"Public Option" out! "Choice and Competiton" in!

I hoped it would happen. The Obama Administration has seen the light and is ready to give up on a Medicare-linked public option (the only kind that could give the public plan an unfair advantage in a reformed marketplace). Now, the buzz-words from HHS Secretary Sebelius and Gibbs (WH Press Officer) are "Choice and Competition". I love it!

The problem with the insurance market has NOT been the evil insurance companies. The problem has been a failure of market regulation to guard against the four sources of market failure in health care insurance:

1. adverse selection bias into health plans -- If health insurance coverage is voluntary, and insurers can't deny coverage, only the old, or sick, or vulnerable will apply.
2. Cream skimming by health plans -- When insurers CAN deny coverage, or charge different rates to different people, only the healthy will be able to get insurance;
3. Incentives for over-use by the insured -- (this is called "moral hazard" by economists, a term that I consider to be incredibly stupid because it doesn't help me understand the problem. It's just an economist's way to keep normal people from thinking they know anything.) It's simple: if you don't pay the doctor anything (or very little) for a visit, or a test, or a procedure, etc., you'll have no incentive to restrict utilization or keep the doctor honest when he/she bills the insurer.
4. The provider is your "agent" in making health care decisions. Well, we pay him/her for that, don't we? Yes, but in this fee-for-service world he/she has an incentive to do more, or at the very least not to conserve resources. So, for example, the doctor may not get any money from ordering an MRI to rule-out something very unlikely but horrible, but he has no incentive NOT to order it, and it will justify a return visit (for which he'll be paid).

If problems 1 and 2 are fixed through regulation -- health insurance must be mandatory for all & health plans cannot discriminate either in coverage or premiums -- and if plans must compete for your business, then most of these problems will dissipate over time. It's the only way to get control over health care costs without leading to a single-payer system. (And I'm against a single-payer system, because Medicare and Medicaid are NO role models for efficiency and effectiveness in health care.)