Engineer Living | Public Options vs. Private Providers | When is a Public Option a Good Thing?

Public Services, Private Providers

There are services that are essential for modern life and crucial for a competitive business. Over the past decades, America has fallen in love with private solutions and have privatized numerous services that have traditionally been public. Some of these industries include roads, electricity, water, telecommunications, and medical insurance. Capitalism thrives when consumers have a choice forcing companies to innovate and compete to keep customers. However, in the modern world consumers no longer reasonably have a choice to abstain.

You need internet to participate in online surveys, email your representatives, research about the world, or for you children to do homework. And you can’t even power your computer or cell phone on if you don’t have electricity. Furthermore, medical insurance is a necessity simply to live and not having it not only reduces your lifespan substantially, it can also destroy a family’s wealth.

Theoretically, privatization isn’t a problem because the extra cost of running a profit should be captured back in improved efficiency and innovation due to competition. However, not only is that rarely the case, but another possibly more important problem arises when private companies take over services that are necessary for everyone: coverage gaps.

A Public Option

A public option guarantees that consumers will have access to a necessary service and can provide competition to private companies to ensure that prices remain low. FDR ran his initial presidential campaign on the idea of public power and despite accusations of being a Bolshevik he persisted. Now, the Tennessee Valley Authority (TVA) and Rural Electrification Administration continue to provide electricity to areas that private electricity companies had no interest in expanding to and keep prices reasonable.

More recently, the TVA in conjunction with the Electric Power Board (EPB) of Chattanooga took that a step further and now provide cable, internet, and phone services in addition to the electricity. In order to upgrade their electricity grid to a cost saving smart grid they needed fiber optic lines. However, the telecommunication companies servicing the area had no plans to install fiber. So, the EPB took it upon themselves and raised money via municipal bonds to fund the project. After installing miles of fiber, they realized they could also provide telecommunication services along with electricity since they had the infrastructure in place. After lobbying their state legislature (laws barred competitors from entering the market so that the private companies could recoup their investment) and fighting off lawsuits from Comcast and other cable providers they were able bring their service to market. Now Chattanooga a city of less than 200,000 people has arguably the fastest internet in the world at a cheaper price than its competitors. Also, as almost a side note the new smart grid has cut power outages in half saving millions of dollars.

Tennessee still has coverage gaps for internet service with some rural towns not having any internet at all and they are begging the EPB to bring their service to their towns and EPB wants to oblige. But, once again other telecommunication companies are barring a public utility (or any competitor) from encroaching on their territory essentially saying we will get there when we get there. This is where privatization of public services becomes a problem, a town shouldn’t be excluded from having an essential service because a corporation is protecting its profits, especially when there is another company public or private ready and willing to provide services. The Obama administration agreed and provided funding for those attempting to expand broadband services to unrepresented areas. However, as always telecommunications companies continually try to restrict competition and take advantage of the majority of the funds dedicated to expanding connectivity. It will be interesting to see what cities can implement their own version of Chattanooga and which ones will be restricted by successful lobbying by the current telecommunication giants.

The Dangers of Deregulation and Privatization

Texas a few decades ago deregulated its electricity and allowed cities to choose whether to privatize their electricity. However, there were caveats the transmission grid is still regulated by Electricity Reliability Count of Texas (ERCOT), but the power plants and service providers are deregulated. The Texas grid has exploded and now wind energy producers from West Texas and the Panhandle are able to sell their energy all over the state at times paying consumers to take it off their hands. However, cities where the grid was deregulated are higher than the national average and much higher than other Texas cities (i.e. Austin and San Antonio) that chose to remain public. There are various reasons for this and some studies suggest that the gap is narrowing, but the fact remains that between 2002 and 2014 deregulated customers paid $24 billion more than regulated customers. That doesn’t necessarily mean that public utilities are the way to go, but points to the fact that privatization isn’t a panacea for costs and mismanagement.

Medicaid and Medicare: Social Insurance Among a Private System

Medical Insurance is one of the most divisive topics here in the US. Since Obamacare changed the requirements for insurance, policies have changed and premiums have fluctuated dramatically. However, lost among a lot of this is the success of Medicare and Medicaid. The Medicaid expansion has brought millions of Americans under the umbrella of health insurance and it has done so in a way that is cheaper than private insurance even though it covers poorer and sicker individuals. Medicare covers anyone over 65 and a few others which totals to 55 million people and Medicaid currently covers 70 million people meaning that over a third of Americans are covered by government sponsored social insurance.

A major complaint of Obamacare is that by requiring insurance companies to not exclude based on pre-existing conditions, to cover care that you don’t need, and forcing everyone to purchase insurance that the healthier generally younger population is subsidizing those who are sicker and generally older. People in general also have been confounded by the changes and have been confused by the exchanges. These complaints have their merits, but the alternative was devastating to a large portion of Americans who couldn’t afford insurance or simply were denied coverage.

Nonetheless, people are actually more satisfied with Medicaid than those who have private insurance are satisfied with their insurance. If Medicaid was sold to those who didn’t qualify for it the same as private insurance, studies suggest that it would be cheaper and more effective than private insurance and as a bonus the exchanges would be much easier to navigate tackling two of the major complaints of Obamacare.

Expanding Medicaid into a Public Option

Those who oppose a public option for medicine generally state that private insurance is more efficient and capable and that government run health care is a mess. Although, government run programs have their flaws (i.e. the VA) they have lower administration costs, are cheaper per capita, and provide better health outcomes to a broader range of people. If the government sold Medicaid on the exchanges its premiums would be cheaper than most options, its network of doctors would be significantly larger than most options (Medicaid is accepted almost everywhere), and any profit it made could be used to lower the costs of the program that is currently completely tax payer funded.

Medicaid already meets Obamacare requirements; is proven to be significantly cheaper compared to private insurance, and is already the largest insurer in the States. It could also offer more generous tax breaks to employers who offer its plan amongst their employees and since it is a federally funded program it would be easier to transfer if you changed jobs or went into business for yourself. Making Medicaid a public option forces private companies to offer better pricing or better services and lessens the coverage gaps that still exist. Also, it could be an additional revenue source for the government to cover the costs of other social service programs lowering taxes overall.

The Case for Public Options

The main complaints about introducing a public option in any industry boil down to two major issues. One the tax payer funds the governments foray into the private sector; however, that is only if the venture fails otherwise it is self-sustaining and beholden to the public. Medicaid and the EPB’s telecommunication network are proven commodities and their expansion or offering as a public good carry with it little risk.

The other issue is that public services have high barriers of entry and corporations have put massive capital investments into infrastructure where they have worked out short term monopolies with the local governments, a public option erodes the value of their investment. I find it difficult to defend corporate interests to citizens who are deprived of internet altogether or whose electricity bill is higher each month than it ought to be because a corporation is trying to recoup losses. It makes sense if the service wouldn’t be there without them, but in most of these cases they are actively restricting access to the service or raising the price when the whole justification for privatization was lowering the cost and expanding access. Giving citizens access to a public service at a lower price, even at the expense of a corporation’s bottom line, is a net positive every time.

Public options are just like a new private company; they increase competition which lowers prices. They also expand services to more people and compete for market share, but with the goal of lowering price not increasing profit. Opponents will say that is one step away from socialism, but it is capitalism personified, who said that the only businesses that can provide competition should be private. With services that are essential to modern life it makes no sense to have citizens at the mercy of a corporation’s P/L sheet. A public option ensures they get the best service for the best price and aren’t excluded if it isn’t convenient to a company’s bottom line. Public options have limited downside and I recommend them for our most important public services that have fell behind specifically medical insurance and telecommunications.