Careful What You Wish For

On the left are those who would like health reform to include a strong public plan, one that could negotiate large provider discounts, driving down the cost of medical care. On the right are those who think health insurance should be provided only privately. I’m neither left nor right. I consider myself a realist and an empiricist.

A reasonable reading of the political tea leaves suggests that health insurance for the non-elderly will remain largely a private affair. (See the Debating the Public Option in The American Prospect by Paul Starr, Robert Reich, and Robert Kuttner.) Therefore, I’d like the private insurance market to work well. I’m also very familiar with the Medicare experience (and its problems) with both public and private provision of insurance.

So is Kerry Weems, the former acting administrator of the Centers for Medicare and Medicaid Services (CMS), the agency that oversees Medicare and Medicaid. Weems was interviewed recently by John Iglehart, the founding editor of Health Affairs, a respected journal of health policy (Doing More With Less: A Conversation With Kerry Weems, Health Affairs, 18 June 2009). Based on his experience managing Medicare and Medicaid, Weems had some interesting things to say, some of which I summarize below.

In general he paints an ugly picture of a public plan. If you’re hoping health reform includes a strong public plan you should be careful what you wish for, and you should read the interview to see what problems a public plan might have. This is not to say a public plan is better or worse than private plans. It is just to say that one should expect that a public plan will likely experience certain types of problems. Now on to the summary of the Weems-Iglehart interview.

On Congress. Congress has not treated CMS well because funding it is not as sexy as funding other agencies overseen by the same appropriation subcommittees: the National Institutes of Health and the Centers for Disease Control and Prevention. A consequence is that CMS has insufficient resources to fight waste, fraud, and abuse. For example, according to Weems,

“CMS’ annual expenditures [are]…more than the economies of all but twelve nations, and CMS carries out its responsibilities with a staff of 4,600 people. Social Security is of comparable budget size and handles its dollars with about 66,000 people…”

On Medicare Advantage. Weems feels that private plans under Medicare advantage can offer “better care at lower or the same costs” as traditional fee-for-service Medicare.

On Payment Errors. Medicaid has a payment error rate of 24 percent, meaning that the payments paid to providers are either incorrect or unverifiable 24 percent of the time.

On Waste, Fraud, and Abuse. Investigations of waste, fraud, and abuse under Medicare and Medicaid have yielded a return of $17 for every $1 spent. However, far too little is spent in the fight. Therefore, a considerable amount of waste, fraud, and abuse exist under Medicare and Medicaid. (See the recent stories on fraud in Miami, Detroit, and Denver.)

On a Public Plan under Health Reform. Weems thinks a public plan is “a bad idea because the government has a difficult time selecting only those providers who deliver high-quality care. There is a risk that a lot of resources will be wasted on poor care.

On Political Pressure. CMS administrators get a lot of pressure from Congress to treat certain providers more favorably than they might deserve. Such political meddling is a handicap in properly administering a public insurance plan.

On Physician Payments. The American Medical Association (AMA) has considerable influence on physician payments through its Resource Based Relative Value Scale (RBRVS) Update Committee (RUC). Weems thinks the resulting payments have “contributed to the poor state of primary care in the United States.” (Weems’ anti-RUC statements sparked a blogosphere debate (hat tip: Kate Steadman of Kaiser Health News). Rebecca Patchin, Chair of the Board of Trustees for the American Medical Association wrote on the Health Affairs blog that CMS is under no obligation to follow the RUC’s recommendations and she cites examples where it has not done so. On the Health Care Renewal blog, physician and Brown University professor Roy Poses asks “why does CMS rely exclusively on the RUC to update the RBRVS system, apparently making the RUC de facto a government agency, yet without any accountability to CMS, or the government at large?”)

On balance, it is clear that Weems is not impressed with the public provision of health insurance under Medicare and Medicaid. Some of the sources of problems could in principle be remedied. However, if Congress were to implement a public plan under health reform there is no assurance it would not suffer from at least some of the problems that plague traditional Medicare and Medicaid. I think the most challenging are political pressures, including rent seeking on the part of providers, and a potential inability for a public entity to selectively contract based on quality.

The Incidental Economist holds a joint appointment at a major research
university and a federal government agency.  In his current position,
he studies economic issues pertaining to U.S. health care policy with a
focus on Medicare. His writings can be found at

25 replies »

  1. I think we need a single transactor system–an entity like the NIH that would act as a go between for any payment for health care or health care insurance. The reasons for this are too many to list here but basically it’s to ensure that providers of both HC and HC insurance comply with regulated standards to best protect all parties and remove the conflicts of interest that currently leave too many HC dollars in the pockets of people who have nothing to do with HC, like insurance brokers, financial advisors, lawyers, marketing agencies, lobbyists, etc.
    This approach seems like the least impactive way to create a selective pressure on the HC industry to become more efficient and look for better ways to deploy effective preventative medicine. I explain this more thoroughly in a series of blog posts starting with the one titled “A single transactor system.”

