Would a public option drive private health insurance out?

The provision of health care in the United States is in a sorry state, delivering at the macroeconomic level substandard health among industrialized economies at by far the highest cost. Much needs fixing, the prime candidates being the lack of competition on the pharmaceutical market, the employer-based health insurance, the overpriced doctors and hospitals and the over-reliance on emergency care for non-emergency issues. The upcoming Obamacare tries to address a few of these issues, and we will see how it will survive the attacks of those due to lose their rents.

One facet of the proposed solution is the introduction of a public option on the health insurance market. Instead of relying entirely on the private, for-profit provision of health insurance, with a public, not for profit option is it thought that a higher level of competition can be achieved. Andrei Barbos and Yi Deng study this by building a game-theoretic model of households with uncertain health outcome choosing between private and public options. The private option survives because of product differentiation: the households that believe they have lower health risks can be attracted with higher deductibles and lower premiums. And I think that we tend to be overly optimistic in this regard, so the private insurance market will remain substantial. The paper also shows that allowing some deficit in the public option or capping the profit margin of the private insurers increases social well-being, highlighting the potential inefficiencies in private for-profit insurance.