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(This post was written on my iPod on the way to/from work today. Please excuse any spelling or syntactical errors).

This Christmas, I absolutely had my heart set on this yellow Mustang. Such power, such agility. The brilliant yellow would perfectly match the summer sun. I simply could not imagine a better Christmas present. So, Boxing Day rolls around and there’s this massive two tonne wrapped present on my front lawn. Hastily unwrapping it, I’m shocked to discover it’s a red Porsche instead. What the hell? I wanted a yellow car and I get a red car? Absurd.

That was the position the American people had when they woke up on Christmas Day and discovered the Senate had surprised them with universal health care.

The Left woke up and thought they were getting a public option and public funding for abortions. The Right woke up and saw pork barrelling everywhere and overregulation. Each had their hearts so set on an All-American muscle car that they just couldn’t see that they got something that does exactly what they wanted except better.

A public option is designed to promote competition in the insurance industry. If your insurer provides you with a faulty plan then you can say fuck you, I’m going to Medicare – their plans are better. But the health care bill, whilst unrooting unfair practices also unroots anti-competitive practices at the same time.

Before, if you got sick, you couldn’t switch insurers. You have a pre-existing condition. But the insurer could choose to switch insured – by terminating your policy at will.

But under the Reid bill, insurers can no longer discriminate against those with pre-existing conditions. You can change plans. And insurers can no longer terminate policies at will. The power has been returned to the People, and the people being the consumer, means it also returns competition to the industry.

More importantly, insurance contracts are more comparable. During the late 1990s, airfares dropped by a huge amount for one reason – expedia. Websites like these let people quickly compare airfares without having to call ten different airlines. Insurance contracts, which stretch into hundreds of pages of non-comparable terms. Now, under law, the contracts are restricted to 4 pages of plain English.

A public option is no use if you do not have a realoption to switch to that insurer. By fixing competition policy in the industry, now you can. Regulating insurance by banning existing unfair practices is no use because the insurance industry can just dream up new unfair ractices. But with a more competitive industry, if your insurer only provides only unfair contracts then switch insurers.

The competition need not be other corporations. They can be the new government contracts under the Reid bill. The government chooses the terms and (to some extent) the prices for these contracts. Or it could be from a non-profit insurer. True believers can set up their own health care co-ops. Or perhaps unions can provide members with health insurance as well as superannuation. We can finally put those luddites to good use.

On the other hand, a public option may not have done all the good that was promised. As I said, without the changes allowing easy switching between insurers it would have done no good at all. Furthermore, if health care costs blow out the government must foot the bill if there is a public option. If there is no public option, then if insurance companies fail then they are reinsured by other corporations. There is no case for bailing them out because there is no systemic risk to the economy (like the banks) or huge job losses (like the auto companies).

Choosing between a public option and a wholly private insurance system is about balancing risk and control. With a public option, the goverment totally controls what policies are issued by the government insurance company. But it also places all the risk from those insurance contracts onto it’s own balance sheets. Insurance, at it’s heart, is risk management. The insurer, in exchange for a fee (your premium), takes the risk of high medical fees away from the patient and onto the insurance company which is better placed to manage that risk. The government is not better placed to manage that risk. It has much bigger bqlance sheet to absorb that risk, but that balance sheet is already doing something- it’s paying for schools, roads etc. It’s reckless to gamble with taxpayer money like that.

The government contracts are a perfect balance of risk and control. The government maintains only total control whilst the insurance companies hold the risk on their balance sheets. I’m not across all the details of the government contracts, but I don’t see a way for that risk to spread to the government.

And on the right, the Reid bill achieves much of your aims as well. It lowers costs through competition policy. Systemic risk is reduced because medical loss ratios have been raised- insurance companies are forced to keep more capital on hand to deal with unanticipated large payouts.

And yes, you are right. The bill could have had less regulation – the goal in making legislation should be to minimise regulation. But minimising regulation is not the same as having no regulation – if you regulate one part of the industry, then you have to ensure you have consistent regulation elsewhere. The mortgage market is a perfect example – you have government interference in the form of Fannie and Freddie, but excessive deregulation elsewhere in the industry. As a result, incentives are not aligned, information asymmetries are amplified and the market cannot autocorrect itself.

The health care industry is exactly the same. Universal health care is by definition a form of government regulation – you are forcing people to buy health care. You are handing the insurance companies a monopoly. The laws of statistics ensure that there are a limited number of insurers (a law called the Law of Large Numbers says that you need a very large number of insured people for your company to be sustainable). From this limited pool of insurers, the laws of economics ensure that there are only a few dominant players in the market – the economies of scale are massive, whether from diversification of risk, advertising etc. The industry is necessarily anti-competitive. Therefore, you need appropriately targeted regulation to stop abuse of this monopoly. It is no different from allowing an infrastructure company to build a road – that is a monopoly, but you regulate how much of a return on equity that company is allowed to take from operating the road.

Could more have been done? Sure. I would have preferred more explicit competition policy – for example, forcing the industry to upload their policies into a central database which makes comparing contracts easier. Or creating an industry ombudsman to ensure that companies provide adequate levels of service when you do lodge a claim. I would have preferred less focus on regulation targetted at equity and redistribution of wealth and more on controlling costs. I would have liked to have seen tort reform as a way of controlling costs. I would have liked to have seen Congress take on the very powerful pharmaceutical lobby and the doctors union (the AMA) which have an equal part to play in exploding health care costs. I would have liked to have seen more steps being taken to address the problem of the aging population (one of the biggest future drivers of health care cost blow-outs).

But so what? This is progress, its better than nothing. And frankly, if the Republicans had realised that they were in the minority in Congress and made real efforts to be bipartisan then perhaps these changes could have been incorporated. Instead the Democratic leadership had to collect the votes of every single Democrat. And that required pork-barrelling. It required pandering and caused all those terrible things in the bill that Republicans will whinge about in the next few months. If you had genuinely tried to negotiate on the bill, you could have changed it.


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