I got into a recent discussion with a first order thinker. A first order thinker is someone who sees only the initial effects of a decision and fails to look two to three or more chess moves away. The discussion was regarding the public option in Obamacare. I thought I would share my short response to the individual here.
Sure a public health insurance plan would provide low cost health insurance to people in need. That first order effect is good. However, in previous posts I have discussed the second and third order effects of how low cost health insurance incentivizes excess medical care costs. Please see my last few blogs on health care. I won't waste time on that here.
If the government option stays in, business will have the option to pay a fine or provide health insurance. So far, that fine appears to be lower than the cost of healthcare for most business. These businesses would be incentivized to cut their costs to be competitive and would just pay the fine, not providing healthcare. This impacts both the providers of healthcare and the health insurance business and its remaining customers.
The effect on healthcare providers: This would significantly push many people in the private health insurance market to the public option. Since the "public option" would really be a government run business, they would, as they have with Medicare and Medicaid, fix the price low, similar to rent control.
Typically when a price is forced low, the supply of individuals willing to provide the service at that controlled price falls and the demand grows (in the case of healthcare paid by the government - free, that demand grows exponentially).
With the lower price from Medicaid and Medicare, physicians and healthcare people have been able to shift costs to people with private insurance, thus making up for the loss from the lower fixed revenue from government payers. This approximates the real set price, and thus the supply of providers has not taken the same hit, as rental unit supply in cities with rent control. For more on the problems this has caused the heath care system see the blog below.
However, if the pool of individuals on the forced lower rates grows and the pool of people on the private insurance companies falls, the ability to shift costs will dramatically effect the overall revenue produced in the business and thus will significantly impact the supply of people willing to provide heathcare at the new reimbursement rates forced by the government payers.
The cycle would further spiral out of control due to the impact on private insurance. As fewer people purchase private insurance, and as costs are further shifted to them, the price for insurance will continue to skyrocket. As this happens more people will bail to the public option, further driving the spiral.
It is not difficult to envision, with a little common sense, the end result of the public option as it is currently written is single payer system. Which, interestingly enough, President Obama has been video taped articulating as his ultimate goal.