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The Promise and Perils of Public Options

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The Promise and Perils of Public Options

February 21, 2020

A review of The Public Option, by Ganesh Sitaraman and Anne Alstott (Harvard University Press, 296 pp., $25.95).

The Medicare for All debate has brought attention to proposals for a government-run health care plan, which have been branded as a “public option.”  This is often seen as a ruse to disguise the imposition of single-payer health care by rendering private coverage no longer viable in practice. But, issues of political strategy aside, is there a genuine case to be made for the ideal of the government providing goods and services alongside private alternatives?

In their book The Public Option, law professors Ganesh Sitaraman and Anne Alstott argue that there is – citing the postal service, public defense attorneys, and municipal golf courses as examples that are long familiar to Americans. Although the authors frame their case as an attack on the familiar progressive bogeymen of “neoliberalism,” “unfettered capitalism,” and “religious faith in markets,” their argument for establishing or expanding various “public options” in a number of policy areas is most convincing as a critique of voucher-based government spending.

Alstott and Sitaraman recall the package of employer-sponsored health care, pensions, and other social benefits made prevalent by postwar labor agreements. They argue that since the 1970s such arrangements have declined because of international competition, shareholder pressure, and ideological transformation. They note that instead, “Vouchers, state-provided coupons to purchase private services, became the dominant approach for how government could advance social goals by market means.”  A shift toward public assistance for the purchase of private services, they argue, has left individuals facing more risk and increasingly insecure benefits.

The authors argue that distributing public funds through voucher programs fails to accurately identify or prioritize basic needs. When programs attempt to adjust the value of assistance in accordance with variations in needs, voucher programs become complex, which makes them hard to administer, inefficient, prone to fraud, and leads to an emphasis on one dimension (such as coverage) at the expense of others (such as access, price, quality, or geographic considerations).

The recent history of the subsidized health insurance plans established by the Affordable Care Act demonstrates such difficulties. By establishing a Rube Goldberg mechanism of subsidies and regulations to guarantee a defined coverage benefit to enrollees, a mechanism that is fully integrated with the mainstream insurance marketplace, the ACA has driven up the cost of health care and left the individual market dysfunctional and dominated by insurance monopolies in many places.

By contrast, the authors argue, funds aimed at creating publicly-managed benefits can more easily be targeted to ensure that basic needs are cost-effectively prioritized. It may be easier to control wasteful spending via the direct provision of services than via open-ended vouchers. The authors cite the lower cost of education at public universities and suggest that for-profit colleges are often just overpriced scams seeking to exploit loosely regulated access to public subsidies. They note that, whereas 48 percent of students at public universities take out federally subsidized student loans, 96 percent of students enrolled at for-profit schools do so.

Subsidizing demand when supply is inelastic often proves inflationary. Thus, the authors conclude, so long as the housing supply is fixed, vouchers may  do as much to drive up house prices as to make housing affordable. The structure of subsidies for health care and higher education have induced an arms race dynamic, with competition on quality, amenities, and convenience driving up costs, while consumers pay little attention to price. Subsidies that make demand insensitive to price have been particularly problematic for positional goods like college education, and have sent prices associated with superstar providers spiraling upward.

Although poorly designed voucher programs could in theory be reined in or reformed, in practice, Alstott and Sitaraman argue, they encourage private actors who profit from them to wage a fierce and often successful political defense of lucrative and even fraudulent practices. Unintended flaws in the design of these programs may for this reason quickly get out of hand.

Alstott and Sitaraman acknowledge that vouchers may be better suited for some purposes (they cite the example of food stamps), and suggest three criteria to highlight when a public option is likely to perform better: first, where access to a good is fundamental to equality or liberty; second, when markets don’t function well (due to monopoly, externalities, transaction costs, etc…); and third, when government actors can easily be held accountable for price, quality, and access.

Whenever public funds are privately managed, there is a temptation to privatize profits while socializing losses. The best argument for public options may therefore be that, by maintaining a clear distinction between public and private, they can ring-fence the moral hazard associated with public assistance, leaving the rest of the market freer to function uninhibited. Indeed, it is possible to imagine that a public option serving as a high-risk pool for the unavoidably uninsurable may quiet qualms people may have with deregulating health insurance markets for everyone else.

But though there may be cases in which public options are appropriate, there are additional reasons for skepticism.  

The market power of a public option is likely to be greater than that of private businesses in even weakly competitive sectors like telecoms, making it less responsive to consumer needs and preferences, especially over the long run. A public option would surely make it harder for entrants to win market share and greatly reduce disruptive innovations, the bulk of which are usually done by new firms. It would also do little to solve “market failures” that are actually caused by policy interventions, such as regulatory restrictions on housing construction, and may divert political pressure away from steps to remedy them.

Many of the underlying trade-offs and opportunity costs that make private options unpopular would likely remain unaltered with a public option. Alstott and Sitaraman endorse a public option for childcare, but the high labor costs that make private childcare prohibitively expensive for low-to-middle income earners in major cities would likely affect public childcare as well. It would be hard to justify a public program that provides $30,000 per year in childcare for two kids so that a mother could take a $20,000 per year job. When Quebec established public childcare and strangers replaced parents and relatives in caring for young kids, the province’s performance on a host of measures of child well-being (including anxiety, aggression, development of motor skills, and illness) deteriorated relative to the rest of the country.