  2. From a smart Congressman….John Fleming….Under the current draft of the Democrat healthcare legislation, members of Congress are curiously exempt from the government-run health care option, keeping their existing health plans and services on Capitol Hill. If Members of Congress believe so strongly that government-run health care is the best solution for hard working American families, I think it only fitting that Americans see them lead the way. Public servants should always be accountable and responsible for what they are advocating, and I challenge the American people to demand this from their representatives.

  3. I don’t understand why in our health care system natural healing products aren’t part of the healing process?
    My wife was cured of arthritis and colitis.
    I was cured of life long sinus and allergy problems.
    Our daughters bad vision was cured with vitamins and herbs, caused by child cold medications.
    Most educated people know chemicals cause uncontrolled cell division in test animals.
    The drugs we take are made of chemicals and yet everyone wonders why the cancer rate is approaching 1 in 3.
    I have not had the flu in five years. Sad to the public this knowledge is hidden from us.
    Really though one has to consider all the problems if people were not getting sick then our economy would suffer greatly. Health care is a large part of our economy.
    Maybe this cause for the economy is the greater good for the people instead of there health?

  4. If you guys only knew what a complete fraud Kerry Weems is. Let’s just say he is not a model for a public servant, although he was quite successful atbureacratic politics.

  5. I don’t think the comparison between CMS and SSA is accurate at all. I might be mistaken but I beleive SSA processes all of it’s payments and claims with staff? CMS outsources all of its work to Medicare Intermedaries. CMS is just a huge midlevel management company sitting between the suits, Congress, and the workers, the private insurers the left wants to get rid of. What we need to be asking is what in the heck are 4000+ mid level managers doing all day?
    No the true cost of CMS and Medicare is not aggregated by the government or the left. That is how they get away with their BS claims that Medicare is cheaper and more efficient. There are dozens of agencies that play a role in managing Medicare whos cost is never added in. CMS, GOA, FBI, Congress, etc etc I have seen private studies and it is no wonder Medicare is such a freaking mess everyone has a hand in it and no one is accountable for the results. Heck the CEOs, Congress, are publicly blaming the Midlevel managers, CMS, for the mess, what’s that tell you about ledership!
    Jd, where you abused by a self funded plan as a child? Did a self funded plan beat you up after school or take your lunch money? Speaking of school let me take you there;
    “Regarding self-funding, ERISA, a federal law, is a gift to the self-funded market more powerful than anything Congress has passed helping fully-insured group plans or the individual market.”
    Was there a self funded market before ERISA? Many people consider the passing of ERISA as creating the self funded market, so really it was a gift to employers trying to offer affordable insurance to their employees. Could you imagine being a national company trying to offer benefits to employees under 50 different sets of law? How do you insure the truck driver that crosses 5 states in a day, or the employee that lives on one side of the state line and works on the other?
    How do you classify HMOs? Fully insured no? HMO Act of 1973 not only gave HMOs all the capital to start up but made it a federal law that employers with more then 25 employees had to offer one, nothing is more beneficial then the federal government requiring people buy your product.
    How did this argument get between SF and FI plans? No one was arguing the merits of one over the other, the point I made was at the same time Congress is on their soap box claiming they want to make insurance more affordable they are taking actions that in fact make it more expensive and less accessible. If Congress really wanted Americans to have affordable insurance they wouldn’t outlaw SF under 250 lives, this statement has nothing to do with fully insured plans or your perceived advantage SF plans have over them. Your left field rant makes no sense, what are you arguing against?
    I was referring to the Surcharge from 10 years ago or so. A brilliant display of political cowardice and inefficiency if there ever was one. NY needed to raise some money to either train doctors or not train them, the tax changes every other year, so they decided to add a surcharge to hospital and ambulatory facility payments. There was only a couple hundred facilities this applied to so any intelligent person would tax those couple hundred facilities. Not the NY legislature. They decided to collect the surcharge or monthly fee in lieu from the health plans. Instead of collecting from 200 points they thought the smarter route was 100,000 or so health plans. This means every single carrier in the country including every single individual self funded plan now had to file monthly reports with the state of NY. Even little 50 life groups in NV with no employees in NY had to file this report on the very off chance one of their employees or dependents in college ever received treatment in NY. Hundreds of millions of dollars where wasted because NY politicians are idiots that didn’t have the balls to tax the 200 facilities. They rather waste the entire countries money so they can avoid being accused of taxing providers. That is what I was referring to. Would you like to argue how this was good for America or is not an example of how politicians claim they want to fix the problem but only exacerbate it?
    Please do share your politically charged topics, I just hope they are a little more relative to my statements then this last rant.

