WILLIAMS: Caveat emptor regarding public option

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Senate Majority Leader Harry Reid capitulated to the liberal wing of the Democratic Party and proposed health care reform legislation with a public option for Senate vote. Aside from the paradigm shift from a private sector medical system to a government run and controlled medical system, the public option will inevitably lead to higher medical costs, lower quality health care and ultimately health care rationing. It also is the gateway to single payer government-run health care because ultimately regulated private insurance companies cannot compete against subsidized government health care.

It is instructive to follow the inevitable chain of events that will lead to inferior single-payer government health care using simple economic analysis. The operating political assumption behind this analysis is that Congress and the political class will always redistribute health care costs from younger, more-affluent and healthier voters to older, less-affluent and less-healthy voters to the extent that the latter class of voters has the voting strength to keep them in power.

A public health insurance company will always have lower initial costs than a private insurance company. Its lower costs will not be set by the market forces but by government regulations requiring health care providers to accept lower reimbursement rates. Government reimbursement rates to doctors, hospitals, pharmaceutical companies and other medical providers will be set below the rates charged to private insurance companies. The empirical evidence for this result is the present reimbursement rate paid by Medicare. Medicare reimbursement is approximately 80 percent of that paid by private insurers. It sets low reimbursement rates for two reasons. It has the market power of being potentially the largest health care insurance company. It has the force of the law behind it.

These low reimbursement rates will eventually reduce both the quality and the quantity of health care. Because doctors will get paid less, they will spend less time with public option patients. They will recapture a portion of the lost income from lower reimbursements by seeing more patients in the same amount of time. They will also limit the number of public option patients they treat. Once again, Medicare provides the evidence for this behavior. Doctors often limit the number of Medicare patients they treat because they receive less reimbursement from Medicare than private insurance patients.

Under a public option, hospitals and pharmaceutical companies will also receive lower reimbursement for costs. This is certainly the experience today for Medicare patients. In order to make ends meet, expect hospitals to cut stays, cut corners on tests and spend less on medical technology.

Since pharmaceutical companies will receive less reimbursement for drugs and other medical technology, they will have less money to plow back into research and development for new drugs and medical technology. It currently takes tens of millions of dollars to bring a new medical product to the market. Only a small portion of these products become commercially successful. Pharmaceutical companies only make these risky investments when they can hit a "home run" on their successful products. Therefore, with a public option reimbursement cap on "home runs," expect to see a decline in new medical technology.

In the initial stages of a public option, private insurance companies and private patients will end up subsidizing public option insurance patients. Doctors, hospitals and drug companies will charge private patients higher rates to make up for the lower reimbursement from the public option health care insurer. As a result these higher costs, private insurance companies will be forced to charge its policy holders higher premiums than those charged by the public option insurer.

Because health insurance premiums in the public sector will be lower than those charged by private insurers, many private policy holders will switch to lower-cost public option insurers. This will result in a two-tier health care system. The political establishment will prohibit the affluent, young and healthy from switching to the public option. They will be forced to pay higher premiums that subsidize the less affluent, older and unhealthy. This is an insidious tax on the former citizens in the form of higher premiums and a massive transfer of income.

The demand for medical services in the public sector will skyrocket because of the low cost of public option insurance. You do not need a course in economics to realize that when the cost of a product is reduced, consumers demand more. This will lead to a huge increase in national medical costs.

Proponents of the public option claim that the public option will lead to a reduction in health care cost because of savings from improved efficiency and will be fully funded. These claims stretch credibility. Readers will be hard pressed to come up with any program in which the public sector is more efficient than the private sector. A review of the actual costs of medical entitlement programs compared with the predicted costs shows that Congress has an abysmal record in predicting costs. Costs inevitably run multiples of the predicted costs of the entitlements.

When the costs of providing medical care skyrocket, the public option insurance company will have four options.

First, it can reduce costs by reducing reimbursement rates or services covered. Second, it can increase revenues by increasing premiums. Third, it can ration medical care like the socialized systems of Western Europe and Canada. Fourth, it can get a subsidy from Congress.

Given the lack of political will of Congress to deal with the exploding costs of Social Security, Medicare and other entitlement programs, it is all but a certainty that Congress will choose to subsidize the public option insurance company. Increased taxes or, even worse, increased national debt will be used to pay for this public option medical subsidies.

A public option will inevitably result in a two-tier medical system with the expensive private system providing superior health care. Congress will solve the cost problems of the public option system by destroying the private system. It will insist that a single government health care agency provide mediocre care to all Americans. After all that is only fair - all Americans should be served by a mediocre health care system. The only exception will be the health care system covering Congress and upper level government bureaucrats.

Many Americans will succumb to the siren call of a public health care option proposed by liberal Democrats. These snake oil salesmen are offering the balm of lower health care premiums and better health care. Everybody wants to believe them. Unfortunately an analysis of the public option confirms there is no such thing as a free lunch. Many sophisticated Americans learned that the hard way and lost their money in the risk less high return funds of Bernie Madoff.

Caveat emptor to Americans who believe that the public option will reduce Americas health care costs and improve health care.

c "The Armstrong Williams Show" is broadcast weeknights on XM Satellite's Power 169 channel from 9 to 10 p.m.