"A Public Option Isn't a Curse or a Cure"

This was in today's links and received quite a few comments, so I'll put it into its own post in case people want to continue the discussion (I think the post below this one refutes some of the main points, e.g. that the public sector can never win a fair fight or be innovative):

A Public Option Isn’t a Curse, or a Cure, by Richard Thaler, Commentary, NY Times: [T]he question of whether a “public option” should be part of the health care solution ... is a red herring, and is getting in the way of genuine reform.

In debating the public option — that is, an insurance option run by the government — the politicians themselves are making exaggerated claims about its pros and cons. We hear from the right that an insurance plan run by the government will drive all private-sector insurers out of business and be the first step toward socialism, if not communism. The left claims that only a public option can give evil insurers the competition they need to create much-needed reform.

To evaluate these contentions, we need to know some details about how a public option would work in practice. And those details have been missing.

For example, President Obama has said that the public plan would be required to break even financially, but Congress hasn’t decided how to make that happen. ... Nailing down this detail is crucial. If the public option does not have to break even — if, in fact, it is to receive government subsidies — then it is correct to worry that it would destroy competition, not foster it. ...

A second detail is whether the government will grant the public plan the power to impose special deals with suppliers like hospitals and drug companies — a move that would dampen, not enhance, competition with the private sector. But let’s assume that the public option does have to break even and can’t make any special deals. What should we expect to happen?

Here is a thought experiment: Can you think of a domain where a government-run business competes successfully with private-sector companies? ...President Obama mentioned one such example: the market for overnight shipments. This market now has two main private suppliers, FedEx and UPS, and one public one, the United States Postal Service. When you have to send something overnight, which one do you use? Most shippers choose one of the private companies. ...

More generally, it is hard to find examples where government-run businesses compete with private companies and win. One reason is that governments are not very good at innovation. As the great 19th-century economist Alfred Marshall wrote, “A government could print a good edition of Shakespeare’s works, but it could not get them written.”

But what about the often-stated fact that Medicare has much lower operating costs than private insurance companies? Won’t this allow the public option to compete successfully? As Victor Fuchs ... recently argued in The New England Journal of Medicine, this is not an apt comparison because the new public plan would have marketing and other administrative costs that don’t apply to Medicare with its captive market.

All of this leads me to conclude that if we impose sensible rules on the public option, it will neither save nor destroy the health care system because it will simply not get much market share. And if we do not impose those rules, the public option will hurt rather than help.

So here’s some free advice to members of Congress: ...

To the Republicans, I say this: If you can get real assurances that the public option has to break even, and that it will get no special deals from suppliers, let the Democrats have it but ask for concessions on tort reform in return. (That could actually save some money.) The resulting public plan will be too small to notice.

To the Democrats, I say this: If you want competition in health care, you won’t get it if the public option can make deals its competitors can’t. So either give the Republicans hard assurances that the public option would have to break even and not get special treatment, or, better yet, just give it up to ensure that some useful health care reform is passed. A public option is neither necessary nor sufficient for achieving the real goals of reform, and those goals are too important to risk losing the war.