  6. The comparison in staff sizes between CMS and SSA is very telling. It’s yet another example of how government is not an efficient means for handling certain responsibilities and deploying resources. The more government gets into, the more thinly it is spread and the more bureaucracy it requires. Throw politics into the mix and it gets even more inefficient.
    Here’s a question: Is the indirect overhead that CMS requires from outside of its agency being allocated to its budget like a subsidiary would see from a parent? In other words, do we really know how much Medicare truly costs?

  7. And that’s just on the relatively apolitical topic of self-funding vs. fully-insured plans! I won’t even get started on the more politically charged topics.

  8. Nate, you often have good insights from your years in the industry that are seldom heard, and for that you provide a service, but you are absolutely not a reliable guide to a fair assessment of issues related to policy.
    Regarding self-funding, ERISA, a federal law, is a gift to the self-funded market more powerful than anything Congress has passed helping fully-insured group plans or the individual market. So get off your damned whine-wagon about how Congress is unfair to self-funded plans.
    That point may make you go ballistic, but the more you try to refute it the deeper the hole you will dig for yourself. Make self-funded companies rely on patchwork state laws like the fully-insured market must and we have a whole new ballgame. Conversely, create Federal oversight over fully-insured plans with more comparable rules to self-funded plans on mandated benefits, reserves and days in claims payable, and the self-funded market would tank.
    As for the NY surcharge you mention, if you’re referring to the recent taxes NY passed to balance the budget, they apply to private insurers as well. My company, in fact, has to pay tens of millions in new tax in 2009 that it did not (could not) budget because of this law. Have you done the analysis that shows whether the adverse impact on self-funded plans is higher than on fully-insured? If you’re referring to some other tax, it must not have hurt the self-funded market very much because self-funding rates are similar in NY to other states (slightly lower, if I recall, but that might just be due to New York City employee’s Consolidated Benefit Plan, which is effectively self-insured but often gets counted as fully-insured).
    And that’s just on the relatively apolitical topic of self-funding vs. fully-insured plans! I won’t even get started on the more politically charged topics.

  9. “Recent work reveals tremendous market concentration among insurers.”
    The quickest and cheapest way to fix this is support more self funding amoung employers. What does Congress propose….outlawing self funding for groups under 250 employees. They pass laws like ARRA COBRA, HIPAA, and the NY surcharge that make it prohibitivly expensive for employers to self fund. When will people wake up and realize Congress doesn’t want an efficient and effective private system they want the tax dollars and they want them 103 years ago.
    Alison can you string together a long enough thought to attack the argument instead of the person? I’m all for calling someone a hack or idiot while I tear apart their argument, you don’t even dispute one thing he says, talk about blabbering partisonship.

  10. “The Centers for Medicare and Medicaid Services (CMS) has become the object of criticism in Congress,”
    Did anyone else get a rolling on the floor laugh out of this? Congress publicly criticizing CMS, when have you ever seen a CEO do that to his company? Congress is the CEO, CFO, CEO etc of both of these plans, if CMS isn’t getting the job done that means the executive suite is failing, wonder if these same members of congress are willing to fire themselves for this poor performance?

  11. I’m generally familiar with Arrow and Public Choice Theory but certainly not at the PhD level, more like the Wikipedia level. I’ll be interested to read Robinson’s reply to Arrow. I’ll just have to order the whole issue of Journal of Health Politics, Policy, and Law — it looks very interesting.
    When you say you’re in favor of single payer, what do you mean by “single payer”? Is that German or Dutch style “single payer”, or UK style “single payer” or have you got something else in mind? I have talked about a distinction between “single purchaser” (German/Dutch) and “single payer” (UK).
    It seems to me the “single purchaser” style helps with two problems: distributive efficiency and what I’ll call “cognitive and/or judgement asymmetries”. It is this second bit that permits “meaningful competition” among bidders to help with allocative efficiency: they face a knowledgable buyer. It seems to me the UK (and Medicare) Single Payer style suffers the fatal conceit and gets allocative efficiency wrong, not that the Single Purchaser is infallable.
    Of course, a rigorous certification program (state-sponsored or not) could solve the “cognitive and/or judgement asymmetry” problem, but it won’t solve the distributive efficiency problem.
    As long as we have the individualism/solidarism split I don’t think a Pareto optimum solution (i.e. “nobody sqawks”) is possible.
    We live in interesting times…

