POLITICS: The Malt-O-Meal of Health Insurance

The "public option" of breakfast cereals.

The Great Health Care Debate has produced enough bantering material over the last few months that it seems pretty trite to write yet another piece on the subject. As health care reform rounds more corners in Congress, though, here is yet another opinion on the matter, specifically the hope that somehow, some way, the public option doesn’t get passed over in the discussion.

It seems as though, in both houses of Congress, leaders of health care reform talks are making the public option a top priority. Rhombus columnist Randal Serr recently wrote a piece about Arizona’s functional public insurance plan that stood, in my mind, as a fascinating precedent for this particular component of reform. Earlier this summer, as health care reform began to get serious attention (attention which, by the way, escalated into a literal blogosphere nightmare riddled with outrageous propaganda), I also wrote a column suggesting a public option might provide the functionality needed to save a severely dysfunctional and unsustainable health care market.

There are two general criticisms of the public option. The first is cost. Recent scores by the non-partisan Congressional Budget Office, however, have put the cost of the most expensive version of the public option in the neighborhood of $871 billion. Or in other words, close to the same amount as the Senate Finance Bill, which included no public option.  This $871 billion proposal is also well below the $900 billion price line set by President Obama in September. Not bad, I would say.

The other (and more legitimate) skepticism of a public option is the belief that the government could run everybody else in the insurance industry out of business by collecting tax revenues, which would allow them to keep their premiums below industry standard. What I’d like to suggest, though, is that facet of the public option is far from the destruction of privatized insurance — and may actually end up being great news for the rest of us. (You know, unless you’re the CEO of CIGNA or Blue Cross and Blue Shield).

While some may scream about the public option representing the government sneaking in through the back door of socialized medicine, it may seem surprising to realize that we actually have some evidence right before our eyes that a public option would not, in fact, lead to the destruction of the private health insurance market. That evidence, my friends, is Malt-O-Meal cereals. Seriously.

The two industries have more in common than you may realize. Consider the fact that, in both cases, the public option and off-brand cereals share some sort of competitive advantage that allows them to charge a lower price than their competitors. Government health care can collect tax revenues to cover cost, while generic cereals pay almost nothing in advertising. They don’t have to — Lucky, Cap’n Crunch and Toucan Sam do all the heavy lifting for them. Then when people saunter down the cereal aisle looking for a magically delicious bowl of Lucky Charms, they see a dog food-sized bag of the comparable Marshmallow Mateys for a fraction of the price. What would you choose? What do you choose? Me too.

But here’s the big secret: Despite this supposed undercut of the market, Post, Kellogg’s and General Mills are still in business. How do we explain this? Well, however we do, we can (with confidence) use the same logic and apply it to the health care industry, since now we see a public option working in Arizona as our functional example.

Essentially, this new competition of off-brand cereals results in three types of purchasing decisions with three distinct types of buyers:

• First, those people that buy the generic stuff because it is all they can afford. My wife and I, impoverished newlyweds that we are, fall into this category.
• Second, those who prefer the taste difference in the name-brand cereals and can afford to buy them, so they do (or maybe they feel buying Frosted Mini-Spooners as opposed to Frosted Mini-Wheats is below someone of their societal position — either way).
• And third, people that could afford to buy name-brand cereals, but are more than satisfied with the generic copy, because they see it as practical to save money for a comparable product, and choose to do so.

What are the results in the cereal industry? The name-brands are forced to lower prices. They can’t quite ever get prices as low as the bagged stuff since they have a different cost structure, but they have to at least stay in the ballpark. Again, this is good for the consumers of name-brands, because they’re now available at a cheaper price. Are profits as large as they were before? Of course not — but in every economic transaction there are winners and losers. If you’re an executive at General Mills, you hate competition from Malt-O-Meal. If you’re one of the hundreds of millions that aren’t said executive (and assuming you eat breakfast cereal), you love Malt-O-Meal.

And this is the fundamental basis of the public option idea. Some will use it for health insurance, because it’s all they can afford. Others will instead be able to pay for the best medical treatment money can buy, and they will. And still others will find the public option’s health coverage perfectly adequate and opt for it, even if they might be able to afford better. Profits will go down and the health industry and pharmaceuticals will lose since they’ll have to lower prices to stay in the ballpark, but millions of Americans would win. As in Arizona, this would prove not to be the demise of insurance companies — they still exist in the state, even after 25 years of a competition from a public option.  Rather, it would become a benefit for citizens looking for solutions to the current, untenable system of privatized health care.

Daniel Anderson is Rhombus’ resident armchair economist. He needs to write more columns comparing public policies to breakfast foods.