A Free-Market Case for the Public Option

Free-market conservatives and libertarians have made the case that sweeping health care reform, especially the inclusion of a government-run health insurance option, would undermine the free-market for health insurance. They rightly say that, without a free market, there are little or no incentives for promoting innovation or efficiency. The great thing about our system is that the more companies compete for our business, the more they must produce a better product at lower cost, and so on. But this is a fallacy because the health insurance industry is not a free market right now.

Something like televisions exist in a free market because consumers, if they don't like any of the new TVs on the market, can simply keep their old one. If they really don't like the market, they can even forgo owning one altogether; it will make you unpopular on game day, but it won't risk your life. Insurance is different. Anyone with a sense of basic self-preservation has no choice but to buy health insurance every single month. You cannot opt out, there are few options to choose from, and it's difficult to know how to price your future risk of injury. So health insurance companies have distorted incentives to innovate or provide a more cost-effective product.

A public option would, crazy as it might sound, make health insurance a free market. If there exists a government-run plan, which by all accounts would be basic and geared towards affordability, consumers will have the ability to opt out of the private insurance market. Private providers would finally have real incentives to provide a better product and innovate by building an insurance plan stronger than public insurance. Fears that a public option might decree certain treatments "not cost-effective," which are not as outlandish as some liberals think, should delight free-market conservatives because it would be an opportunity for private insurers to step in. Worried you might develop a condition requiring $60,000 medication that no public option would ever include? Buy a blinged-out private plan that, for an increased premium, will.

The hurrahs over last week's CBO score make this even more important. The deficit-positive badge on Baucus's plan makes it all the more likely that his version of reform will be similar to the final product, which means greatly enhanced coverage, through a weak but present mandate and other provisions, but no public option. In short, it means 29 million more people will buy private health insurance, which is great for them. But with insurers getting millions of guaranteed customers without having to improve their product, the incentives for innovation go way down. The already unfree health insurance market would become even less free.