Perhaps the biggest battle brewing in Congress in the health reform war is that of the public option. As I said back in January, “Opponents claim that the Feds would have an unfair advantage due in part to their sheer size; they’re just so big that private plans could not compete.” Some Republicans and their affiliated think tanks continue to complain private health plans will not be able to compete with a public option as the public plan will just dictate pricing to providers, and they don’t have the capital and financial stability requirements forced on private plans.
They’re half right. Re the capital requirements, they’ve got a valid argument. As we know all too well with Medicare and Medicaid, the Feds (and we taxpayers) know we have an ultimate unfunded liability in excess of $22 trillion, but that figure doesn’t show up on any formal financial statements.
But when they complain about pricing, that’s a red herring – for two reasons.
First, physicians don’t have to accept Medicare or Medicaid, and wouldn’t have to agree to any ‘public option’ pricing. In fact many docs don’t accept Medicare today. As participants in the free market, they are able to opt out if they feel the compensation is too low – and many do.
The other factor is just as simple – pricing is but one component of the health cost equation. The others are utilization and frequency. ‘Utilization’ is the number of a specific type of services used by a patient, while ‘Frequency’ is the percentage/number of patients that use that type of service.
Here’s an example. For MRIs, the total cost calculation might be 10 million patients (frequency) X 1.2 MRIs per patient (utilization) X $800 per MRI (price).
Sure, price is a factor – but it is not the most significant factor – not by a long shot. By keeping patients out of the hospital, a private plan would eliminate utilization and prevent price from ever becoming a factor. So, even if a service area was dominated by a public plan, a private plan that did a really good job of keeping members healthy and out of the hospital would deliver lower costs – even if their hospital stays, when they did occur, were more expensive.
Those lower medical costs would enable the private plans to offer lower premiums, which in turn would attract more members, and those members’ dollars. The private payers that could deliver better health would also deliver better returns to their investors, while taking share from both the public plan option and other, less successful private plans.
The other reason – markets are already monopsonies
As noted previously, there’s another reason the arguments against a public plan don’t stand up. Opponents complain that the government’s market power would allow it to dominate a market, thereby making it impossible for a private plan to compete.
The reality today is that almost every market is already dominated by a very few health plans, so much so that in most markets, there really is very little market competition amongst health plans.
Here are a few factoids using 2005 data; if anything there has been more market consolidation, so these percentages are even higher today…
– 96% of HMO/PPO markets are deemed highly concentrated
– 99% of HMO markets are highly concentrated
– in 96% of markets, at least one insurer has share higher than 30%
– in almost two-thirds of the markets, at one insurer has share greater than 50%
– in a quarter of the markets, one insurer has share at or above 70%.
What does this mean for you?
If anything, a robust public plan would add competition to many markets, competition that would, if anything, increase consumer and provider choice.
How exactly is that bad?
Mar
30
Thanks for the analysis, Joe. I’ve noticed, also, that opponents of a public option tend to make two contradictory arguments at once: that private plans won’t be able to compete with a public plan, and that a public plan will be incompetent (because it’s run by the gov’t.) Unless you’re willing to argue that you don’t need to be competent to be competitive, you can’t have it both ways.
The real question is how will employers, as purchasers, respond to the availability of the public plan option? If the premium rates rates offered to employers by the public plan are designed to be lower than the private plans, should not we expect employers to migrate away from private plans toward the public plan to take advantage of the lower cost? Accordingly, why shouldn’t one consider this to be a veiled, back-door approach to converting our market-driven, pluralistic health insurance system to a single payer program?
First, I totally agree with you Joe.
Second, I think that Jim Lott’s comments ignore the reality of experience rating groups. If an employer has poor experience and can get a better rate through the “public plan” than through local or regional insurers/MCOs, it’s a good deal for them. If the employer has a healthier population, the local or regional will probably have a lower experience-rated rate and they can select them.
The insurers/MCOs may lose some covered lives, but the losses will probably be in groups that are unprofitable. My guess is that a “public plan” will result in lower MLRs (medical loss ratios) and higher profits for smart insurers/MCOs.
JMHO
A public plan will probably attract people who cannot buy private insurance, which implies that they will be sicker. That will drive the cost of the public plan way up, driving any healthy customers away. Basically, I can’t see how it would work. The net result could end up being less access to care for those who are forced into the public plan because the comprehensive plan may cost a huge amount. They would have to get the mnimal version, which would leave them with more risk than they can handle, but its their only “choice”.
I think that we are seeing that many of Obama’s healthcare proposals have this dark underside.
Single payer works in many developed countries and it is what we need here. Its the only way we can afford to give everybody good care. They know that.
Everything else is a delaying tactic, I suspect.
Why should we have to waste another ten or twenty years learning that when we already know it? Because insurance companies currently get 31 cents out of every healthcare dollar and that buys a LOT of access in Washington.
Why is the Obama administration taking single payer “off the table”?