Since when was a two-tiered health insurance system a Democratic policy goal?
Among Democrats in the Congress and at the White House there is a great deal of interest in creating a government-run health plan in the under-age-65 market. Such a plan would compete with the existing private health insurance market in a head-to-head showdown between private and public health insurance.
Such a plan was part of the President Obama's campaign health proposal—albeit limited to the small employer and individual market. We are told the President’s greatest interest here is in “keeping the private health insurance market honest.” That is, creating competition in order that private insurers do a better job of controlling costs.
most observers assume that this would mean paying providers at
Medicare—or even Medicaid—rates the administration says not necessarily.
The respected and non-partisan Lewin Group recently issued a report evaluating the idea, “The Cost and Coverage Impacts of a Public Plan: Alternative Design Options.”
It looks to me to be a credible job. They made the assumption providers
would be paid at Medicare rates—a logical conclusion if the objective
is lowering costs.
Among Lewin’s findings:
- “If the public plan
is opened to all employers…at Medicare payment levels we estimate that
about 131.2 million people would enroll in the public plan. The number
of people with private health insurance would decline by 119.1 million
people. This would be a two-thirds reduction in the number of people
with private coverage (currently 170 million people).”
study also examined what the proposed plan might do to provider
reimbursement rates. Lewin says that if current Medicare payment rates
were to be used for a public plan option,
physicians would see their net income drop by $33 billion (-7%), and
hospitals would see their revenue fall by $36 billion (-5%) in just
- “If Medicare payment levels are used in the public plan,
premiums would be up to 30 percent less than premiums for comparable
private coverage. On average, the monthly premium in the public plan
for a typical benefits package would be $761 per family compared with
an average of $970 per family in the private market for the same
- “If as the President proposed, eligibility is limited to only small employers, individuals and the self-employed, public plan enrollment
would reach 42.9 million people. The number of people with private
coverage would fall by 32.0 million people. If private payer
reimbursement levels are used by the public plan, enrollment would be
lower, with only 10.4 million people switching to the public plan from
- Medicare premiums would be lower
than private premiums because of the exceptional leverage Medicare has
with providers. Medicare pays hospitals about 30 percent less than
private insurers pay for the same service. Physician payments are about
20 percent less than under private coverage. Also, because Medicare has
no allowance for insurer profits or broker/agent commissions,
administrative costs for this population are about one-third of
administrative costs in private health plans.
found, a government-run Medicare-like plan in the commercial market
covering those under-age-65 would save an enormous amount of money.
It would do so in two ways:
eliminating the higher expense factors that private health plans have
in order to do business. Right at the top of the list are costs built
into insurance plans to pay brokers and agents, health plan profits, as
well as state and federal taxes.
- By paying providers less. Simply, the government plan would pay providers just as they now pay for Medicare and Medicaid—Lewin
presumed providers would be paid at the Medicare level that is
typically 20% to 30% less than what providers get from private plans.
at once, in what would be almost a simple wave of the hand, doctors and
hospitals would see their reimbursements cut by 20% to 30%.
Provider cuts would be across the board.
and hospitals that provided unnecessary and wasteful care would see
their reimbursement cut 20% to 30%. However, providers delivering
appropriate care would also be cut 20% to 30%. That would be sort of
like the difference between carpet-bombing and laser guided
bombs—somewhat effective but totally inelegant as a solution.
cutting provider payments across the board in a government plan would
reduce the cost of providing insurance to the two-thirds of the
population that Lewin
estimates would ultimately gravitate to the public plan because these
provider cuts and overhead savings would make the cost of insurance
about 20% less.
But there is also a concern that a public plan would lead to two-tiered health care for those under-age-65. That is the proverbial “push it here and it pops out there” result.
the concern goes, 85% of our under-age-65 citizens arguably get access
to first class health care because they have insurance. Granted, it may
be a level of health care that produces enormous waste but at least 85%
of us get it while 15% of us under the age of 65 struggle because they
If a public health care plan
is created the current equation may just get turned upside-down. The
two-thirds of the market Lewin estimates may shift to the public plan
may no longer be in first class—they may be in coach.
tier would be composed of those in the public plan—presumably a public
plan that balanced its books as Medicare does now by cutting provider
reimbursement as needed to meet the federal budget. Doctors and
hospitals would be “negotiating” with the federal government for their
reimbursement to serve these people—not a long list of private
insurers. And, it’s hard to see how any discussion between the
“thousand pound gorilla” that is government and health care providers
would be other than a very unilateral discussion.
