Dem Healthcare “Plan” Won’t Cure Anything

The health care debate is heating up, and I am on record arguing that it is in the interests of everyone for a bipartisan effort to emerge. One sticking point is the desirability of creating a new “public option” – a federally-run insurance plan that competes with private health insurance. Some Democrats are adamant. Republicans are opposed. What makes sense?

In sorting through the issues, it is useful to begin by reviewing what health insurers do:

• They advertise and otherwise compete for customers.
• They take in premium payments from insurance purchasers.
• They recruit, assess, and otherwise formalize relationships with providers.
• They negotiate payment rates with their provider partners for services rendered to their customers.
• They pay the cost of services used by their customers using the negotiated rates.

That’s it. So, a convincing, substantive case for a public plan must rest on the ability of the public plan to meet policy objectives by doing one or more of these five things better than the private sector. Is this likely to be the case? Let’s consider the policy objectives:

Universal coverage. One policy objective is to expand coverage and reduce the ranks of the uninsured. Almost certainly a public plan has no special advantage in pursuing this goal. If the United States wants fewer uninsured, it can subsidize individuals to purchase private insurance. Bribes, after all, work. An alternative would be to disguise the subsidy as a public program, a tactic with ample precedence in Medicaid and Medicare. But the transparent insolvency of these programs makes this an unattractive precedent, so it is not obvious how a new public option would not simply replicate the financial horror story that faces us from these programs.

Alternatively, one could mandate that individuals carry insurance coverage. The desirability of an individual mandate is a separate and complicated policy issue – there are Democrats and Republicans on both sides of the issue as a result – that is beyond the scope of this discussion. But it has nothing to do with a public plan; the private insurance model can support a mandate.

Increased Insurance Choices. In general, it is useful to have options. If there is one clear lesson of economic history, it is that monopolies are dangerous in both the private and public sectors. (That is one of the reasons I oppose the naïve idea that there should be a single government agency, program, or person charged with each policy objective. Bureaucratic monopolies blessed with sovereign powers are especially toxic. But I digress.) But there is nothing inherent in a public option that increases options for choice. If a state-regulated insurance market has permitted a few carriers to dominate or raised barriers to the entry of competition, the problem is the public sector and regulatory reform is in order. 

Alternatively, the problem may be that would-be purchasers of insurance are turned down because of their health or ability to pay. This is a real issue, but not one that leads immediately to the need for a government plan. As usual, there is a time-honored tradition and desirability of helping the less affluent purchase health insurance. In addition, it would be desirable to “risk-adjust” assistance, because income alone is not the issue. Instead, the real issue is how costly a person’s insurance will be (because of their health status) relative to their income. A sensible system of risk-adjusted subsidies that recognizes both the denominator and the numerator can lead private insurance to compete on basis other than denying coverage. 

In addition, Americans who get their insurance through their employers earn re-enrollment rights by keeping themselves covered by health insurance. There is no reason why this same approach cannot be extended to those individuals who purchase insurance on their own.

In light of these considerations, what would a public plan offer a high-cost, low-income potential enrollee? Nothing.

Better Insurance. A value-based insurance design would incentivize individuals to undertake prevention, participate in effective monitoring and treatment of chronic diseases like diabetes, and avoid a reliance on acute-care episodes. Surely a public plan could be constructed to reflect the latest informed thinking on these issues. But notice that if one permits every individual to earn renewal rights and provides risk-adjusted support for the ability to pay for insurance, these things will happen automatically. Private insurances will own someone “for life.” There is no better incentive for them to pay the (low) costs of prevention to prevent the (high) costs of hospital care. Transforming the private insurance market is the answer. And it makes a public option unnecessary.

Cost control. America’s health care costs are out of control. Agreed. But what costs would a public plan control? Admittedly, any such plan would have a serious advantage in advertising and recruitment of new plan enrollees. Whether this is a good idea or not is another matter, but I would anticipate that a fully-insured population with a public plan option would have lower overall administrative costs than a fully-private population for this reason. I doubt the difference would be dramatic – a couple of percentage points, tops, is my best guess. 

I can’t imagine that it would negotiate better than private plans. Blue Cross/Blue Shield, for example, has over 100 million subscribers and enormous bargaining power. In a different context, the Congressional Budget Office has regularly concluded that giving the Secretary of HHS the power to negotiate with drug companies would not lower the budget cost of Medicare. Why? Because existing private prescription drug plans have millions of beneficiaries and ample bargaining power. (Full disclosure: I am a former Director of the Congressional Budget Office, so I contributed – albeit, not much – to that conclusion.)

It might even be a worse negotiator. The government has a terrible time saying “no” because it usually invites political repercussions. How will the public plan choose one hospital over another in an influential Congresswoman’s district? How will it choose to reimburse a generic drug when the Senator’s state hosts the innovating drug company? The examples go on and on. 

Costs are the product of prices paid and the quantity of services covered. Prices don’t look to be lower under a public plan. What about utilization? A public option does not seem to have any particular advantage. With the right reforms, value based designs will shape utilization, low-income and high-risk patients will be covered and the best case will be a wash. Or, it could be the case that a public option will, again, be unable to say no to covering low-value – and perhaps costly – procedures. If so, costs will go up, and not down.

The bottom line seems to me inescapable: a review of how insurance actually operates and the policy goals that are on the table does not lead to any particular virtues of creating a public plan. 

And there would be costs. The first is undesired change. The Lewin group has estimated that an Obama-like public plan would cause over 100 million people who have employer-sponsored insurance to lose their coverage. Most people like what they have and want choice as an option, not a necessity. Beware the unintended consequences of unneeded public plans.

Second, the history of Medicare suggests that a public plan would quickly stop negotiating prices and instead resort to using sovereign powers to dictate prices. And nothing – I mean nothing – is more indicative of what is wrong with American health care than the operation of Medicare. It is fragmented (Part A for hospitals, Part B for docs, Part C for insurers, and Part D for drug companies), with no reward to prevention or coordination, and so under-priced that beneficiaries are saddling general taxpayers (who have in turn punted to our kids) with the bill.  

This danger is magnified by the fact that no public plan could really go bankrupt. It would have no inherent incentive to adequately reserve against losses, charge market-based premiums, or adjust coverage to rule out low-value care. It would more likely look like the Fannie Mae or Freddie Mac of health insurance – sub-prime insurance at the taxpayers expense.

Now, I realize that there will be some who argue in favor of a public option because it is the government. And there will be those that argue against a public option because it is the government. But seriously, folks, this is health care reform; not junior high. 

What mystifies me is the apparent fact that otherwise clear-thinkers are bewitched by a public plan when there is no substantive argument in favor of this option.