The fierce battle over the public plan option is much ado about very little, an epic battle over a useless piece of political ground. It is the health care debate’s version of the Battle of the Hurtgen Forest – a huge waste of time, resources, and talent on a pretty much pointless contest.
The political treasure spent by pro- and o-ponents to date has been huge, and the spending looks likely to increase in the coming days.
For what? How does the public option help, or hurt, health care and the health care system?
The short answer is – it doesn’t.
Democrats see the public option as critical; it adds competition to a mostly non-competitive business, puts pressure on private insurers, and ensures individuals and businesses can get access to good coverage at a reasonable cost.
How? Premium rates are driven by medical costs. Plans with low costs get more members, and take share from plans with higher costs. That’s why the big indemnity carriers of the late eighties (Travelers, Home Life, Great West, Time, Phoenix et al) are mostly out of business and the world is dominated by HMO-based plans – the HMOs’ cost of goods sold was lower.
Costs are the price per service times the volume of services provided to members who get those services times the number of members getting those services – more simply, price x utilization x frequency. Price is the primary reason health care costs here are so much higher than in other countries.
How would a public plan control price per service? It can’t. The Republican bemoaning the ability of a public plan to use Medicare rates (or a similarly low fee schedule) miss the fact that docs and other providers would not have to sign up for this plan – as with Medicare, there’s nothing forcing them to agree to participate. Sure, most providers do accept Medicare, but that’s because it is a huge payer. Which brings us to the second point.
A public plan would begin with zero members. And zero bargaining power. The big health plans have lots of members, which is how they convince providers to agree to discount their services. Without volume, no discount.
Without discount, no price advantage. Without price advantage, higher premiums. With higher premiums, few members. With few members, no volume.
See where we’re going here? A public plan could not compete effectively because it could not get a lower ‘cost of goods sold’.
The opponents of a public plan are equally confused, claiming it would damage the free market, adding unfair competition. The reality is that in most areas, there is no free market in health insurance; markets are already monopsonies.
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%.
As I said back in January, would a new governmental plan have an advantage over, say, Blue Cross of Alabama, which has market share ranging from 67 percent in Tuscaloosa to 95 percent in Gadsden? Or Blue Cross of Arkansas, with share from 63 percent in Hot Springs to 97 percent in Texarkana? Or the two dominant health plans in Ohio, with combined share ranging from 46 percent to 80 percent?
It wouldn’t; in fact it would be an uphill climb on a very icy slope for a governmental plan to reach market parity, much less market dominance in most of the country’s MSAs. Health plans execs spend every waking hour, and some while asleep, thinking about how they can steal share from their competition. They beat each others’ brains out on a daily basis, fighting over each employer, each member, each new contract. And most are very, very good at it.
Yes, a governmental plan could try to force docs to accept lower fees, and physicians could and would tell the Feds to pound sand. There is precedence for this – try and find a doc who will accept Medicaid in New York. Recall the revolt of physicians last summer when they were facing a dramatic cut in Medicare reimbursement. Physicians do not have to work with any health plan – governmental or private.
There just isn’t any logical basis for the argument that a governmental option would somehow be unfair for competition, or drive out private plans, or lead to a government monopoly. Just as there is no basis for contending that a public plan would add reasonable competition, thereby forcing the ‘market’ to hold down costs.
If the Democrats succeed in passing health reform with a public plan option, it will have very little impact on system cost. And if the GOP and moderate Democrats are able to stop a public plan yet reform still passes, their ‘victory’ will have no impact on system costs.
The health reform war is about cost. The battle over the public plan is a fight over a useless piece of ground.
A huge new governmental program without meaningful, and effective, cost control is a recipe for disaster. We don’t need another Part D with its eight trillion dollar unfunded liability (passed by a Republican Congress and signed by a Republican President.
What we need is health reform that injects competition into a non-competitive business.
Jul
16
I have believed for some time that the public option is there only as a bargaining chip, to be given away at the last minute to assure passage of more meaningful nuggets of reform, like guaranteed-issue, community rating and a “healthcare Fed.”
But let’s assume I’m wrong, and that the administration and Congressional Democrats are serious about keeping — and actually manage to pass — the public option. Well, then the devil will be in the details.
Would the FEHBP qualify as a “public option”? Does public option mean federal? If it means any public plan, wouldn’t that mean state- and municipal-employee plans would qualify? How about the VA? Or the Indian Health Service? Certainly Medicare and Medicaid will qualify.
Let’s remember that when you add up Medicare, Medicaid, VA, TRICARE, Indian Health Service, the FEHBP and all the various state, education and municipal plans, more than half of all Americans are already getting their health coverage from the government, and thus, are already on the “public option.”
Depending on how the final regulations are written, the argument that a shiny, new “public option” starts with zero members and zero bargaining clout assumes that the program is created from scratch. That won’t be true if the Obama administration writes the regulation to merely open up existing government plans to all comers.
I fully realize this means that passing the public option isn’t all that big a change from the status quo. Thus, my first paragraph above.
Now, you are right, Joe, in saying that passing the public option — regardless of what it ends up looking like — does nothing about cost containment. But I really think that the comparative effectiveness research (CER) and EMR initiatives requiring “meaningful use” — a term still not well defined, but ideally meaning channeling CER to the point-of-care in real time, and applying it in care decisions — that already have been passed into law as part of the stimulus (ARRA of 2009), coupled with the creation of a Healthcare Fed via S. 1110, Sen. Rockefeller’s MedPAC Reform Act of 2009, give us all the tools we need to begin imposing real cost control within months of passage of reform.
