As the Democratic majority in Congress puts the finishing touches on the various health insurance reform measures, it appears certain that the proposed legislation will contain a “public option,” that is, a low-cost, government-subsidized health insurance plan.

Supporters of the public option say it will force private health insurance companies to be more competitive. Never mind that this assumes that private health care insurance is less than competitive now—surely a debatable point. It also ignores the fact that the best way to make private health insurance more competitive is to allow health insurance companies to compete for business across state lines, something the government prevents right now.

The reality is that the public option will drive private health insurance out of the marketplace because it ignores the most basic premise of insurance: shared risk.

The notion of shared risk has its roots in the aftermath of the Great London Fire of 1666 in which 13,200 homes were destroyed. In 1667, an English doctor and businessman named Nicholas Barbon conceived a plan to insure against future fire losses. He collected small premiums from a large number of people, invested the funds, and paid claims out of the company’s reserves, creating the first fire insurance company.

American inventor, publisher, and signer of the Declaration of Independence Benjamin Franklin popularized the idea of shared risk on American soil. He founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire in 1752. The company offered perpetual insurance against fire. Instead of charging periodic premiums, Franklin’s company accepted a single deposit from the insured. The company agreed to pay any losses during the term of the policy. When the insured cancelled the policy, the company returned the deposit to him or her. In the meantime, the company earned profits by investing the deposits.

For shared risk to work, the premium amount cannot be an arbitrary number. If the insurer charges too little, it will not be able to pay its claims. If it charges too much, it will not be able to compete in the marketplace. Premiums are based on actuarial science, balancing expected losses against expected earnings.

The public option ignores this actuarial balance. It assumes all the risk without sharing the costs.

Supporters of the public option foresee an insurance bonanza as millions of Americans are forced onto the health insurance rolls. As I have written before, this will not occur because the newly insured will be determined to “get their money’s worth” out of the program by visiting the doctor more often. The premiums charged for the public option will barely cover the cost of the new enrollees, if that. It will not generate enough in reserves to cover the extreme costs associated with insuring those with serious preexisting conditions who will be mandated into the system.

Health care is not one of those industries that benefits from economies of scale. That’s because health care service is delivered one-to-one, from a physician or nurse to a patient. Dumping 20 to 40 million new patients into the healthcare system will not make it more efficient. On the contrary, the sudden influx of the newly insured will create a logistical nightmare.

With subsidies from the government, the health care system might mask its actuarial imbalance for a couple of years. A tipping point will be reached when tens of millions of Americans move out of private health insurance and into the public option. Some people will do this to save on premiums. Others will be forced into it when their employers drop private insurance in favor the cheaper public plan. Even when employers stay with private insurance, some employees will elect to enroll in the public option because it is less expensive. If enough employees drop out of the company’s group plan, the policy will be cancelled, moving even more people into the public option.

Eventually, inevitably, the public option health program will face an actuarial crisis, just as Medicare does today. As the rolls of the public option swell, so, too, will the costs. Because the risk is not shared proportionately, the system will face deficits, becoming another unfunded entitlement. The funds require to keep this bloated program afloat will cost the taxpayer even more than private health insurance. By then, however, private health insurance companies will be out of business. There will be nowhere else to turn.