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Dear Mrs. Clinton, Is the Public Option Really an Option?

 

Screen Shot 2016-07-20 at 12.02.59 PMOn July 11, 2016, the Journal of the American Medical Association published an article written by Barack Obama, JD.  The JD (juris doctor) part reflects the fact that the author graduated from law school.  Listed among the article’s purposes is to “recommend actions that could improve the health care system.”  One of those recommended actions is “introducing a public plan option in areas lacking individual market competition.”  While the President devoted only a small portion of his article to the public option, this is what he wrote:

“Some parts of the country have struggled with limited insurance market competition for many years, which is one reason that, in the original debate over health reform, Congress considered and I supported including a Medicare-like public plan. Public programs like Medicare often deliver care more cost-effectively by curtailing administrative overhead and securing better prices from providers.  The public plan did not make it into the final legislation. Now, based on experience with the ACA, I think Congress should revisit a public plan to compete alongside private insurers in areas of the country where competition is limited. Adding a public plan in such areas would strengthen the Marketplace approach, giving consumers more affordable options while also creating savings for the federal government. ” (Emphasis added)

Note that the recommended action quote proposes a public option “in areas lacking individual market competition (emphasis added).”  The individual market means non-group, non-employer coverage contracted for and paid for individually, still a relatively small part of the entire insurance market, albeit growing.   Yet the larger quoted paragraph is not so limited, nor is Hillary Clinton’s ambiguous (intentionally so I suspect) adoption of Bernie Sanders’ position on the subject.  Ms. Clinton always has favored a public option.  But when you add it to her additional announcements about allowing the over 55’s into a Medicare-type coverage, we are well down the slippery slope toward single payor federally run health insurance.

Let’s look at the public option a little closer.

The most oft-stated justification for the public option is the lack of insurer competition in some areas of the United States.  Commentators who favor the  public option suggest that more competition is needed in those regions to “keep the insurers honest,” reflecting an understandable belief that more competition will lower prices.  As I’ve written before, in healthcare, at least as presently constituted, additional insurer competition usually does not significantly reduce the price of insurance.

If the public option becomes law and is implemented, we already have a pretty good idea of what it will be like.  Medicare.  What do we know about Medicare?

While hugely expensive, the only way it keeps any control over its costs is by dictating (not negotiating) very, very low fees.  Commercial insurers (Blue Crosses, United Healthcare, Aetna, Cigna, etc.) regularly pay hospitals and physicians 20-30% more than the federal government under Medicare.  Why?  Is it because the commercial insurers are insufficiently aggressive in negotiations?  No.  The commercial insurers for years have been the difference between survival and bankruptcy for many community hospitals and other providers.

Even so, a 2009 survey reported that more than 60% of physicians supported a public option.  Really now.  If implemented, an even greater portion of their revenue will be paid by the federal government at those way lower rates.

The other way that Medicare puts a dent in its costs is by a lower per insured operating expense.  To put it bluntly, of course Medicare has a lower per insured operating expense rate.  Its scale is enormous, and it does almost nothing other than process claims and take in money.  Medicare does not manage care or do the myriad other things that private insurers do.  To put it in context, Blue Cross & Blue Shield of RI covers about 500,000 lives.  An expenditure by the RI plan (say a significant technology upgrade) of $50 Million would add $100 to rates.  At last look, the Medicare program had almost 54 Million insureds, so a similar spend by Medicare would add 93 cents to its rates.

And even with all that, Medicare is not as “efficient” as it seems.  Forbes published an article exposing the myth of Medicare’s low administrative expenses that puts all of this in better for us.

As I’ve written time and time again, operating expense accounts for a small portion of premiums, less than 10%.   The CBO in a 2015 Report on p. 34 stated that in 2012, 88% of insurers’ revenues covered healthcare costs (actual claims paid for services to their insureds) while 12% went to operating expense and profits (or for nonprofits contributions to reserves).  Those margins ranged from 2-3%.  Compare that with virtually any other industry.

And the 88% of the premium bill, claims expense, is driven by fees and rate of use of medical services (i.e., insurance premiums not only cover increases in fees paid, but also increases (or decreases) in the rate of use of services and products by insureds).  In that regard, it is very different from inflation or CPI which reflects price (the equivalent of fees) increases or decreases.

IF the federal government is suggesting that private insurers “be kept honest” and reduce their costs, the only way they can do that with a significant impact on rates is by reducing the fees paid to providers or reducing the per member use of services.  There are no other ways.  In regions where there is just one private insurer, usually the lack of alternatives for providers gives such insurers leverage to negotiate very low fees.  Which makes for bad press and public outcry, but that’s for another time to discuss.  My plan in RI which had a very large market share was accused of doing just that.

I’ll say it again.  An insurer, and particularly a smaller regional insurer, even one without competition, can do only so much to reduce its operating expenses.  Their regulators demand that they do much more than Medicare does.  Customer service, managing care, wellness, employer group servicing, and the list goes on.  And a reduction of operating expense means fewer employees who (we’d hope) do helpful things like customer service and care management.  Just sayin’.

