Excerpt: The Public Option
Reform without a Public Health Insurance Option Is Not Real Reform
For the great majority of Americans, staying just one step ahead of mounting medical debt is a constant struggle. Medical crises contribute to approximately half of all home foreclosure filings. According to a recent study published in The American Journal of Medicine, 62 percent of all bankruptcy filings in 2007 were partly the result of medical expenses; 78 percent of those who filed for bankruptcy actually had health insurance but found that insurance inadequate to cover their bills.
Even as skyrocketing healthcare costs are bankrupting millions of Americans, however, the earnings of private health insurance firms are rising. In most areas of the country, the insurance market is dominated by one or two large providers. Rather than bargaining for lower rates, large insurer conglomerates are transferring the high prices charged by hospitals to patients and padding their profits. As premiums soared, the profits of the top ten insurance companies grew by approximately 1,000 percent. During the same period, insurers merged more than 400 times, but employee premiums increased nearly eight times faster than average U.S. incomes.
The U.S. healthcare market is broken. Large insurers have little incentive to bargain for lower prices. Smaller insurers do not compete on premiums to gain market share; instead, they follow the pricing of the dominant insurer and compete on risk. As the Urban Institute has pointed out, “Competition in insurance markets is often about getting the lowest risk enrollees as opposed to competing on price and the efficient delivery of care.”
Health reform must restore competition into health markets and reorient the business model toward quality of care. To do this, President Obama has proposed a new public healthcare insurance plan that, as I have noted, would look much like Medicare.
Medicare: A Model for a Public Option
President Lyndon Johnson signed the Social Security Act of 1965 and enrolled former President Harry Truman as its first beneficiary. To this day, the program is financed through a payroll tax of 2.9 percent, split evenly between worker and employer. It makes every citizen or permanent legal resident who has been in the country for at least five years and is over the age of sixty-five eligible for Medicare. People under sixty-five who require dialysis or suffer from certain debilitating diseases can also enroll.
Medicare is divided into four parts: hospital insurance (Part A); medical insurance, covering physicians and other services (Part B); managed care plans (Part C); and prescription drug coverage (Part D). Part B costs extra and covers outpatient medication. Part D, which is a drug benefit, is far from comprehensive and requires enrollees to pay large out-of-pocket fees beyond a certain amount.
Medicare is easy to understand. All of your working life, you are taxed 1.45 percent of your income; this amount is matched by your employers. When you turn sixty-five, you become eligible for hospital insurance (Part A). Part B is voluntary, but the overwhelming majority of beneficiaries with Part A are also enrolled in Part B. The program includes limited cost sharing. People who wish to have outpatient coverage pay about $100 a month. People who have incomes greater than $85,000 ($170,000 for married couples) encounter greater costs. Beneficiaries enrolled in Medicare Part B may also elect to enroll in a Medicare Advantage plan (Part C), a stand-alone prescription drug plan (PDP), or a Medicare Advantage prescription drug plan—programs that are channeled through Medicare but administered by private insurers.
Overall, Medicare provides comprehensive benefits at a reasonably low price. It enjoys high user satisfaction and, given its low administrative overhead, delivers care more efficiently than insurers in the private market.
Still, there are weaknesses in the system. One is that billing criteria and rules are not always clear to physicians. The costs of Medicare are also rapidly increasing. While it is far more efficient than for-profit private health insurance companies, it is a very large program. According to the latest Medicare trustees report, the Medicare trust fund for hospital expenses “will pay out more in benefits than it collects this year and will be insolvent by 2017.” The worsening economy is certainly a contributing factor, but the real cause of Medicare insolvency is “the ever-escalating cost of health care.”
These problems are not Medicare’s alone. In recent years, private health insurance has also begun to under-reimburse physicians, sometimes paying even less than Medicare. The bureaucracy of private insurance companies has increased dramatically. In addition, insurers have resorted to selling contracts to other insurance groups that were not originally physician partners and lowering the reimbursement to physicians when they do so. In both the private and public systems, we’re spending too much money on hospital care because we don’t invest enough in preventive care—catching a disease early and preventing the need for hospitalization in the first place. Baby boomers, for instance—who make up 17 percent of non-elderly adults but account for 26 percent of those with at least one chronic illness—have a hard time finding affordable/continuous health coverage and contribute to increasing healthcare costs.
Unless we can reform the whole system—using the public system as a lever to ensure cost controls in the private sector— the continuing financing problems will only worsen.
What Would a New Public Health Insurance Option Look Like?
A healthcare reform initiative that includes a new Medicare-like public option would permit individuals who do not receive coverage through an employer to choose from a menu of private and public coverage options. Enrollees would pay a subsidized premium (should they qualify for a government subsidy) and receive the coverage of their choice. The new public health plan would build on the existing Medicare infrastructure and negotiate with hospitals and doctors for the best healthcare prices. Costs would be set through a process of competitive bidding in which all of the different healthcare plans (public and private) would participate to provide standard benefits.
