Adverse selection, cross-subsidy, and a public health plan option

Megan McArdle thinks that a public option would require a subsidy, because the public plan would not risk-classify (e.g., by pre-existing condition) or otherwise try to avoid attracting customers with higher-than-average health-care utilization. The public plan would therefore fall victim to adverse selection, with sicker people choosing the public plan and healthier ones the private plans, and would require a subsidy to stay in business. That would be bad, she says, because the subsidy would need to be fed by tax revenue.

But if that’s the case, then the private insurance plans actually benefit twice from the presence of a public plan: once by getting rid of bad risks, and again through the shrinkage in unpaid-care accounts. If I’m someone with private insurance now, I’m not sure why I should mind having my taxes go up if my health insurance premiums go down. Money is, after all, fungible.