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


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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  1. 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)
    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.
    Physical at original sign up determines health risk as Low Medium or high.
    An insurance board maintains:
    The parameters for the “limited malpractice” level of award. (e.g. $1M for wrongful death, $500k for major handicap, etc).  
    A database of all medical services and prescription drugs. (e.g. definitions of surgeries, treatments, medical tests, drugs, etc).
    A lifetime maximum for each level of insurance. This could be raised or reduced each year based on inflation and “national debt”.
    Each provider determines the following:
    Which services and drugs are included in each “level of service”.
    The “standard cost” for each service and drug”.
    A list of recommended doctors that provide the services for their “standard cost”.
    The Insured:
    Selects their own personal physician who determines which services and/or prescriptions are needed by the patient.
    Selects where to get any services and/or prescriptions recommended by their doctor (including those not on the recommended list).
    Pays (or banks) the difference in cost, from the “standard cost”, of any service or drug.
    Money “banked” is added to the lifetime limit (as an incentive to watch costs).
    Insured is responsible for paying any amounts due not covered by their insurance.
    All current plans will be “transitioned” as follows:
    Private plans will be redefined within the above framework.
    State mandated plans will be redefined within the above framework.
    Medicare and Medicaid will be redefined within the above framework.
    A start date for all plans to switchover will be set by the Insurance board.
    On switchover date, all money paid for employee healthcare will be given to the employee as a “pay increase”.
    The U.S. government can pay the premium for unemployed persons, seniors,   and/or subsidize low income people.  
    People can opt out if they wish.  
    Anyone who opts out can still get emergency care but will owe the money for treatment to the government.  (wage garnishment).
    New extensive online system will be created that allows doctors to sign up (like facebook), individuals to sign up (like twitter, great for tracking health and symptoms), match doctors with patients (like eHarmony), and negotiate and track services and provide feedback (like ebay).
    Basic level should include preventative care, emergency service, treatment for common illnesses.
    Extended level would add rare diseases, artificial organs, recently approved drugs, private rooms, eye correction surgery etc
    Premium level would allow organ transplants (if available), cosmetic surgery, experimental drugs, etc
    Perhaps a consortium of companies could develop the online system (Facebook, Twitter, Ebay, eHarmoney, Oracle).
    you could add a degree of life insurance by providing any unused “lifetime” limit as a payout on death.
    Levels of insurance, services, drugs and prices can be reviewed/adjusted annually by each insurer.  
    New products like an artificial organ, a new procedure or drug could be added to the premium service and perhaps work its way to the basic service as costs decline.
    Any “public” plans will be IPO’d within 5 years.

  2. 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 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.

  3. 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.

  4. 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 in that context the focus is on who meets needs better. The key needs are similar to what Jon says, though I would rephrase some things:
    “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.”
    Meeting needs for cost, quality and access is all relative. It’s not so much who does a good job, but who does a better job than their peers. “Meeting needs” therefore can be misleading, in that someone may end up with a high-deductible plan because it was the only thing offered by their employer or it was the only thing they could afford. It doesn’t mean they are happy.
    As for the “high-quality” network of providers, this is one of the most neglected topics in all of health care reform. First, people wouldn’t know a low quality provider if it gave them a staff infection and charged $20,000 for the honor (remember Bill Clinton’s botched surgery?). People look for markers of quality that have poor correlation with actual quality (cost, pedigree, fanciness of facility, etc.).
    When people have a choice of plans, they put a premium on having a large network. Creating a smaller network that focuses on the more effective physicians generally fails to attract members for several reasons: People don’t like small networks because it is less likely to contain physicians prospective members already see and because they want to have hypothetical choices in case they need that “best” doctor recommended by a friend or other physician. Also, a smaller, more efficient network creates a lower premium price and there is a presumption that this means lower quality. If 30% fewer doctors wanted to join this network, it must be worse!
    Aetna probably more than any other insurer has tried to overcome this problem with its Aexcel network and heavy promotion as high-quality. I’m not sure where it stands right now, but would-be reformers might do well to study it.
    One thing this post made me think of for the first time: a public plan may want to have two options: an HMO-like option and a PPO (Medicare)-like option. If it’s anything like the current private market, the PPO will have costs 10-20% higher and about 70% market share.

  5. 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, 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 thing members of Congress want is another 1990s style consumer revolt against an onerous HMO for which they would be held accountable.
    Will the plan set payment levels for providers via negotiation or fiat? FIATs that will be negotiated by trade associations and other special interests. To the biggest campaign contributors will go the spoils.
    How will the plan influence the volume of services provided? Given the public’s unwillingness to accept HMO gatekeepers overseen by clueless bureaucrats, I’m guessing that whatever Obama signs won’t cut volume and won’t cover more than 10 million of the truly uninsured American citizens.
    How does the plan contract with efficient providers? The same way it will contract with all others. The markets work, and the markets made HMOs contract with almost all providers and will force them to under any plan enacted this year, if one is enacted. If you start telling people who have moderately rich to rich benefit plans that they have to use docs dictated by Congress, members of Congress won’t be able to get off the phone or show up at town hall meetings.

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