The new plan would also use its inherent advantages to do what private insurers have only promised: control costs over the long term. Unlike private companies—which typically spend between 20 and 50 percent of healthcare dollars on expenses such as administration, executive salaries, advertising, and shareholder return on equity—Medicare has low administrative overhead and the ability to bargain for volume discounts, as the new public plan would have.
Remember, the private sector’s high administrative spending is responsible for a good portion of the excess spending in the healthcare system. According to an analysis by the McKinsey Global Institute, excess spending on health administration and insurance accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Eighty-five percent of this excess overhead “can be attributed to the highly complex private health insurance system in the United States.”
The new public health insurance option could use its ability to negotiate for lower prices and volume purchasing capacity to muscle private insurers into lowering their administrative spending and using more healthcare dollars to provide actual healthcare. According to a report from the Commonwealth Fund Commission on a High Performance Health System, these kinds of proposals would slow health-spending growth by $3 trillion by 2020, simplify the medical billing process (thus pleasing doctors and patients alike), and allow small businesses to finally enroll their employees into a health insurance program that provides comprehensive health benefits. Estimates also indicate that “premiums for the public plan would be at least 20 percent below those currently available for a comparable benefit package in the private market.”
Better Care, Efficiency, Cost Reduction: The Benefits of Going Public
Traditional public health insurance plans such as Medicare have been a source of important payment innovations that private plans have often adopted. A new public healthcare plan could therefore serve as an agent of innovation and quality improvement. Simply having universal healthcare formularies (lists of less expensive drugs that doctors can prescribe) by every insurer, both private and public, could make a difference. This innovation has been talked about for decades, but it has never been realized.
Today’s Medicare program, for instance, promotes quality reliable care alongside cost containment. Medicare’s refusal to pay medical care providers for “never events”—when a patient suffers a knowable and catastrophic mistake—is something other major insurers are now adopting. Similarly, Medicare’s development of its provider-payments systems and its investments in measuring and reporting quality care indicators are being copied by private insurers. A new public plan has the potential to do even more “to drive improvements in the health care system” and set the standard for developing new payment models and investing in preventive care and care coordination.
How Will Private Insurers Compete?
When most conservatives and insurance industry insiders read about increased efficiencies in the public arena, they only see red. Conservatives charge that private insurers could never compete with a new public option on a level playing field. The Heritage Foundation argues that “with the government plan, taxpayers would presumably absorb all of the risks, losses, and liabilities of such an enterprise, while private health plans would absorb their own risks, losses, and liabilities. Consequently, from the beginning, such a competition could not possibly be fair in any meaningful sense.” The public plan could use its advantages to outcompete the private insurers and drive them out of business.
As Jacob Hacker, a University of California–Berkeley professor and public plan architect, explains, what the critics of the public option really mean is that “they do not want a new public health insurance plan to have any inherent advantages.” That’s akin to criticizing Home Depot for outcompeting other home improvement stores by using its market clout to negotiate for better prices. Stripping a new public plan of “inherent advantages”—like the right to use its market share to bargain with providers or its lower overhead and administrative spending—“is at odds with true competition, which does not require competitors to be equal but that they have an equal chance to succeed if they are equally good at doing what consumers want,” Hacker writes.
Hacker explains that giving all healthcare plans the same opportunities to attract new enrollees would require the following:
- The public plan could not be run by the same authority that governs the new regulated menu of private and public health plans.
- All plans should play by the same rules: charge the same rates to all subscribers (guaranteed community rating), take everyone who applies (guaranteed issue), provide objective information (comparative effectiveness research), offer the same basic package of benefits, hold adequate reserves, and clearly state their terms.
- The public plan cannot dip into general government reserves to cover its losses.
- Plans should be paid different amounts based on the risk of their enrollees. At the end of the year, funds could be redistributed among the plans to ensure that those with very sick people are protected.
- Plans should bid to provide benefits within specific regions. “Once the premiums were set through competitive bidding, subsidies for low-income enrollees . . . should be based on some weighted average of public and private premiums within the region.” This way, lower-income enrollees are not always stuck with the lowest-bid plan.
Of course, if the Medicare-like public option could use its efficiency to deliver high-quality, cost-effective care, it would attract more enrollees. After all, this is the crux of why conservatives and the private insurance industry so vigorously object to a public plan. Their real concern is sacrificing profits to competition. Insurance companies, as we know, have increased their profits—and their administrative costs—over the last decade while spending a decreasing percentage of their revenue on their policyholders’ healthcare. Forcing private insurers to shave off some administrative costs and compete with a public option may very well reverse that trend.
Their argument essentially amounts to the notion that they are entitled to be inefficient. I don’t believe such a constitutional entitlement exists, nor do I believe this Congress approves of entitled inefficiency in the private sector.
More Americans will likely enroll in the new Medicare-like public option, but the goal isn’t to eliminate private insurance. In fact, private plans would fill an important niche within the new competitive environment.
