Five Truths About Health Insurance: Public, Private, or Cooperative

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In the debate over whether health reform legislation should include a public plan or cooperative, too much has been said about the general objectives of such an approach – expanded choice, level playing field, benchmark for competition, etc. – and too little has been said about the specific objectives of such an approach – affordable premiums, high quality care, accountability.  Here are five specific truths about any insurance plan, private, public, or cooperative.  The reform debate must reconcile itself to these truths.

First, health plans succeed when they attract and retain members.  People join a health insurance plan because it meets their needs for cost, quality, access, and satisfaction.  Is the premium affordable, and are the copayments manageable?  Does the plan have a high-quality network of providers?  Will I have to wait to see a specialist? Will I be subject to a number of complicated rules and requirements?   Ultimately, a public plan or cooperative will succeed or fail based on consumers’ perception of the plan’s value proposition.

Second, to make the premiums affordable, the cost of medical care needs to be affordable.  All health plans must find a way to manage medical spending, and there are only three ways to manage spending:  reduce the amount paid to providers; reduce the volume of services through utilization controls or provider payments that encourage efficiency; or contract only with efficient providers who deliver high-quality, low-cost care.  A public plan or cooperative will need to decide how it manages payment levels, volume, and contracted providers.

Third, any health insurance plan needs to establish a payment strategy for providers.  Most private plans negotiate individual rates for each hospital and physician, with some beginning to experiment with bundles of services and episodes of care.  Medicare and Medicaid set payment levels through legislation and regulation.  A public plan or cooperative faces a critical choice:  reliance on negotiation or base payments on some fraction or multiple of existing Medicare rates.  Under the former strategy, a public plan or cooperative would face significant operational challenges in contracting successfully with adequate numbers of willing providers; under the latter, the public plan or cooperative faces significant resistance from physicians and hospitals, many of whom may decline to participate at payment levels they deem inadequate.

Fourth, health plans struggle to manage the volume of services provided to consumers.  Because total spending equals price multiplied by quantity, managing volume is critical to affordable premiums.  Medicare has never managed volume, instead relying on payment levels alone to control overall cost.  Private plans employ a mix of strategies to manage volume, including explicit controls using nurses to approve or deny requested services, as well as implicit controls, such as paying capitated rates, which require providers to manage to a fixed budget.  A public plan or cooperative will either embrace the private sector’s volume control strategies or limit itself to managing cost using only price levers.

Fifth, insurance plans that attract high-quality, highly efficient hospitals and physicians tend to offer lower premiums than those that contract with all providers.  Many private plans seek to steer patients to the high-quality, lower- cost providers in their networks.  A public plan or cooperative will need either to limit its network to high-quality, efficient providers or open its doors to all comers.  Either choice is challenging:  contracting with some but not all providers implies a degree of selectivity that would create a number of due process issues for a public plan; contracting with everyone makes it more difficult for the public plan to offer affordable premiums.

Expanding access to an additional 50 million Americans requires affordable insurance options, which requires managing medical costs.  These costs are determined by the interaction of the payment for a given service, the number of those services provided, and the quality and efficiency of the providers delivering care.  Private plan proponents, public plan proponents, and those advocating for a cooperative plan approach alike must answer three fundamental questions:

  1. Will the plan set payment levels for providers via negotiation or fiat?
  2. How will the plan influence the volume of services provided?
  3. How does the plan contract with efficient providers?

Answered, these three questions have the potential to clarify the debate and discussion over what kinds of health plans should be offered to Americans; unasked and unanswered, we will continue to talk past one another as the clock ticks.

Jon Glaudemans, Senior Vice President at Avalere Health, is an expert on a wide array of Medicare, Medicaid, and hospital/plan issues. Jon has more than 25 years of senior leadership experience in health insurance, managed care, policy issues management, and public affairs.  In his various professional engagements, Jon has worked closely with boards of directors, hospital chief executive officers, and key corporate and public sector leaders to develop and implement business strategies and public policy reforms designed to improve healthcare delivery and financing at the national, state, and local levels. Jon holds a B.A. in Political Science from M.I.T. and a M.P.A. in Economics from Princeton University.

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Greg ZwickJoseph44Disability InsurancejdDonald E. L. Johnson Recent comment authors
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Greg Zwick
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Greg Zwick

I am a small business owner that has dealt with providing health insurance for 15 years covering 40 employees. I have formed many opinions over the years about how the system could be improved. I would propose the following framework: All providers offer insurance within the following framework. Anyone in the world can join. (including providers) The U.S. Government subsidizes or pays premiums for U.S. Citizens. (unemployed, seniors, children) FRAMEWORK Three levels of malpractice awards 1) none, 2) Limited, 3) Full. Three levels of insurance:  1) Basic, 2) Extended,  3) premium Three levels of health risk: 1) Low, 2) Medium, 3) High.… Read more »

Joseph44
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Great post! As the health care reform debate rages on, I am very surprised at how little dental insurance and dental health care is mentioned.
After I was laid off recently, I joined a discount dental plan from http://www.DentalPlans.com and was able to save a significant sum on the dental care I needed. I was wondering if you could share your expert opinion about these affordable alternatives to individual dental insurance plans.

Disability Insurance
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Very well done, many new health care consumers are very apprehensive about insurance. This article should be very helpful to them and they should know that they shouldn’t be intimidated and that caring for their health and protecting their income should be more important than not having insurance.

jd
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jd

This commentary is long overdue if for no other reason than it presents how things look from the insurer’s point of view. You hear an enormous amount about insurers, but almost nothing from insurers except in the form of AHIP, which is doing a kabuki dance in the political realm and uses a lot of boilerplate. Item #1 is what’s on the mind of most insurance CEOs most of the time. This is what the core strategies of a health insurer tend to focus on: how they can take market share from their competitors (without giving away the store), and… Read more »

Donald E. L. Johnson
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Interesting and well written. Jon leaves out the reality of American politics, economics, demographics, geography and culture. They all affect the workability of any government-imposed plan and account for a large part of the variations in practice and costs from town to town and state to state. As noted at politico.com, which has basically called Obamacare dead and elsewhere around the the web, the Dems seem to have a death wish for health insurance reform. Betsey McCaughey’s exposure of the 1990-style HMO gatekeeper provisions in Kennedy’s $1.6 trillion times x bill is sending reality shock through Washington today. The last… Read more »