Two days ago I encouraged people not to get too caught up whether or not the public option is in the final reform bill — that the keep piece is the individual mandate. I think I want to amend that.

A couple of things have happened since I wrote that post. The first is that Republicans have publicly demonstrated that opposition to the public option is really a proxy for being in favor of not doing anything. The discussion of dropping the public option led to an interesting thing — Republicans attacking co-ops, which are the watered down compromise replacement for the public option that nobody puts much stock in. To be clear, I don’t care what Republican politicians think about health care reform. Conservatives have value to add to the discussion, but Republicans don’t care about the outcome of the bill. They care about the outcome of the political process. So we can’t assume they are making any of their arguments in good faith.

I do care what the more conservative Democrats in the Senate think. In order for reform to pass, we either need enough Republican support to make them feel safe or we need to peel those conservative Democrats away from the Republicans that they usually cling to for political cover.

It is much more apparent now that there is no version of health care reform that more than a few Republicans in the Senate will support. So it’s time to move on, working under the assumption that the Democrats in the Senate can see what’s going on as well as we can. And if we’re cutting the Republicans loose and putting the screws to the conservative Democrats to get on board, we should definitely keep the public option.

The second thing I’ve learned is that some people are strongly against being forced to purchase insurance from a private insurance company. One of the Republicans working on health care reform in the Senate Finance Committee says the bill needs to be broken up and debated in pieces, but most pieces of the bill are interdependent. You can’t demand that insurance companies offer plans at the same rate to people with different health histories without expanding the risk pool, for example. You can’t mandate that everyone purchase health insurance without subsidizing the poor. And maybe you can’t mandate that everyone purchase health insurance unless you give them a public option to choose.

Speaking personally, I still wouldn’t consider a reform bill that is enacted without the public option a defeat, but I think it would be a huge mistake to give up on the public option prematurely. There’s only one time to give up on it — when the final bill is in conference and the Congressional Democrats find that they do not have enough votes to pass it unless that gets dropped.

As I noted in my earlier post today, the big news is that people are fretting about the Obama administration abandoning its commitment to the public option — a government-run health insurance company that would compete with private insurance companies. I’m a supporter of the public option, and I really hope that it makes it into the final bill. But it’s not the prize. The prize is the individual mandate. The individual mandate says that everyone must have health insurance. It’s the only non-negotiable piece of health insurance reform.

Why’s it so important? Because of adverse selection. Whenever anyone talks about a plan to reform health insurance (or talks about insurance, period), adverse selection is the issue that must be addressed. Conceptually, it’s simple. Adverse selection describes the condition where insurance is usually purchased by the people most likely to file claims.

Let’s say I want to start an insurance company — the way to make money is to take in more money in premiums than I pay out in claims. That’s the bottom line for car insurance, flood insurance, health insurance, or credit default swaps.

Premiums must go up to account for the amount I’m paying out in claims, plus the overhead of the business. One thing I can do to make my business more profitable or lower my prices is get rid of the people who file too many claims. This is why insurance companies charge people with preexisting conditions more money, refuse to cover sick people, and so on. It’s also why they try to dump expensive customers by any means necessary rather than paying all their claims.

This is where adverse selection comes into play. Only people who think they will need insurance are liable to buy it. People who don’t live in areas that don’t flood rarely buy flood insurance. Young healthy people often choose not to buy health insurance. People who drive old clunkers only buy the auto insurance that’s mandated by law.

If I offer health insurance, this is a problem. Without healthy people who probably aren’t going to need to use their health insurance in my plan, I’m going to have to charge a lot of money to cover the claims from the sick people who I am insuring. Those healthy people do still need health insurance, though. Any of them could get sick — really sick — any time. Sure, they are healthy and probably aren’t going to have a stroke, but there are diseases who strike the young and healthy as well. Hospitals in America cannot turn away patients, so they wind up getting treated anyway, not paying their hospital bills, and either filing for bankruptcy or dying because they can’t afford proper followup care.

This is where the individual mandate comes in. It simply requires everyone to have health insurance. That maximizes the size of the risk pool and eliminates adverse selection as a problem for health insurance companies. As long as everybody is buying in, they can sell insurance to people with preexisting conditions at the same rate as everyone else without worrying about it. (This is how insurance through employers works. If a company has enough employees, then the differing health of the employees doesn’t matter much.)

And once there’s an individual mandate, lots of good things follow from it. First of all, everybody is insured. Secondly, the government has a stronger incentive than ever to control health care costs, because it would be subsidizing the premiums for the poor. Perhaps that would even lead to the creation of a public option that seems so elusive right now. Finally, it is a huge leap for America. Imagine a real commitment, written into the law, that every American will have health insurance. That’s a big deal — the biggest deal. Everything else is an implementation detail. Does anyone really think that five or ten or twenty years from now, anyone will vote to take away their own health insurance? The individual mandate is the ballgame.

I really want health care reform to be enacted, so I’m going to keep talking about it.

Last week Whole Foods CEO John Mackey wrote an inflammatory op-ed about health care reform for the Wall Street Journal. He’s posted the unedited version on his own blog, and notes that he didn’t come up with the headline that appeared in the paper. Starting out with a quote warning of the dangers of socialism from Margaret Thatcher, who never tried to dismantle Britain’s completely socialized health care system, was his own choice. Radley Balko says it’s dumb to boycott Whole Foods even if you’re irritated by Mackey’s op-ed.

Speaking of op-eds, Barack Obama laid out his case for reform in the New York Times. It’s a written version of the opening comments he’s been making at town halls for the past week.

Nate Silver says the public option is probably dead. For people who aren’t obsessed with the health care debate, the public option is the proposed government-run insurance company that individuals would be able to use if they prefer it to any of the options offered by private insurance companies. Silver explains why the public option is probably dead and what it means — it’s a must-read piece.

Republicans keep making the point that what we really need is easing of regulations that prohibit health insurance companies from operating across state lines. For example, here’s what John Mackey says:

Repeal all state laws which prevent insurance companies from competing across state lines. We should all have the legal right to purchase health insurance from any insurance company in any state and we should be able use that health insurance wherever we live. Health insurance should be portable everywhere.

Anyone seen any data driven analysis that predicts what the effects of this would be? I’ve seen a lot of reference to it, and it seems to make sense, but I’ve only seen the assertion that this would be good and that it would make a significant difference, not any arguments that bear it out. I still haven’t seen any arguments from the anti-reform camp that deal with the adverse selection issue.

Tyler Cowen says that our health care debate in the US is going to make it more difficult for the UK to improve its health care system.

Update: Here’s a very simple flow chart that lays out how the reform plan is intended to work. Pass it around.

I have been avidly devouring everything I can on the health care debate. There are certain aspects of health care reform that I’m very strongly in favor of for selfish reasons, and for reasons of conscience, I think every American should have some form of health insurance. That said, I’m not sure there’s much point in paying a whole lot of attention to the individual bills that are being drafted.

There are a bunch of bills in the works, some better than others. When each committee has completed its bill, they’ll all be mashed up into one big bill that will hopefully be decent and will go to President Obama for his signature. I think the details are very much out of our hands right now, but public outcry will help later when final bills are submitted to the floor of the House and Senate.

That said, the bill the Senate Finance Committee is working on is certain to be terrible. And I can’t help but wonder why these guys are in charge of writing it in the first place.