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Harry Reid’s “Corporate” Public Option: Not Public, and Not an Option

Harry Reid says it might be best to use a corporation as the vehicles for the public option. That’s a really bad idea. Here’s why.

Any corporation set up to act as an insurance company will have to follow the same business practices as health insurance companies do today. As this post explains, one of those practices is the requirement that they have large reserves. The first days of operation require cash on hand, and the corporation will have to be capitalized by the Treasury. The premiums come in well before they are needed to cover outgoes, and good business practice requires that they be set at a level high enough to accumulate a protective layer of cash so that the company can handle irregular cash flows of payments for medical expenses.

Suppose instead that the public option was set up as a department in the Department of Health and Human Services. There would be no need to worry about a cushion, because the Treasury would be making payments. If premiums weren’t enough, Treasury would cover them one year and make them up the next. If there were an overage, the next year’s premiums would reduced from the projections.

Second, the corporation has customers all across the country. It has to establish provider networks everywhere. It has to establish payment provisions suitable for all parts of the country. This creates an unreasonable level of costs. As a separate corporation, it couldn’t force participation by physicians and providers. It would have to bargain with them one after another. It would have to work out reimbursements and then calculate premiums. It would have to have staff and equipment equal to an insurance company, only one with its customers spread out over the entire country.

As a government agency, it will have the ability to bargain. The original HR 3200 barred participation in Medicare by physicians and providers which didn’t participate in the public option. It set premiums for physicians at Medicare plus 5% and other providers at Medicare rates. In itself, this will reduce costs. And look how easy and cheap it is to set things up.

Third, there is the matter of governance. Reid thinks the board of directors should have some federal officials and presumably some others, but we should assume that the rest will be political appointees. On whose behalf is the entity operating? How will it decide questions like this: if there is a large surplus, but in one year premiums were set too low resulting in a loss for that year, does the entity make up the shortfall from surplus or does it increase premiums the next year? This is a real concern; Michigan Blue Cross chose to raise premiums in that situation. This situation, and others, create conflicts of interest between the insureds and the taxpayers. How does Reid think that conflict should be resolved?

Not content with this stupid idea, Reid goes on to suggest that this proposed corporation would farm out the operation of the public option to some other private corporation. He was thinking of Blackwater, I believe.

This whole idea is a non-starter. Reid should get behind a real public option like his constituents want him to.

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