Those proposing a public option might suggest that the federal government, might agree to implement fees that are somehow “comparable” to the private insurers’ fees.  That really won’t work.  And reread what Mr. Obama wrote about “…securing better prices from providers,”  a central basis for his suggesting a public option.

Moreover, even if the government agreed to use fee parity with private insurer, what would happen?  Given that it doesn’t manage care, its claims costs would be in excess of the private insurers because the use by its insureds would be more and its fees are the same.  It would be uncompetitively expensive.

Given the political environment, there may even be some claims this Fall that the public option would stand on its own and be self-supporting.  That was said of the Medicare program in 1967, and look at where we are now.  At least 50% of the cost of Medicare is funded by the general Treasury and not by direct employer/employee contributions (FICA) and beneficiaries’ premiums.

I lived through the fear mongering of the “Domino Effect” of the 60’s in Southeast Asia, eventually serving there for a while in courtesy of Uncle Sam.  I appreciate that slippery slope arguments are too often overstated.  Here, however, it is not.  A public option where the federal government, which is not just a payor but also a user of services and the regulator, steps in as a “competitor” would be devastating to private insurance.  It has the power of the Treasury behind it.  A formidable “competitor” indeed.

Together with Medicare for over 55’s, it would gut the market and get us within shouting distance of Bernie’s single payor governmentally run health insurance dream.  And we (and our children and their children) will somehow have to pay for it, because it’s not “free stuff.”

 

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15 replies »

  1. Jim’s argument is cogent and well-infomed but the big picture is that in some geographic areas, plans offered through the exchanges could fail due to several forces. Already, insurers are dropping out, pulling back…or seeking large premium increases…is some areas. This could necessitate a public option in those areas. States, like Colorado, also may choose to add a restricted public option to the mix, to drive competition. That seems a rational approach, and one that will test whether a public option puts us on the proverbial slippery slope to single payer. (We may ultimately be headed there anyway.) For the foreseeable future, I doubt Congress or a Clinton administration would let a slippery slope happen….if of course either pursue a public option at all.
    I think Jim overstates the danger. But I’m glad the issue is being discussed here. With any luck, a more reasoned and less ideologically driven approach to ACA fixes can begin in 2017.

  2. And why does a MRI at a hospital based facility cost almost twice that of a private facility?
    Those pesky extra fees that hospitals get.

  3. Yes, Barry wrote a good post regarding the public option, but I partly disagree with the statement “ Health insurance is expensive because health CARE is expensive” Healthcare is expensive, but our system has developed into a bureaucratic nightmare that leads to a lot of these costs. Some economists have estimated these costs to be twice as much as they should be.

    We have to start looking at the costs of those things that subtract rather than add to the patient’s outcome. On this very blog we see a lot of people peddling their work product that feeds off the healthcare system, but doesn’t help the patient.

  4. Great post by Barry. And thus we have the mainstream candidate of the left putting us on a path to single payer without paying attention to the unit cost of healthcare. Any wonder why choices this election cycle are as difficult as they are?

  5. Health insurance is expensive because health CARE is expensive, especially hospital based care and prescription drugs. I haven’t seen or heard any ideas to lower the cost of care that will not result in either rationing, a reduction in innovation, or require people to pay significantly more for their care out-of-pocket many of whom cannot afford to do so. Public payers, for their part, are also riddled with fraud as compared to private payers. The current Medicare system works as well as it does because there is still a significant commercial insurance sector for providers to shift their costs to.

    A public option that pays Medicare reimbursement rates and is required by law to cover its medical claims and administrative costs solely out of premium revenue is not likely to be noticeably cheaper than current private insurance because of fraud alone even without adverse selection which it would probably wind up with as Don McCanne notes. The government, even if it passes legislation that requires a public option to rely on premium revenue to cover its costs, cannot be trusted to sustain that position once the PO starts to lose money.

    If a public option ultimately became a pathway to a single payer system, as many liberals want, we will soon learn the severe consequences of being wrong as we experience healthcare rationing, a reduction in medical innovation and the need for higher taxes to shore up an increasingly expensive system. By then, the private insurers will have been driven out of business and will be extremely difficult, if not impossible, to reconstitute. Be careful what you wish for.

  6. Did not say ColoradoCare works. Only saying that ColoradoCare is an example of a health care fix that makes an effort to cut out two of the offending players that everyone, rightfully and understandably, complains about.

    Regarding the insurance history, which I enjoyed reading, health insurance is a not so ancient product and is a profitable failure. Difficult not to see health insurance as a zebra amongst insurances.

    Not a fan of the ACA, but I saw the ACA as a move by my government to defend the citizenry. But it was/is destined to fail as it did nothing to contain costs and added administration, too.

    Plus, the whole push to get Americans insured as a large red herring. What it is, more accurately, is a push to get the uninsured up to the status of under-insured. We are a nation of under-insured citizens where GoFundMe is effectively become our supplmental option.

