The Public Option Survives! Would It Work?

Suddenly, the public option is the Charles de Gaulle of the healthcare debate: resurgent, victorious, beloved by all.  I'm not sure I get it.

The only way the public option saves money is by using fiat to slash reimbursement rates to some variation on Medicare reimbursements:  Medicare +5%, +10%, or whatever rate they finally settle on.  Otherwise, it's unlikely that the thing will even compete on an even basis with private insurers, who have a lot more experience managing billing, claims experience, and negotiations with providers.

The problem is, Medicare doesn't pay the average cost of providing services in many cases--in some cases, it doesn't even pay the marginal cost of providing services.  Conservatives frame this as Medicare "free riding" on the private sector, but that's not necessarily correct.  The fixed costs of the health care industry are, as the name implies, fixed--they have to be averaged over the entire population of patients.  Now, if you think that without Medicare, seniors would consume a lot less healthcare, the population of patients with private insurance would still have to pay for most of those fixed costs.  So as long as Medicare patients generate more revenue than the marginal cost of treating one additional patient, they're profitable for the hospital--and probably even lower everyone else's bill a little bit, by at least partially defraying some overhead.

Of course, if you think that in a universe without Medicare, many or most seniors would probably have found a way to consume a bunch of health care, then yes, Medicare is free riding.

But moral calumny aside, the thing about patients whose insurance doesn't cover the average cost of treating them is that they cannot be 100% of your patient pool.  Someone has to cover the cost of that MRI machine.  If the public option does manage to crowd out other insurance--as it might well do, with the ability to dictate price controls--then suddenly, the public option won't be cheap any more.  Hello, fiscal crisis.

That's the financial problem.  Here's the political problem:  if you insert a strong public option, the providers will revolt.

You've already lost the insurers.  Try to reimburse hospitals and doctors at Medicare + 5% for any large segment of the market, and you'll lose them too.  Health care reform is likely to survive the defection of the much-hated health insurance industry.  I doubt there is any way at all that it survives negative ads from coalitions of doctors, hospitals, and other assorted healthcare workers.  I don't see Obama having much success getting on the radio one Saturday morning to complain that doctors are all a bunch of lying obstructionists.

The House dealt with the problem by sweetening the deal for physicians:  they "fixed" Medicare's Sustainable Growth Mechanism, which would slash physician reimbursement by more than 20% if it weren't ritually repealed every year.

The problem is, this costs money, almost $250 billion over ten years.  This made the House bill cost more than Obama wanted to spend, and also, not so deficit neutral.  The CBO is not going to find another $200 billion worth of surprise dynamic effects to keep the final bill from adding to the deficit over the ten-year window.  And the tax increases the House wanted to implement have two major problems:  it's unlikely they'll get through the Senate, and if they did, they would pretty much completely exhaust the remaining politically acceptable revenue sources available to help close the existing, gaping budget deficit.

Either way, a bill with a strong public option looks to me like a bill that can't pass.  What am I missing?