Critics of government involvement in healthcare have plenty of nightmarish (and accurate) expressions with which to describe the predictable result of further intervention: "Post-Office care," "Amtrak-care," "DMV-health." Of all the nicknames, perhaps the most accurate name for the public insurance option is the one offered by John Calfee from the American Enterprise Institute: "Fannie Mae Health Care."

The reference, of course, is to the government-backed mortgage broker that used its immunity from failure to offer artificially low premiums to risky borrowers. When borrowers defaulted and the sub-prime market collapsed, taxpayers were left footing the bill.

Now, Congress wants to institute the same kind of public option in health insurance that failed in mortgage lending.

If enacted, individuals in need of insurance would be sold coverage regardless of their health status—just like they were given home loans regardless of their credit history. But there is more. Thanks to the doctrine of community rating, prices would be set on group characteristics, meaning that enrollees would all pay the same premium. In order to keep the premium affordable, it would almost certainly have to be subsidized. Otherwise, healthy individuals would be better off to stay in the private market or pay their own bills out of pocket (i.e. self-insure). The result is that the government will end up bringing people onto the public plan at premiums of, say, $150 per month despite the fact that they have multiple chronic conditions, require numerous medications, and cost the plan tens of thousands of dollars per year.

The math doesn't add up—not without a hefty taxpayer subsidy. In the Fannie analogy, this would be the equivalent of using taxpayer funds to pay the mortgages of those who cannot afford the homes they bought.

Whether for housing or health insurance, the public option is wrong. It is morally wrong for what it does to taxpayers and private insurers, and economically wrong for the trillions of dollars it will waste while distorting incentives and creating moral hazards. If people thought the failure of government-backed sub-prime lending was expensive, they will be shocked at the cost of government-backed public insurance.

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¹ Calfee, J. "The Dangers of Fannie Mae Health Care" Wall Street Journal, June 26 2009

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