The health plan being considered in the Senate includes an individual mandate: everyone has to get health insurance.  There is a good reason to include this if the insurance market is competitive.  Otherwise, low risk types opt out and go to the emergency room if they get sick and impose a negative externality on the rest of the population who end up paying for them in their health insurance premiums, taxes etc.  An individual mandate eliminates this cross subsidy and allows prices to fall for the people getting health insurance at the current status quo.

But if the health insurance market is not competitive, the insurers will make yet more profits by charging the low risk types a high price.  Moreover, they will not cut prices for the high risk types and there will be no benefits to health reform except to insurance companies.  This is the nightmare scenario.  And in fact my Kellogg colleague Leemore Dafny has a nice paper (Are Health Insurance Markets Competitive?) showing that in concentrated markets with a few health insurers, a firm that enjoys a positive income shock sees a greater increase in health premiums for its employees.  So, there is evidence of market power and hence some basis for the nightmare scenario that Howard Dean etc. are concerned about.

To prevent this from arising, there has to be more competition.  Then, an insurer that keeps prices high is undercut by another who is going for profitable volume.  The public option was meant to provide competition. It was going to be run as a non-profit so it might have had lower costs by avoiding the costs of marketing and advertising and creidbly played the role of the undercutting competition.

What’s left now that the public option is no longer an option?  The best answer I have found is in a blog by Ezra Klein at the Washington Post.  His answer is:

Under health-care reform, there are at least three bulwarks against the monopoly-profits scenario: Inter-insurer competition, regulators, and the tax on excessive premiums. Two of these mechanisms don’t exist in the current market. One — the market itself — is much weaker and more opaque, and individuals have a far harder time navigating it.

Even if the insurance market is competitive, it’s not clear what’s happening to the costs of inputs, drugs, doctors’ fees, hospitals, administration etc.

Secret deals with Pharma, the AMA, death panels and tea partiers, the random movements of Lieberman, Ben Nelson’s signaling to the voters in Nebraska….not as exciting as the primaries and the general election but pretty close.  That rollercoaster had to end November 4.  Will this one end December 24?