Simon Johnson and James Kwak and Alex Tabarrok separately offer useful correctives on the public option. First, Johnson and Kwak have a column on the subject in the Washington Post.

Imagine health-care reform without a public option: Insurers have to charge the same price regardless of customers’ medical history; everyone has to buy insurance; and poor people get subsidies to help them afford it. From the insurers’ perspective, they get more than 40 million new customers, they subsidize the old and sick by overcharging the young and healthy (who have to overpay because of the mandate), and the government even pays people to buy their product. There are no new competitors (additional choices for customers), and there is no pressure to reduce costs. What could be better?
This type of reform, with no mechanism to reduce long-term costs, would still be a significant achievement, especially for the millions of uninsured. But it’s only a temporary solution because rising costs would force the government to go back to the drawing board (to pay both for Medicare/Medicaid and for those subsidies). This is why the public option seems to be on the Obama administration’s preferred-but-not-absolutely-critical list. The true alternative to a public option isn’t “no public option”; it has to be some other lever to force private insurers to reduce costs. Saying that people can get all the care they want and private insurers will simply pass on the costs as higher premiums is not a solution.

Tabarrok writes in a similar vein:

In short, insurance reform will mean that everyone will be required to buy a product that will be tightly regulated and more homogeneous. Both of these factors will increase the market power of insurance firms. Since escape via non-purchase will no longer be a potential response to higher prices, mandatory purchase will reduce the elasticity of demand giving firms an incentive to increase prices. Moreover, in oligopolistic markets, a more homogeneous product can increase the ability of firms to collude. I believe that health insurance reform will increase the market power of insurance firms and drive up prices. In this scenario, the public option at least has a raison d’etre, although whether it actually fulfills its purpose is an open question.

And as Tom Hamburger and Kim Geiger report in the Los Angeles Times, the insurance industry is setting itself up for a massive windfall.

“The insurers are going to do quite well,” said Linda Blumberg, a health policy analyst at the nonpartisan Urban Institute, a Washington think tank. “They are going to have this very stable pool, they’re going to have people getting subsidies to help them buy coverage and . . . they will be paid the full costs of the benefits that they provide — plus their administrative costs.”

I have the sinking feeling that we’re walking into a buzzsaw. I’m increasingly drawn to innovative reinsurance proposals, and also to the more radical structural approach Harold Luft outlined in his book Total Cure. I’m hoping to write more on Luft this weekend. For now, I recommend an op-ed he wrote back in April.