Health-Care Reform's 'Public Option' Obsession

By Ruth Marcus
Sunday, June 28, 2009

The health-care debate is focused these days way too much on the tail and not nearly enough on the rest of the dog. The disappointing result could be a stubby little tail attached to a poorly designed -- not to mention astonishingly expensive -- dog.

The tail in my canine metaphor is the so-called "public plan" as part of the available health insurance choices. The dog is the broader structure of the proposed "exchange" to which those without employer-provided health insurance would go to obtain coverage.

I'm ambivalent on the merits of including a public plan in the exchange. But I think its advocates are wrong in elevating the public plan to litmus-test importance. And I worry that their focus on a public plan will sap time, attention and political capital from more crucial questions about the overall structure of the new insurance "exchange" that would allow those without employer-provided insurance to purchase coverage.

With insurance companies opposed to any public plan -- they sent a line-in-the-sand letter to President Obama last week -- the public plan that is likely to emerge from congressional negotiations is apt to be a diluted version (stubby tail) of what advocates seek.

Meantime, there is too little focus on making certain that the overall regulatory structure (the dog) is strict enough and transparent enough to prevent private insurers from gaming the system to maximize profits by stealthily attracting the healthiest enrollees. It's not far-fetched to imagine that instead of having a public system that trounces private insurers on cost, the public plan will end up being a more expensive repository for the sickest enrollees, holding little attraction for those in reasonably good health and doing little, then, to hold down costs.

Let's assume that public plan advocates are not promoting it as a stalking horse for a purely government-run health insurance system and that it is possible to design a playing field that is not so tilted in favor of the public plan that private insurers will ultimately be driven out of business. The more the playing field is leveled, the more you wonder: Where, exactly, is the advantage in a public plan?

Is the health-care industry so uniquely impervious to effective regulation that -- even with insurers required to accept all applicants and not allowed to charge more for riskier enrollees -- a public plan is the only way to ensure that they compete on price rather than engage in covert cherry-picking to attract customers who will cost less? This seems an odd position for those who tend to be fans of regulatory regimes.

Is the health-care industry so uniquely anti-competitive that a public program is required to drive prices down? Advocates of a public plan argue that many markets are dominated by just a few insurers, and that even those insurers don't have enough muscle or motivation to extract lower prices from providers such as hospitals and specialists in increasingly concentrated markets.

This is a serious concern, but if hospitals have the upper hand in a particular market, how is a public plan going to drive prices down unless it exercises the kind of 800-pound gorilla bargaining power that the political system is unlikely to produce?

Is a public plan -- without the need to turn a profit and with lower administrative costs -- inevitably going to be more cost-effective than a private competitor? To some extent, but the difference in administrative costs between public and private plans is easy to overstate: Public plans would have to market themselves and collect premiums, just like private plans, while private plans, required to take all applicants on an equal basis, would be spared expenses they have now, such as the cost of figuring out how much to charge for patients of differing health status. The overall differential would probably be about 5 percent.

John Holahan and Linda Blumberg of the Urban Institute, thoughtful advocates of a public option, have a new paper outlining a public plan that would pay providers either 10 or 20 percent more than Medicare rates; by contrast, private insurers now pay about 30 percent more. They argue that private insurance would not "be eradicated" under this approach -- the strongest and most efficient private insurers would survive, they say -- but would lower costs to compete. Consequently, the government would have to pay less in planned subsidies to help lower-income Americans obtain insurance, saving an estimated $224 billion over 10 years if prices were 20 percent more than Medicare rates and almost $400 billion if prices were at 10 percent above the Medicare level.

But they end with a cautionary note: "It is important to recognize that the cost containment potential of a public plan rests fully in its ability to leverage the power of the federal government as health care purchaser to encourage provider participation and reduce prevailing payment rates. Without taking advantage of that strength, the cost containment potential of the public plan option . . . would be tremendously weakened."

In other words, to work, the public plan has to be able to set prices and, at least at the outset, require providers to participate if they want to remain eligible to accept Medicare patients. Does anyone think that is what's likely to emerge from Congress? If not, is this really where all the energy of those who want to ensure effective reform should be spent?

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