Josh Marshall has been all over the point that the strongest opposition to the public option comes from Senators representing states with little or no competition. That the health insurance companies in those states are resistant to the public option should come as no surprise.
Firms produce to the point where their marginal cost is equal to the price. This assumes that total cost rises as a firm gets close to capacity and that it maximizes profit by selling up to the point where it makes no money on the last unit it sells. Under perfect competition, this happens at a higher quantity and lower price than under a monopoly-dominated market. Under an oligopoly (where a few firms dominate) the equilibrium point will be somewhere in the middle, but definitely less 'output' and higher cost in perfect competition.
Oligopoly pricing is complicated and it depends on whether firms try to drive a price level or a quantity level. It seems to me that in health insurance firms set the quantity of output (Cournot competition), and in a future item I'm going to look at the implications of that. The important point here is that insurance companies in states with limited competition don't operate in the kind of competition that we think of when someone says 'free-market.' They produce less, either by insuring fewer people or by delivering worse service (recision, anyone?). Ironically, the current model of state-sized markets, while allowing greater local control over regulation and preventing the race to the bottom we seen in corporate charter regulation, has created markets so small that they tend to oligopoly if not outright monopoly.
The right kind of public option would be an entity that would produce at a point that looks more like a business in perfect competition. This would offer a price that would drive the price down and force competitors to produce more and price lower. Additionally, there would be national regulation and national competition. The bigger markets would tend to more competition with the public option as a backstop. This is a much less congenial environment for insurers to play in. Bluntly:
Senators who come from states where there is limited competition and who oppose the public option are unambiguously taking the side of the insurance executives and shareholders against their constituents. Period.
There are a bunch of questions that need to be answered in terms of how to set up the public option, what the subsidies and incentives should be, but at the end of the day the worst model is these state-by-state monopoly / oligopoly markets.
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