11/24/2009 05:12 am ET Updated May 25, 2011

Some Problems With the Partial Public Option

Throughout the Summer, Obama declined to provide any details about his health care plans. The justification was that any plan that would be offered would instantly become a piñata. Unfortunately - as even Obama has admitted - the flaw in that strategy is that in the absence of a real piñata to whack, opponents of reform were able to hit an imaginary piñata with imaginary sticks. The thing about hitting an imaginary piñata with an imaginary stick is that you almost never miss.

Now we are in phase II. Polls suggest that most of the public does not buy the attacks on the imaginary health care plan that was the piñata at all those town hall meetings. And of course, the main piñata is the "public option." In his speech, President Obama insisted that he envisions a public option only as a fallback safety-net program for "less than 5%" of the population.

The politics of the public option are muddled. Polling shows that one can get swings of more than 40 points - from 34% in favor to 77 % in favor of a public option - depending on whether the question is worded so that it refers to the "choice" of a public plan or "a public health care plan administered by the federal government that would compete directly with private health insurance companies." So the key, from a political perspective, is that people feel they are being given a choice. The problem from a policy perspective is that it is not entirely clear that would be the case. Here are a couple of reasons why.

One of the favorite arguments of opponents of reform is the claim that a public plan would necessarily drive private insurance out of the market, and thus end up diminishing the choices available. That argument depends on the presumption that the public insurance system would be heavily subsidized. Obama says this is not so. He says the public option is expected to cover only about 5% of the population who cannot afford to purchase private insurance through the new interstate market. There is also an assumption that people will be required to purchase private insurance if they can afford it and do not receive it from their employers.

The problem involves employers. Some proposals require employers to purchase insurance for their employees. Leaving all other issues aside, the continuing rise in costs means that those employers will be squeezed more and more severely. Among other things, this puts a drag on job creation, which is a Very Bad Thing. Alternatively, the House bill does not require employers - especially small employers -- to purchase health insurance for their employees. Instead, those employers would be permitted to pay a tax equal to 8% of payroll (for employers earning more than $400,000) that would help fund the public option. Employers with payrolls under $250,000 would be exempt. The first problem with that idea is that it raises the specter of large numbers of employees working at businesses with payrolls under $250,00 being pushed into the market. But the 8% penalty has problems of its own. As insurance costs rise, 8% of payroll is going to become increasingly less expensive then providing insurance, giving employers an enormous incentive to choose to pay the tax and let their employees loose in the market place. Then what happens?

Remember that the main proposals being discussed require people who can afford to buy health insurance to purchase it. By necessity, there will be a formula for determining what people can afford; if you want to see what this looks like in practice, check out a FAFSA , the form that parents and students fill out to apply for college financial aid. Lots of people find that what the government says they can afford and what they think they can afford are miles apart. In the case of college, this leads students to attend less expensive schools. In the case of health insurance, that's not going to be an option. So those no-longer-covered employees will be in the position of being forced to spend money they do not want to spend. How much money? The Baucus bill could require people to spend 13% of household income.

But the effects of forcing people to spend significant portions of their income on insurance and the incentives for employers to stop purchasing coverage are only the first set of problems. Here's the second. The public plan is either going to offer high quality, generous coverage or it is going to be a demonstrably inferior product. The former scenario raises the prospect of higher costs, with more people requiring financial assistance, and higher levels of government subsidy for the program itself. All of this creates a consequent incentive for large numbers of people to switch to the public option. Which a) creates a spiral of upward costs, and b) really does begin to look like a step toward single payer, or at least something a lot closer to that than the President is letting on. (Single payer may be a great idea, but it is not the one presently being discussed.)

The alternative, that the public option will offer an inferior product in order to keep it affordable, leads to the outcome that as employers stop buying insurance, employees are effectively forced into less generous coverage plans, public or private. Which makes hash of the reassurances that everyone will be able to keep the plans they already have.

As I have already suggested, some people will see all this as a good argument for a single-payer program. A large-scale public plan that competes with private insurance can, indeed, keep down costs, although almost certainly at the cost of reducing levels of coverage. (Which might not be a bad idea, given the ways in which the overuse of tests and technology drives up health costs - but again, that's not the way this thing is being sold.) Other people might say that we should require employers to buy insurance for their workers and trust that the costs can be brought down - or the alternative contribution to the public option made so high - that employers will prefer offering coverage. But that just perpetuates the dysfunctions of the employment-based coverage system we have now. Moreover, there's not much in the plans (especially the one proposed by Max Baucus) that looks like it will reverse the secular trend in health care and health insurance costs, and squeezing employers is not a good labor policy - just ask the folks in Detroit.

There are 500-plus proposed amendments to the bill being reviewed in the Senate Finance Committee - maybe somewhere in there we have a solution to these problems. Right now, though, the partial-public-option-for-those-in-need model -- the one Obama touted in his speech -- looks like it puts either middle and lower-middle-class people or small business owners in a vise. The ones who come out of this with really great prospects are - who else? -- the insurance companies.