The extreme danger of the "public option"

Now that the buzz in Washington is that the "public option" is back, resusciated from the coffin analysts thought it had been buried in earlier in the debate, it's time to tell the truth about how bogus the claims are about what the public option will and won't do. Fred Hiatt lays out in today's Washington Post how the so-called public option will do nothing to lower health care costs. Instead, all we'd get is a new, hugely expensive entitlement piled on to the Medicare costs that are fated to break the budget in a few years.

The "public option" is dangerous not for what it might do but for what it allows the politicians not to do.

From the start, the Obama administration has said that health-care reform has to make health care both more accessible and less costly . If Congress does the first without the second -- guarantees a new entitlement without controlling costs -- it will bankrupt us, because health-care costs are rising faster than the overall economy is growing.

Hiatt then goes through some of the possible reforms that might work to control costs. One that conservatives support would be removing the tax deduction that employers get for offering health care. We're stuck in a model that was created during World War Two when there were wage controls in place. Employers who were unable to offer wage increases in order to attract workers resorted to offering benefits instead. Thus arose employer-provided health insurance. The government liked the idea and offered tax benefits. However, this drives up the costs of health care because employers can offer so-called Cadillac plans and get the tax write off. The increased third-party payer participation means that people with health insurance have no real interest on being more cost effective in their use of medical care. Removing those tax breaks would be a win-win: the government would get more revenue and patients themselves would have incentives to be their own watchdogs on how much they're spending on health care rather than being indifferent because someone else was paying for it. But it's a political loser so our politicians will never support it.

What are those reforms? The most logical big thing Congress could do would be to tax, as income, the value of the health-care benefits Americans receive from their employers. By not doing so, the government forgoes $250 billion in revenue every year -- effectively, its second-biggest health expense after Medicare. It discriminates against people who have to buy insurance on their own. And it encourages overuse of health care, which drives up costs.

If employees had to pay taxes on their plan, they might opt for one that cost, say, $12,000 per year rather than $16,000, and push to receive the difference in wages. The government could use the revenue to subsidize health insurance for those who need help.

But many unions oppose this change, because they fear it would jeopardize their members' hard-won benefits, and so Democrats won't go for it. Sen. John McCain (R-Ariz.) embraced the idea as presidential nominee and was irresponsibly attacked for it by his opponent. Now Republicans oppose it so that, were President Obama to embrace it even in part, they could beat him up for retreating from his foolish campaign promise to reform health care without raising taxes on anyone but the rich.

Another change that might lower health care costs would be to decrease governmental regulations that drive up the price of insurance plans and health care. But politicians never like to cede power so that's a non-starter. So we're left with the myths of how a public option would lower costs and not alter anyone's existing health care. And that's a myth, a dangerous myth.

The claim merits skepticism. If, as advocates sometimes argue, a public plan operates without favoritism, it will be simply one more entrant in the marketplace. Like other companies, it will have marketing and administrative costs. In some markets served by few private plans, it could offer a useful alternative. But it won't radically reduce costs.

If, as advocates argue at other times, the point is to insure sick people whom private companies, despite all regulatory efforts, find ways to shun, the public plan could offer a valuable safety net. But that wouldn't save money.

And if, as seems likeliest -- and as House legislation mandates -- the plan uses government power to demand lower prices from hospitals and drug companies, those providers may lower quality or seek to make up the difference from private payers. Private companies would have to raise their rates, so more people would choose the public plan, so private rates would rise further -- and we could end up with only the public option and no competition at all.

We won't get lower costs and we will get humongous new public expenditures when we can't afford the entitlements we now have. Don't be fooled by all the gauzy promises of what a public option would and would not do. As Jennifer Rubin writes,

So it is this sort of reform — one that doesn’t do what it claims (control costs) and does do what it claims it doesn’t (create a government-run health-care system) that is supposed to attract a majority of votes in both houses of Congress.

We can hope it is not so, but don't bet on Congress's ability to pass fantasy legislation based on clicking their heels together and whispering "We think we can. We think we can." Unfortunately, we're the ones who will have to live with the real world consequences.