The Public Option and Price Discrimination

Wed, 15 Jul 2009 01:15:47 +0000

Blogger Milton Recht made a very good comment on my recent post about public/private competition in health care and education markets. Here's his description of what would happen if the public/private split in healthcare markets looked like education markets (with my emphasis):

A similar effect is possible with the introduction of the public health insurance option. Health insurance price insensitive consumers will buy an expensive private health insurance with extra bells and whistles. The public option will be cheaper (either by forced price controls, subsidies, fewer benefits, rationing, longer delays, denials, etc.) but it will not have the bells and whistles (or maybe just prestige) of the private option.

In this price discrimination situation, there will be two different goals. The public option will want to be as low cost as possible and it will curtail benefits as much as it served population will allow. The private option will want to distance itself from the public option as much as possible, adding many additional benefits and pricing itself as high as it served population will allow and that will maximize profits. Over time, the low cost public option users will want the better benefits of the private option and force the government to try to increase benefits or deal with an increasing dissatisfaction among the electorate using the public option. The result of a public private option is class distinction based on the source of the benefits, a public education versus an elite private education or a public health plan versus an elite private health plan.


The sentence I've highlighted is what distinguishes whether this will be "Medicaid for all" or "Medicare for all." The program is operated within state budget rules (though with some federal funding), so there is no presumption that costs can grow without regard to other funding priorities and the current taxpayers willingness and ability to pay. The beneficiaries of the former are low-income and thus too weak politically to effect these changes through the political system. They get very little help toward that end by the suppliers in the market. My concern about a larger government role in health care is that with federal funding and a beneficiary population with more political muscle (like the elderly in Medicare), there will be very little to control over the cost growth in the program. We'd have all the risks of third-party payment, with a direct line to the Treasury and a sense of entitlement to the funds.

Be sure to check out more Milton's posts at his blog, Misunderstood Finance.