  12. A question and a comment about your blog, Matthew. How come you don’t have the guts to put your full name out there, if you’re really an independent-minded economist? And second, it seems obvious that Kerry Weems, now that he’s left the Bush administration, is out marketing himself as a management consultant to the health-care industry (as owner of Communix, a management consulting company in Kansas). So it comes as no surprise that Mr. Weems is opposed to a public health option. And this is not the only time he has shilled for the industry. He cast stones at a government-run plan in a recent editorial for The Wall Street Journal. Is it too much to ask for a little transparency here?

  13. Let’s bear in mind that Weems was a Bush appointee.
    What evidence is there that private plans are not subject to waste, fraud and abuse as much as a public plan? Is that Ok if it’s private for profit payments?

  14. Interesting post.
    I, too, believe single payer makes the most sense and, as the French and Japanese, among others have shown, it can be done well with fast, high quality care.
    But, I also agree that we can’t get there from here, which brings me to the solution that seems possible from here: A German Style system of Social Health Insurance. Payroll tax, supplemented by other revenue, insurers are not for profit (in the sense that most of us think of intuitively, not in the multi-million dollar CEO and VP salaries that are de riguer in AMericn “not for profit” insurers.)
    Put not for profit and for profit insurers into the national health insurance exchange, regulate the bejeesus out of them (i.e., 90-95% of premium dollars go into pay-outs), and see who still wants in the business. Single, mandatory claims process; Federal health board working on cost and quality issues, etc.
    It’s not so hard if we re-frame the debate.

  15. Dear Incidental Economist:
    I recommend that you read James C. Robinson’s follow-up to Ken Arrow’s famous 1963 article which was published a few years ago in the Journal of Health Politics, Policy, and Law (“The End of Asymmetric Information”). While information problems in health care markets certainly have not gone away, there are both public and private institutional mechanisms for mitigating these problems. Also, while Ken Arrow arguably deserved his Nobel Prize in Economics, keep in mind that his 1963 article grossly underestimated moral hazard problems in health care markets (e.g., physician induced demand).

  16. Rahm Emanuel’s latest adroit remark- “In health care reform our fundamental goal is success”
    Does that signal compromise? Yes.
    But make no mistake about-
    – we are all in for big time change as a very real imperative in US health care
    – change is what scares people most
    We must not let this fear paralyze us. The time for big change has arrived.
    Dr. Rick Lippin

  17. @Tom Leith – I think we can lean on the literature. Ken Arrow’s 1963 paper made clear why the health care market won’t function as we might like if left to itself (all references at the end of this comment).
    Recent work reveals tremendous market concentration among insurers. Hospital mergers have been going on with little anti-trust resistance for decades.
    I would have to leave the details of how to measure and regulate competition in these markets to those more expert than I. For example, economists Deborah Haas-Wilson (Smith), David Dranove (Northwestern), H.E. Frech (UC Santa Barbara) have expertise and publications in these areas. Perhaps Matt could solicit a contribution by one or several of them to address these issues further.

  18. So it seems that you don’t think the market for medical services financing or services can be a free market in the laissez faire sense. Why not? Let’s narrow the scope and focus on “meaningful competition in the insurer and provider markets”. What are the characteristics of or prerequisites for a “meaningfully competitive” market?

  19. @Tom Leith – I’m actually in favor of single payer. But I don’t consider it realistic. So, given that there will be private plans I want to see that market work “well.” You ask what this means. I think my goals for a well-functioning insurance market are similar to those of the Administration: affordability, guaranteed issue and renewability, universal coverage, cost control, and meaningful competition in the insurer and provider markets. I’d like to see those goals quantified and then backed up with a threat of a federal fallback to a strong public plan if they are not realized.
    @ravi – Reform is often less about what is “right” and more about what is “possible.” That aside, it is also quite possible to imagine a strong public plan that we all hate. There are lessons to be learned from Medicare and Medicaid. Weems pointed them out. Good for him!

  20. Let us not use what does not work as an excuse for doing the right thing. First we need to do what is right. THen use inputs such as this to create a system which minimizes these risks.
    What is at the core is taking burden off the employer, reducing cost of care, improving life quality and overall wellness index, and so on.
    We have to do it for american competitiveness, and national security. If we do not, this might create the crisis that will shame the current economic crisis.

  21. Great to hear from an economist. What are the characteristics of or the prerequisites for a market that “works well” on your definition?