Health 'Opt-Out': Brilliant Maneuver or Crippling Compromise?

03/18/2010 05:12 am ET | Updated May 25, 2011

Democrats on the left and right are expressing interest in a new compromise that would provide a public option in the health bill but allow individual states to opt out of it. People may well be right when they say this is a deft way to pass a bill with 60 votes, but policymakers and observers should be clear about the potential downsides. It could disable the already-hamstrung public option, create new political liabilities, and be castigated by critics as the "Blue Cross of Alabama Enrichment Act of 2009."

A simple thought experiment might clarify the issues at hand: What if Medicare had been passed with this 'opt-out' provision? To make the thought experiment more appropriate to the situation at hand, we must imagine that the 1965 law creating Medicare had already been subject to the same compromises that the public option has been: that its ability to negotiate with certain suppliers and providers has been negotiated away, and that instead of being available to all older Americans, access has been restricted so that only an estimated 5% of them are expected to join.

A plausible answer is that a number of states, especially in the South, would have chosen not to participate.

What happens next in our thought experiment? Our hypothetical Medicare program, which was already likely to enroll only a few million elderly people, is now likely to enroll even less, reducing it by 20-30% or even more. That means it has even less operational efficiencies, even fewer economies of scale, and less leverage with those suppliers with whom it is permitted to bargain.

The end result would probably have been a pretty weak Medicare - one that's unable to report significant savings when compared to the private sector. Those weak results, the product of political compromise, would probably then have been used by political opponents as evidence that "government-run healthcare" doesn't work.

Now that the thought experiment's out of the way, let's consider the states that are most likely to opt out of a public option if this provision is enacted. Alabama would be high on anyone's list, and Blue Cross has 83% market share in that state. In practice, that would mean that most middle-class Alabama families would be required to purchase Blue Cross insurance or face a tax penalty under the mandate provisions of the Finance Committee bill. The bill would strengthen an already-unacceptable monopoly while increasing the financial burden on working people.

The monopolization problem isn't restricted to one locale, either. An AMA study concluded that one carrier had 70% or more of the market in 37% of areas studied. In 16% of areas one carrier had 90% or more of the market.

And those are precisely the areas where carriers will spend whatever it takes to get an "opt-out" enacted. Add in the ongoing mergers in the health industry and the study which shows that 94% of markets have a near-monopoly situation already, and you have a genuine ethical problem in any state that chooses to opt out of the public option. (Ironically, it was Sen. Schumer who first discussed the monopoly problem - the same Sen. Schumer who is now pushing the opt-out idea.)

One solution to this ethical problem would be to waive the individual mandate for states that don't offer a public option. That would make the compromise more defensible, and would provide more incentive for insurance companies to accept full reform. But is that likely to become part of this package, especially since the CBO already estimates that 6% of Americans will remain uninsured following the enactment of a bill that we were told would achieve "universal coverage"?

Liberal supporters of this compromise are quick to suggest that few states will opt out, and that leaders in those that do will face severe punishment at the polls. They're not considering the massive amounts of money at stake, and what that will mean in terms of insurance industry campaign contributions. There will be even more money spent on advocacy ads that explain why the public option is "bad for America, bad for (your state here), and bad for you."

The usually genteel Nate Silver opts for an uncharacteristically harsh and sarcastic approach in voicing his support for this idea. "Opt me out of public option purism," he says, deriding (but not naming) the "usual suspects" for their rigidity and suggesting that "this compromise is leaps and bounds better than most of the others." But the right question is: Will it work? He says it will, and cites the behavioral economics theory that says change to the status quo is difficult because "default preferences are extremely powerful." Yet this entire debate is about major change. We're only discussing this issue because we've rejected the "default," which seems to render that argument somewhat moot. Sure, it's better to have an "opt-out" than an "opt-in," but a number of states are still likely to leave the system.

Nate then suggests that public sentiment will shift if, as seems likely, a public option is proven to reduce costs. But we're talking about changes here that make it less likely that a public option will significantly reduce cost, so we're skewing the results before we even begin the process.

To paraphrase Mao: Let a hundred flowers bloom, but don't water 99 of them.

Ezra Klein argues for the "opt-out as fair competition" model, too, adding that "It also creates a neat policy experiment." But the experiment's not so "neat," and not much of an experiment, if a series of compromises rigs the outcome. And the experimental subjects in those monopoly markets may not be happy with their test-subject status.

Will a major compromise be necessary? It's possible, and if that happens realists may decide that this idea warrants consideration. Fair enough. Nobody who follows practical politics can afford to be a "purist," to use Nate Silver's language. But let's be realistic about our compromises before we make them, and let's not leap to embrace major compromises by pretending they are less significant than they are. It's misleading to imply that a "robust public option" can co-exist with an opt-out. Should the day come when all other options fail, Democrats should make an informed decision: The opt-out is a hard blow to the public option, and potentially a crippling one. Medicare as we know it might not have survived such a compromise. When a solution sounds too good to be true - we can compromise and still get everything we want! - it probably is.

For those who agree with Sen. Sherrod Brown that "the public option is the moral compass of health reform," the stakes are even higher. If it's really a moral issue, how can states be allowed to opt out? If this is your position, the opt-out is the moral equivalent of the Missouri Compromise.

Is a 60-vote, non-reconciliation outcome in the Senate worth the loss, the cost, and the risk that an opt-out provision brings? Maybe in the end the answer will be 'yes,' but that question should only be posed after all other options have failed. In the meantime, Democrats who remember the successful fight for Medicare might best be served by the acronym WWLBJD:

What would LBJ do?

RJ Eskow blogs when he can at:

(From time to time I put my comments in context with a disclaimer statement like this: I have done consulting work for large health insurance companies in the past. While I'm not doing any such work at the moment, I might do so in the future - although that becomes less likely every time I write a piece like this one.)