A common view of the public option is that its non-profit structure and other administrative advantages would produce lower cost insurance that would attract customers away from private insurers. The insurers perpetuate this view, claiming it would lead to their demise but also claiming it would be a function of unfair government subsidies.

I’ve always been skeptical that such cost advantages would be significant or persist. But more important, I’ve come to believe that a primary advantage of a well-run public alternative would be to serve as an escape for people the private insurers sought to drive away. They’d do that through targeted marketing, disguised cherry picking and discriminatory treatment in the handling of claims and provision of care — like not having enough specialists lined up to handle those with particularly costly illnesses.

In other words, a guaranteed public health insurance plan would become more than just another option that might be cheaper if it were well managed; it would become a necessity for those excluded and discouraged customers — essentially older and sicker patients — that the private insurance industry would actively seek to avoid.

The need to have the public option function as a safety value would grow as enrollees got older but not old enough for Medicare. That seems to have occured in the current Great Recession when middle-age and older workers were layed off and lost their employer-based insurance.

I think this helps explain why many unions within the AFL-CIO have been persistent in supporting the public option, even though you might think their workers were usually covered by employer-based plans.

It’s only a small step from that logic to realize that the public option could foreseeably function as a bridge for those getting older but still years away from being eligible for Medicare. Anticipating this, I began to frame the public option as “Medicare II.”

This isn’t how the public option is currently discussed in the media or by its main advocates; I haven’t seen articles describing the public option in these terms. But read what Ezra Klein is describing in this post, in which he critiques the insurance industry’s second report (from Blue Cross Blue Shield) on what ails the Baucus Finance Committee bill:

But what’s interesting about the BCBS report is how clearly it shows that insurers have gotten themselves into this mess. Essentially, they’ve spent so long pricing the sick and the old out of the individual market that they don’t really know what to do when they’re allowed back in. Consider this paragraph from the analysis:

“Insurance reforms alone will substantially increase claims costs in the individual market. The individual market “risk pool” will be less healthy than today and will drive higher insurance premiums. We estimate the average medical claims for the uninsured are 20 percent higher than claims in the current individual market. In addition, certain segments with high medical utilization who are now insured through other arrangements will enter the individual market as a result of guaranteed issue and modified community rating requirements. This includes people enrolled in state high-risk pools, people on COBRA through their former employers’ coverage, and other group conversion policies.”

Or this one:

“In most parts of the country today, insurers in the individual market are permitted to underwrite and design benefit plans with a variety of price points. This flexibility enables a stable, competitive insurance market. Perhaps most importantly, it offers the greatest affordability to attract younger and healthier members and helps encourage wider enrollment in health insurance.”

This is the house they’ve built: an insurance market where plans are written for the healthy and all legal efforts are made to exclude the sick. That’s meant premiums are somewhat lower than they’d otherwise be, but only because the people who most need health-care insurance aren’t able to afford it, or in some cases, aren’t able to convince anyone to sell it to them. Now that arrangement is ending and they’re scared that they can’t provide an affordable product to the people who need it. They may be right, but it’s evidence of how deeply perverse their business has become, not of what’s wrong with health-care reform. When they say that the individual market would be cheaper in the absence of health-care reform, they’re saying the individual market would be cheaper if they could continue refusing to sell affordable insurance to people who need health-care coverage.

This isn’t an argument against health-care reform. This is proof of its necessity.

Amen. But what it’s also revealing is that we’re going to need something like a strong public plan with exchange subsidies to provide affordable insurance to the people the insurance companies will do everything they can to avoid covering. These will be folks who tend to be sicker — mostly older, but not always — and that sounds to me like Medicare II. And the interesting thing is, the private insurers are telling us they really don’t want to cover these folks anyway.

Given where the logic is leading us, it seems both strange and disconnected from what needs to be done for Congress to be searching for ways not to provide a guaranteed public alternative to private insurance. Because that option looks more and more like it will be a necessity, not just a choice.

What are these people thinking?

More Congressional opinions on the public option:
Mary Landrieu says people think public option means free health care.
Susan Collins doesn’t have a clue.