The CBO contention that the public option would offer premiums rates higher than that of private insurance in the exchanges implicitly assumes that private insurers would not take all comers or welcome sick patients – and that they would get away with it.

Ezra Klein explains some of the logic behind the score.

To translate some of that back into English, the public plan will pay prices equivalent to those of private insurers and may save a bit of money on administrative efficiencies. But because the public option is, well, public, it won’t want to do the unpopular things that insurers do to save money, like manage care or aggressively review treatments. It also, presumably, won’t try to drive out the sick or the unhealthy. That means the public option will spend more, and could, over time, develop a reputation as a good home for bad health risks, which would mean its average premium will increase because its average member will cost more. The public option will be a good deal for these relatively sick people, but the presence of sick people will make it look like a bad deal to everyone else, which could in turn make it a bad deal for everyone else.

The nightmare scenario, then, is that private insurers cotton onto this and accelerate the process, implicitly or explicitly guiding bad risks to the public option. In theory, the exchanges are risk-adjusted, and the public option will be given more money if it ends up with bad risks, but it’s hard to say how that will function in practice.

Ezra tries to turn this into a quasi-defense of the insurance companies, but what he seems to be saying is that sick patients with access to the exchanges would flock to the public option because it would provide more reliable service to them than private insurance. Indeed, this assumes that private insurance will try to violate new federal laws that ban discriminating against sick patients. The risk adjustment is probably not enough of a deterrent for the private insurers, and they would rather find ways around the law to dump patients onto the public option.

I agree that this would mean that a public option as a dumping ground could be worse in practice than a world without a public option at all. What’s more, that could turn people off to public plans in general, although the culprit would be the private industry.

I’m trying to square this with the insurance industry’s insistent opposition to a public option. Perhaps the industry believes that the policymakers would fix the adverse selection problem down the road, either with enforcement or risk adjustment. But as it exists now, it would be a great safety valve for them. Jon Walker has great posts on this here and here.

The only way to combat this is through strict enforcement of non-discrimination rules. The regulatory enforcement of patient dumping would be likely to go through the National Association of Insurance Commissioners, at least as it stands in the Senate Finance Committee bill. But they have long been seen as tools of the insurance industry.