After blaming neoliberal ideology for the decline of defined-benefit pensions and the rise of 401(k)s, the authors suggest that a public option may prove to be a better steward of savings over the long run. Yet, America’s switch to defined-contribution pensions was mostly the result of the Employee Retirement Income Security Act of 1974, which required employers to set aside adequate funds to fulfill promises associated with defined-benefit pensions after several had catastrophically failed to so. The track record of state employee pensions, which remain defined-benefit but exempt from ERISA’s regulatory requirements, offers good reason to believe that public management would destabilize pension finance.

Every legal provision of a public program quickly becomes highly politicized and difficult to change or reform. Alstott and Sitaraman suggest that a public option would be accountable to voters rather than consumers, but politicization of a public monopoly necessarily favors those most organized to vigorously participate in disputes over a vast array of arcane operational issues; i.e., producer interest groups rather than customers. Under Medicare, thousands of reimbursement rules and payment rates for services are perpetually the subject of fierce political battles. As a result, Medicare beneficiaries are exposed to potentially unlimited out-of-pocket costs for prescription drugs, while a cap on such expenses is mandatory under private insurance. Rather than public administration leading resources to be efficiently targeted where most needed, a public monopoly tends to protect benefits accruing to groups with the most political clout (like teachers unions), while cutbacks become focused on other aspects of services (like equipment or facilities), which lack such a powerful constituency.

A public option often sits uneasily alongside private alternatives. If it were required to compete on level terms with private organizations, a public option would likely differ little from the variety of private options that already exist. If a public option were required to bear additional responsibilities, such as providing better services to cases with greater needs, it would find it difficult to survive against private competitors free to cherry-pick customers. If one were established with substantial tax, subsidy, and regulatory advantages relative to private health insurance plans, it is hard to see how the latter could remain viable. The complexity of voucher subsidy rules is often an attempt to focus assistance on the needy while at the same time mitigating adverse impacts on competition.

The word “option,” which makes a big difference in opinion polls, seems to amount to little in Alstott and Sitaraman’s vision of the world. Although the authors repeatedly discuss the US Postal Service as a “public option,” they nowhere mention federal laws prohibiting the carriage and delivery of letters by rival private organizations. Even more remarkable, the authors claim that Social Security is “optional” because contributors could refuse to claim the associated benefits!

An effectively mandatory “public option” would therefore likely share many of the disadvantages of single-payer health care: shortages, suppressed demand, and rationing of expensive medical services. Yet, the experience of Australia suggests it might leave room for supplemental insurance and treatment at dedicated private hospitals to make up for the shortfalls – resulting in a two-tier system in which the majority of the population are in the bottom tier, often unable to access expensive medical services when they need them.

The bifurcated quality of services under a public option can similarly be observed in America’s schools. Rather than creating equality, preventing parents from directly choosing between public schools has led them to use the housing market to do so. Management by a public monopoly has resulted in a bundling educational concerns with residential choices, thereby coarsening and exacerbating inequalities. Alstott and Sitaraman acknowledge an association, but not a causal link, between public options and historical racial segregation. School vouchers are popular among African Americans because such polarization of provision between high- and low-income neighborhoods is inherently unequal.  The American health-care system undoubtedly faces many problems, but they are unlikely to be best solved by moving to a system in which there is one set of hospitals for the poor alongside another for the rich.

Market forces should be harnessed rather than fought against. Vouchers can more easily be designed to supplement rather than supplant private spending. Whereas the authors lament that funding for America’s public universities has fallen in recent decades, its private universities have experienced a boom and are the best in the world. While the resources available to American health care have risen steadily, single-payer health-care systems are chronically short of funds and must ration essential medical services. Scarce public funds are better focused on those who are least able to pay for themselves, rather than being stretched across the population as a whole.

A public option tends to frustrate distributive priorities, because resource allocation is constrained by operational considerations. Political pressure to keep facilities open often leads to a death spiral of falling revenues, service quality, and demand. For instance, federal Critical Access Hospitals are not an equitable way of providing actual low-income rural people with cost-effective care; instead they support rural institutions that drive up costs and reduce quality. Over time, the allocation of assistance distributed through rigid public institutions becomes increasingly inequitable and misaligned with evolving social needs and priorities.

The rise of voucher-based finance was not just the result of the political right’s preference for private enterprise. It owes much to distributive objectives of the center-left in a diverse and changing society. Voucher-based finance also best aligns with the modern liberal conception of justice as what is most supportive of equality, freedom, and neutrality as between lifestyles. As Allan Bloom noted: “With respect to ends, government for Rawls must laisser-faire; with respect to the means to the ends, it must beaucoup faire.” 

The choice between vouchers and a public option is therefore not just a technical matter of a make-or-buy decision by the government, but concerns the scope of control and choice afforded for individuals to use government funds to pursue their own preferences. At one extreme lie proposals like Andrew Yang’s to redistribute cash with no strings attached; at the other are those that would provide benefits in-kind with no options. Although Alstott and Sitaraman envisage public options as supporting liberty, the case for them is, in its essence, a paternalistic one.

Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

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