Health Insurance Price Discrimination And The Public Option

A public private option allows for price discrimination, creates disparate benefits, creates social classes and raises prices.

The public option in education allowed the double the inflation rate tuition increases in private institutions. The public/private option allowed price discrimination. The more price sensitive parents and students switched to public universities with their lower tuition. The price insensitive students kept going to private universities and universities found that they could further increase prices without negative revenue effects.

Without the existence of any public educational institutions, the price sensitive students would have to go to private universities and tuition increases would result in loss revenue to private institutions. Private schools would not have been able to afford tuition rebates (financial aid) to all the students in public universities. Completely underserving the price sensitive population is politically and publicly impossible. Without public educational institutions, private universities could not raise their tuitions as much as they did without suffering a negative financial impact and without a political and a public backlash.

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.

Furthermore, it would not be surprising to see geographical segregation based on expected health costs in attempts to increase benefits. Lower expected medical costs groups could band together, most likely geographically, and asked for private insurance based on their lower expected medical costs. Since premiums are the observable metric in medical insurance, benefits (the return to the consumer) will increase without lowering premiums. Subtle housing discrimination could develop based on medical cost profiling further solidifying the class distinctions based on expected medical insurance costs and public versus private insurance.

I published a very similar post to the above on The Capital Gains and Games blog. Unfortunately, the comment defaulted to the author's name of "Yet Another Budget Wonk" and I did not notice until I submitted it to the blog and it was too late to change.