    Is it not interesting the number of Americans with health insurance that end up bankrupt due to medical bills?

  7. Insurance is an ancient product created privately to protect assets. If cargo was lost insurance distributed the burden of the loss. Insurance works because it is a voluntary agreement between the buyer and the seller. When it is interfered with as we have seen with the ACA and other government interventions, insurance becomes less useful or even worthless.

    As far as ColoradoCare, why don’t you write a blog on it? Then we can all respond on that blog. Of course, ColoradoCare isn’t even in existence yet so don’t you think you require a bit of time before saying it works?

  8. Single payer in Colorado is projected to make your state the least friendly to business from one of the most friendly due to the increased taxes it will require

  9. I’m sympathetic to the disdain for government. But American health insurance is no product of worth.

    As I actively push to fix health care, I seek out successful business individuals and hear lines such as “private insurance brings nothing to the table.” Or, “Private insurance really doesn’t add anything to healthcare except cost.”

    Regarding, government regulation causing the lack of insurer competition, and government micromanaging healthcare? These thoughts don’t seem to have factored into them the fact that 64% of U.S. healthcare spending is financed by taxpayers.

    Or in other words, we are already are well on our way to having a single payer system. And we are already paying more than a single payer system would cost.

    A lot of this site’s views on fixing health care, or protecting the profits of health care, rely on broad sweeping left versus right arguments and ignore the fact that we have the most expensive and least effective health care system in the world – the cost of which is rising rapidly to and beyond 20% of the GNP.

    It’s our new bubble that’s getting big, fast.

    How about this? A resident-owned, non-governmental health care financing system designed to ensure comprehensive, quality, accessible, lifetime health care for every citizen of whichever state.

    PIe in the sky?

    No, that’s called ColoradoCare which is on their ballot in November. And it, by design, defends the citizens against both the government and the mafia-like health insurance industry and profiteers.

    Yet, where is the discussion about that on this health care blog site?

    Non-existent and surprisingly so.

    Perhaps we all should take a tour of that site, http://www.coloradocare.org, and meet back here in a week to disucss it all.

  10. “The most oft-stated justification for the public option is the lack of insurer competition in some areas of the United States.”

    It’s amazing. Government regulation causes the lack of insurer competition and then we ask government to fix the problem when all they know is more regulation. Government is immune from suit and in many cases job loss. At least those remedies exist in the private sector. Therefore the solution is to increase competition by stopping government from micromanaging healthcare.

  11. Agreed. Thus, the real issue is whether the demise of private health insurers is a bad thing. One could argue either side of that issue. It’s just that we have to go into these things with our eyes open to the consequences.

  12. Don
    One advantage of the public option is that the government operates as a unique insurer
    For example, Medicare premiums are paid to the Treasury’s general fund which pays General appropriations
    One of those appropriations is Medicare
    Assume Medicare comprises 10 percent of the budget
    Reasonably, The Medicare trust fund receives 10 cents for every dollar appropriated
    The other 90 percent as well as the growth of the trust fund is funded by debt
    What private insurer could compete with that?

  13. Although it is not at all clear how the public option would be designed, let’s assume that it would be similar in costs and benefits to private insurance plans. As such, it would only be one more plan in our fragmented, dysfunctional system of financing health care. Very little of the administrative waste that permeates our system would be recovered, thus it forgoes the efficiencies of a single payer system.

    Insurers would exert their influence on Congress to make sure that the public option would include design features that would place it at a competitive disadvantage (just as they did with the public option during the markup of the Affordable Care Act – an option that was discarded anyway).

    The public option would likely be subject to adverse selection, considering the private insurance industry’s ability to skirt insuring the ill and game risk adjustment. It would attract sicker, more expensive patients and thus would be subject to the death spiral since premiums would become less and less affordable.

    Just as Medicare has not led to a single payer system, a public option designed like a private insurance plan will never get us there either. That may please the author of this blog, but it does not please those of us advocating for health care justice for all.

  14. Here is the problem with a single payer, otherwise called a monopsony:

    “If you were a coffee grower in East timor, Indonesia, when it came time to sell your crop, you would find that you had two choices: you could sell your coffee to the P.T. Hernandez International Company, or you could let the coffee rot in the field. Denok is owned by he Indonesian military, and they do not allow competition. Consequently, Denok is the sole buyer of coffee grown in East Timor. Let’s look at the market from Denok’s point of view. The supply curve that it faces is the East Timorese market supply curve for coffee beans. The company views coffee beans as an input into the production of coffee for export. In buying this input, Denok recognizes that it has considerable influence on the price of coffeed beans in Timor. The more coffee beans it buys, the higher the price it must pay to buy them.”

    This quote, from Microeconomics by Katz and Rosen, 1994, Irwin Books, illustrates the problem: whenever a monopsony or single payer faces the need to buy more goods or services, it has to pay the new seller a little more AND IT HAS TO PAY ALL THE OLD SELLERS THE SAME NEW PRICE SIMULTANEOUSLY!.

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