By BILL KRAMER

As the health reform effort moves into the final stages, everyone seems to be taking a whack at health insurers. Some of the insurers’ wounds are self-inflicted, such as WellPoint’s announcement of 39% premium increase for individual policies in California. Some of the attacks are calculated to build public support for health reform, since every good crusade needs a good enemy. Some of the criticism has even suggested that we don’t need private health insurers. Michael Hiltzik asked the question in a recent column “What do we need health insurers for anyway?” James Surowiecki – usually a careful and thoughtful observer of business and economic issues – said the following in a recent article in the New Yorker:

Congress [in its health reform bills] is effectively making private insurers unnecessary, yet continuing to insist that we can’t do without them. The truth is that we could do just fine without them: an insurance system with community rating and universal access has no need of private insurers.

Surowiecki goes on to comment on what the world would look like without private health insurers:

In fact, the U.S. already has such a system: it’s known as Medicare. In most areas, it’s true, private companies do a better job of managing costs and providing services than the government does. But not when it comes to health care: over the past decade, Medicare’s spending has risen more slowly than that of private insurers. A single-payer system also has the advantage of spreading risk across the biggest patient pool possible. So if you want to make health insurance available to everyone, regardless of risk, the most sensible solution would be to expand Medicare to everyone.

Not so fast. I would feel more optimistic that this would work if we had a different political system. One of the limitations of this approach is that Medicare’s spending is ultimately determined through the political process. The U.S. political system – for better or worse — allows the health care industry (or any other well-funded interest group) to use its financial resources and lobbying power to increase the flow of government funds into the health sector. The idea that Medicare has a “hammer” to force providers to accept lower payment rates is largely an illusion. In the current system, Medicare can do this only because there is a safety valve, i.e., a large private insurance segment that pays much higher rates to providers. If Medicare gets larger or replaces private insurance altogether, there will be less opportunity to use the safety valve, so providers will step up their efforts to use political pressure to increase payment rates in Medicare. I simply don’t see a strong countervailing political force that would exert sufficient political pressure to hold down costs.Continue reading…