As I understand it, the insurance industry fears a public option that would pay Medicare’s dictated, not negotiated, rates and force providers to accept the public option insurance if they want to continue to do business with Medicare. Medicare is a big enough chunk of business, especially for hospitals, that they feel they have to accept it. They can’t afford to drop it. A public option that paid Medicare rates would have a lower cost of goods and could, therefore, charge lower premiums. The risk that private insurers could lose significant market share or even go out of business is real under that scenario. Isn’t it? What am I missing?
I can’t entirely agree here. First, according to the Senate HELP bill and the House bill, the public plan would start off with no patients, BUT at rates set by Congress at Medicare (or Medicare +5 or +10%), with negotiation over rates to begin on year two or three, by which time the public plan would be well-established enough to have some bargaining power.
Also, the costs argument seems spurious. You focus on the costs of services rather than the internal administration costs. A “weak” public plan does do less to control costs than a strong one, because as you point out docs and hospitals could demand better rates or opt out. Fair enough. But the theory is that the efficiency of the public plan (low overhead compared to privates) would allow it to be cheaper, maybe a lot cheaper, than the privates. If it was cheaper, then market share would start to drift towards it until the private plans had to squeeze out more internal efficiencies or lose more share.
This assumes that the public plan will eventually be open to all employers. If it remains only for the individual insurance market, then its effect will be greatly diminished.
Joe,
I agree with everything that you have said with one exception. Price doesn’t drive cost in every instance. For example, the Blues pay very low reimbursement rates to providers while charging high premiums. The result is fat pockets for their executives. Blue Cross of Texas obviously feels that they have alot to lose. They are sending out emails to their insured groups and participating providers, asking them to “oppose a government run plan”. It’s a doozy, and I could forward it to you if you have not seen it yet.
Unfortunately for your anology, the insurance companies do not licence the docs, the state does. The state can compel participation as a condition of licensure or the fed can coerce the professional societies to require participation as evidence of “quality” in order to be board cerified. finally, if the price is right, businesses will push their employees onto the public plan making it necessary for marginal providers to particpate.
A couple of questions & comments for Joe and the audience. I’d love to hear your take …
If I remember days gone by correctly, for the reimbursement of bills – actual labor & systems involved – isn’t Medicare (and possibly Medicaid) farmed out to various insurance plans in many states? (i.e. BCBS is processing many/all of the CMS bills/claims for their state) And doesn’t this scenario allow the Fed to claim low overhead while burying the cost in a different bucket?
Second, today’s insurance companies are interested in Market Share, as Joe points out, and they are also FOR PROFIT entities. What makes any of us think that the Fed doesn’t also want to make a penny or two on this intitiative? Do we foolishly think they are going to take a loss on the Public Plan and add that loss to our Federal (& ever-growing) debt?
Third, although I could go on, if we aren’t addressing the QUALITY of CARE and the UTILIZATION of said care, then are we really getting to the root of the issue? We need to not only address these issues but give the consumer tools to understand & CHOOSE their care but also improve overall healthcare & its corresponding expectation of the consumer in the US?
Life is not an episode of ER or House. But it is starting to feel like a soap opera in many of the Fed discussions.
Barry et al
the point is providers do NOT HAVE TO ACCEPT Medicare rates for the public plan. and without any members to direct to the providers there is no reason for docs to want to/have to accept those rates.
There is no requirement that providers must agree to those rates. Most do take Medicare but that’s because Medicare already has tens of millions of members.
Joe – I agree that as long as providers don’t have to accept the public plan but can continue to accept Medicare, the public plan is not a big threat to private insurers as most providers won’t take it. However, the insurers fear that Congress could just change the law later if the public plan isn’t meeting their expectations for enrollment and cost savings. If the law were changed to force providers to accept the public plan if they want to continue to do business with Medicare, private insurers could indeed by at risk to lose a significant portion of their business. Hospitals and doctors, for their part, may find that once there is no longer a significant private sector to shift costs to, they may not be able to provide the same standard of care as they do now and could even go out of business.
I disagree with your assessment. As someone who has worked in both public and private health care I know it is not just the cost of medical care that drives price. Overhead, fraud, medical error, administrative inefficiencies, etc. also add to medical costs. Also, the roles of insurer and clinic manager have become somewhat merged in both public and private realms, allowing the insurer to affect, for better or worse, clinical inefficiencies that affect medical costs.
In my experience in private PPO, HMO and the VA, and working with Medicare data systems, the federal government is far more efficient and effective at managing health care. The VA provides the highest quality care on every standardized measure we have, at the lowest cost. Medicare is close behind, using the same providers as the general population, but requiring specific outcome measures and procedures. You hear about problems within the government health programs because they are transparent, quality improvement-driven, self-monitoring cultures. You don’t see what goes on carefully hidden behind the closed doors of the private sector.
Both the VA and Medicare differ significantly from the private sector in their having extremely lean administrative costs and, in comparison, virtually no executive compensation. No golden parachutes or stock options here.
The public option might, in theory, begin with 0 enrollees, but that will not last long. I predict that the rolls will fill quickly including many people who, like myself, are former government health care employees who know how well oiled that machine really is.
The rise in cost of health care is not driven as much by price as much as utilization, especially high tech diagnostic tests. My surgeon knew I had a torn rotator cuff from a quick 5 minute in office ultrasound for 250 bucks, but wouldn’t dare attempt surgery without that 2500 MRI with and without contrast, mostly for protection against lawsuits.