2008.
The paper's main argument is that firms setting out to buy health care insurance for their employees are beset by too many choices and too much complex information. Firms and employees often change plans. To retain and gain customers, insurance companies therefore overspend on marketing and prices are higher than marginal cost. The paper proposes a "public option," a government-subsidized
insurer offering a simple plan below cost; the theory is that this new entrant would change market dynamics and reduce the price of insurance. The concern that a subsidized entrant would drive private insurers from the market is addressed, neatly, in a sentence. We need not be concerned about this, the argument goes, because the government option would be less desirable than the private options. (One may suppose that this sentence answers concerns about the competence of a government-run entity as well--if it is incompetent, that is all to the best, for it must be "less desirable").
As powerful intellectual support for the "public option," how does this argument rate? Not well, I am afraid. 1) To begin with, the paper relies on the assumption that marginal cost pricing is a valid policy goal or a valid metric by which to assess actual prices. Economists agree that it is not--economist friends of mine have repeatedly told me so, and assured me that my article on this topic is entirely unnecessary. 2) The paper disregards research on the function of marketing in the economy as an engine of informing buyers, lowering prices, and enhancing competition; the argument that marketing money ought not to be spent is a dubious one. 3) The paper's complaints that the market offers too many insurance products and that people switch between them look alarmingly like complaints that there is too much competition. 4) The idea that a "public option" would improve the situation is not well developed. The assumption that a government run program would be "simple," (is insurance or government ever simple?) is odd. Answering concerns about subsidized insurance driving private insurers from the market by the argument that the government option is "less desirable" is even odder. Why undesirable? Are taxpayers to be expected to support a shoddy operation? And this is to be the way in which we address concerns about access for the poor, as well?
The best part of the paper is an aside recommending that competition between insurers could also be enhanced by straightening out the appalling tangle of state and federal regulation, which hampers the offering of standardized national plans. Sadly, this idea is never developed further, and of course, unlike the public option, never made its way into any legislation.
When all's said and done, I'm little closer to understanding why the "public option" got taken seriously when a dozen other ideas better developed and more promising have been neglected. The whole process has been curiously half-baked, and yet so far the outcome could have been worse. So we muddle on.