The Politics of the Opt-Out

The rumor at the moment (which may well be disproved shortly) is that the health care bill Harry Reid will send to the Senate floor will include a national public insurance plan that individual states may choose to "opt out" of. I've previously written that I think the "opt-out" is by far the best of the various watered-down public option compromises that have been suggested. In fact, there are scenarios where I think the "opt-out" might actually be better than the full-fledged public option. But I want to expand upon that thinking a little bit, because it requires quite a bit of speculation.

Let's assume, for the moment, that the Senate bill includes an public option with an opt-out provision and that this version of the public option is the one that survives the House-Senate conference process and is eventually signed into law by the president. What happens then?

Well, assuming it's a true opt-out provision, the national plan will initially be available in every state. Undoubtedly there will be calls from conservatives (particularly Republican politicians who are considering presidential runs in 2012) for states to opt-out of the public plan. Minnesota Governor Tim Pawlenty has already stated that he will lead such a campaign in Minnesota. As we saw with the stimulus bill, however, there is often a stark difference in both priorities and opinions between state-level Republicans and Republicans with aspirations for national office. It is one thing to posture for the national media; it is quite another to actually take steps to deprive citizens in your state from being eligible for a federal benefit. It would not surprise me at all if, when push comes to shove, many state-level Republican (even in very red states) balk at the idea of opting out of the national plan.

On the other hand, unlike the stimulus battle, it's not just ideologues who will have an interest in opting out. Insurance companies will not want the competition of a public plan and may well try to lobby hard at the state level to get states to opt-out. Republicans running for Congress in 2010 may also seize upon the opt-out as a campaign theme. They would have little to lose in the short term by demonizing the health care bill, especially when much of it will take time to go into effect.

These efforts will, of course, be counterbalanced by Democrats who, having voted for the plan, will be very invested in defending it. And, on the merits, the Democrats will have a winning argument. Their opponents will be trying to deny their citizens an option that their friends and family in other states will have. Moreover, I suspect that much of the business community will at least tacitly support the Democrats on this one. Having another insurance option can only help businesses who are struggling mightily with the costs of rising premiums.

The bottom line is that it is very difficult to predict exactly how this debate will play out in the short term and how many states will ultimately choose to opt-out. If I had to guess, I'd guess that no more than a handful would opt-out, but I could easily wrong. One thing I'm fairly certain of, however, is that a large number of states will not opt-out, including many of the most populous states, like California and New York. Therefore, whatever happens, there will be a national public plan of significant size.

Many people have suggested that this would create a perfect laboratory to test whether the public option does in fact work to control costs. I'm not so sure that's true. My guess is that, even if the public plan works to control costs, we won't see a significant disparity in premiums between opt-out states and public plan states. The reason for that is that private insurers will feel pressure to be competitive with the public plan even in states where the public plan is unavailable. After all, states can always opt back in, and if it becomes obvious that people in opt-out states are paying much more for insurance, politicians and businesses in those states will clamor to opt back in. Thus, the only real test of the public option will be whether it slows the rise of premiums nationally, and it will take time to make that assessment.

Indeed, it's possible (likely even) that Republicans will point to the lack of any significant premium disparity between opt-out states and public option states as evidence that the public option doesn't work (even if it is working on a national level to control prices). Fortunately, while this might score rhetoric points, it is very unlikely to lead any additional states to opt-out. Once the national public plan is up and running, state legislatures will be loathe to opt-out of it because such a move would necessarily deprive many of their citizens of their existing health insurance (which could be disastrous politically). Thus, it's a smart bet that the universe of opt-out states will only get smaller as the years go on, not bigger.

On a purely political level, this issue could pay dividends for Democrats for years to come. Democrats running for office in public option states would have a reliable, winning issue in every election ("the Republicans want to take away your health insurance"). And in opt-out states, Democrats would also have a strong message ("I will give you the same options that everyone else in the country has already"). That's an issue that could breath new life into the Democratic party in red states.

So to summarize, I think that a public option with a state opt-out will likely accomplish nearly everything a national public option would. And while the politics of the issue may be a wash in the short term, in the long term they overwhelmingly favor the Democrats. Indeed, from a purely political perspective, the opt-out may well prove to be far superior to the full-fledged public option, and without sacrificing much, if anything, on a policy level.