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Why the Public Option Opt-Out is a Trojan Horse, and a Good One

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From Economics Professor Steven Kyle of Cornell University:

In all of the excitement about Harry Reid’s inclusion of an opt-out public option in the Senate version of the health care reform bill, one question has been somewhat submerged: "Opt out of WHAT exactly?"

What the public option actually would provide to states that DIDN’T opt out has been left pretty much to the imagination of each person. But the fact is that there are some concrete details to be worked out that will be very important in determining whether the public option actually helps much or not. First, what exactly are they proposing?

The core of the proposal is a not-for-profit plan run by a board chosen, one presumes, by the government in some form or other. It would negotiate reimbursement rates and coverage just as private plans do, but the main differences would be that:

- It would accept anyone who couldn’t get private insurance
- It would not make a profit, instead aiming to break even

Right there it would have a signficant advantage. It wouldn’t have to have a bureaucracy whose sole raison d’etre was to deny coverage to anyone who looked like they might get sick or who actually got sick. It also wouldn’t have to tack on a profit margin or huge salaries for a large bureaucracy, as private plans do. Nevertheless, it is unlikely that even these advantages could provide an immediate decrease in premiums for anyone, particularly if the public plans are state-based rather than federally based.

This last point is a key uncertainty. One of the main advantages of a national insurance plan is the fact that it would be large enough to both spread risk widely (and thereby reduce costs), and also that it would provide significant leverage to negotiate rates with providers, drug companies, etc. So here is something to watch. Will the “public option” really be 50 plans or will it be one national plan, either by design, or by strict federal regulation of what the public option plans can look like?

Also, can states form regional plans by joining each other? The bigger the population covered by each single plan the better....

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