According to a Lewin Group analysis of Jacob Hacker’s public-option-centric healthcare proposal, 28.1 million Americans would find coverage through the exchange in private plans, 65.6 million would enroll in the new public option, and 113.6 million would keep the insurance they receive from their employer. Moreover, in the public plan, “the average premiums would be about 23 percent lower than comparable private insurance for the same set of benefits for the same population.” The average enrollee costs in Hacker’s public plan would be about $3,250, compared with $4,230 under a private insurance product.
As Hacker explains, “Private insurers certainly will have a great role in providing more integrated coverage options than the public plan would provide.” Private plans would also have a “brand advantage” (in the same way that a lot of people would rather have the branded drug than the generic) and “could play an important role” as alternatives that look like the public model but provide “better customer service, nicer marketing and better brochures, but they might also be doing other things in terms of quality improvement or care management that the public plan wasn’t.”
What Will Policy Makers Choose: Public Plan or Private Monopoly?
Policy makers now have a choice to make: design a system that promotes the general welfare by “providing basic services, protecting the poor and the sick, and ensuring a well-working economy,” or protect the monopoly of private insurers and continue redistributing as much income as possible to the wealthy. As economist Dean Baker concludes, “These competing views of government are coming to a head in the debate over national health care reform.”
Fortunately, President Obama and 73 percent of voters strongly support a new public health insurance plan.The Congressional Progressive Caucus has even threatened “to vote against any health plan that doesn’t include a public plan option.” “We have polled CPC members very carefully in recent weeks and a strong majority will only support comprehensive healthcare reform legislation that includes a public plan option on a level playing field with private health insurance plans,” explained CPC co-chairs Lynn Woolsey (D-CA) and Raul Grijalva (D-AZ). But some lawmakers have indicated that a public plan may not be part of the final reform legislation. One senator has recently said that the public plan is just a bargaining chip to “encourage the private health insurance industry to move in the direction it knows it should move toward—namely, health insurance reform, which means eliminating pre-existing conditions, guaranteed issue, modified community rating.” “I think we can accomplish [healthcare reform] without” a public plan, this senator commented in an interview.
Let’s be clear. There can be no real healthcare reform without giving Americans the choice of a public health insurance program. What could be more American than letting Americans choose for themselves, instead of having employers, politicians, bureaucrats, and insurance companies do it for them, as they do so often under the present system? Moreover, we should not waste $600 billion on reforming the healthcare system and expanding access to care if we can’t contain costs in the long term. Without a public healthcare plan, health reform is simply unsustainable.
And there has been no effective cost control of healthcare over the last thirty years. Even though primary care physicians, in particular, have suffered and complained greatly, with more than a little justification, that their working conditions and salaries have dropped significantly under the heels of enormous downward pressure from insurance companies, overall health insurance costs have continued to rise at two to three times the rate of inflation every year for thirty years. In the Medicare plan, while costs are still rising at greater than the rate of inflation, the rate of increase is not nearly as great.
The Lewin Group points out that administrative costs would be significantly lower under a public plan. “First-year national health spending would drop slightly (100 million in 2007—the year projections were done) despite broadening of coverage, new federal spending would be $49.3 billion in 2007. Most of savings come from administrative costs (–25 billion), changes in reimbursement (–7.4 billion), negotiated drug discounts (–8.8 billion) and more efficient models of delivering care (–11.7 billion).”
While those figures are at some variance with the widely accepted notion that Medicare administrative costs are closer to 4 percent of covered benefits, the difference is still stark. Private insurance costs more than twice as much to administer as does a public insurance plan.
The question that this raises is: Why not require everybody to be in a public insurance plan if it is much cheaper? The answer is simple. You can’t take choice away from Americans. This country was founded on the idea that individuals can make their own choices and are free to make their own mistakes.
Furthermore, there will be inefficiency and bureaucracy in any plan, public or private. There will be, inevitably, Americans who are dissatisfied with their plan, whether they’ve chosen the public or private option. They should be free to change plans. If you have only one plan, no change is possible.
Those who advocate for a pure single payer with no choice for America are most likely correct in terms of the inefficiency of the system, but they don’t fully understand the American psyche. Americans want to choose.
Single-payer advocates will not deny Americans choices and in the end legislators won’t either—or they will pay an enormous price at the polls, as their constituents are reminded daily that these lawmakers refused to allow citizens to choose and, instead, made their choices for them. If individual Americans are willing to bear the extra costs of private insurance, there is no reason not to let them.
It is incredibly important to understand that the opposite must also be true. If individuals are willing to sign up for a public option, they should be allowed to do so. Votes against the public health insurance plan are simply votes for the health insurance industry. That has not served us well over the last thirty years and it has sought to substitute its own judgments—along with those of its allies in Congress, who have received generous campaign contributions over the years—for the judgments of the American people. There will be a price to be paid for that at election time.
There have been proposals for “public options” that are not really public options. One such proposal calls for copying state plans that feature private insurance companies from which individuals can choose; the bills are split among the state, employers, and employees. The problem with this is that these same for-profit health insurance companies still have to supply a return on investment, large executive salaries, and advertising and administrative costs, all more expensive than in the public sector.
A real public option gives real choices to the American people. A “fake” public option run by insurance companies is not real reform.