Medicare has a
history of rarely if ever cutting benefits instead continually
tinkering with payments to providers—payments very few providers find
On the positive side, even a 20% to 30% cut in
reimbursements by a government plan paying at Medicare rates would be
better than getting nothing from those who can't now pay. Lewin
does assume this advantage would be somewhat limited with the number of
those uninsured only cut to about half under an Obama campaign-style
The second tier of coverage would be for those who could
still afford to pay the higher premiums for the better reimbursing
private plans. It is likely that the higher reimbursement levels
providers of these plans would get, as well as the likely desire for
private plans to keep their customers happy by granting them better
access to care, would create a “first class cabin” for health care.
Just as it is in Great Britain where citizens can opt out of the public
system, those wealthy enough to be able to afford, or have their
employer pay for, private insurance will have it.
A government-run health plan for those under-age-65
would also do nothing to bring our long-term Medicare entitlement costs
under control. This is a plan for the under-65 market—it would do
nothing to solve Medicare’s solvency problems.
In fact, a government-run plan for the under-65 market would likely make matters worse for Medicare’s long-term fiscal outlook.
the government making lower provider payments for those covered under
Medicare is possible because health care providers have a huge private
population of under-age-65 people to shift costs to in order to make up
for the lower payments they get from the government. The private pay
market has been large and rich enough to absorb these shifts from
Medicare providers, which have generally kept the provider community
But with two-thirds of the population in a Medicare-style
government-run plan, cost shifting would no longer be a tenable way for
the private sector to subsidize the public sector. Medicare providers
would pretty much be on their own with a much reduced ability to shift
It’s also ironic that Democrats have been fearful of doing anything that would create a two-tiered Medicare system
for seniors. The reasoning goes that if the rich and powerful are in
one plan and everyone else is in another there will not be the
political will to sustain a solid Medicare program for regular folks.
That reasoning has always made political sense to me. And, it has been
at the core of their opposition to the privatization of both Medicare
and Social Security.
Which makes the notion that Democrats would now support what will almost certainly evolve into a two-tired system of health insurance for those under-age-65 perplexing.
A public health insurance plan of the kind envisioned in Lewin’s
analysis is perhaps one way to pay for covering more people by cutting
out insurance company overhead and reducing provider reimbursements by
20% to 30%.
It is also a way to change the American health care
system—for consumers, providers, and insurers—in a dramatic way. “Push
it in here and it pops out there.”
America’s health care system
is unsustainable because it is too expensive partly because of the high
overhead produced by so many competing health plans. But mostly it is
unsustainable because we waste so much money on unnecessary and
Fixing that problem, and therefore crafting a
sustainable system will require entirely new incentives and a focus on
paying for value.
It is also entirely possible that insurers, who would be desperate to survive in competition with a “Medicare for all model”
would create their own “coach product” by doing everything in their
power to just whack provider reimbursement levels to Medicare levels
irrespective of which providers create value and which ones waste
money. What would they have to lose?
Making the politically
problematic decisions that would end the waste in our system is proving
to be very hard. It’s entirely possible there will be proposals to
create a government-run health plan to compete with the private sector and leave for another day dealing with the enormous waste already embedded in the system. Already, the Congressional Budget Office has said
that programs that the administration claims will deal with this
waste—introducing health information technology, comparative
effectiveness reviews, prevention, and wellness—will have only minor
impacts on spending.
If we kid ourselves into thinking that a public health plan program
will by itself create real savings—instead of artificial savings
produced by underpayments—and continue to avoid the real issue of value
for what we pay, we will only end up with a two-tiered health care
system (coach for most and first class for a few) for those
under-age-65, providers just as underpaid in most of the working age
market as they now are in Medicare, and nothing done to stem the
unsustainable cost of Medicare’s entitlement benefits.
For providers this would be a disaster—at
least two-thirds of the under-65 market would now be paid at Medicare
rates and the best providers would be hit as hard as those who under
perform. At worst, even the private health plans could be desperate to
drive the rest of the market down to Medicare payment levels in an
attempt to avoid losing two-thirds of their market share. There would
also be about no one left to shift costs to!
I’m trying to understand how a government-run health plan alternative in the under-age-65 market
that focuses on payment rates to control costs, absent changes that
produce a value-based payment system, would be any kind of policy
victory for Democrats—or the rest of us.