Don't Want a Public Plan? Well, What Do You Think of Medicare?

By Simon Johnson and James Kwak
Tuesday, August 25, 2009

Opponents of health-care reform should be chanting "No more Medicare!" The arguments that have been made against the public option (a health insurance plan sold and administered by the federal government) apply with equal or greater force to Medicare.

Plan designed by the government? Check. Government bureaucracy? Check. Subsidized? Check. (Medicare does not have to fund itself solely by charging premiums to its members; instead, it is largely funded by a payroll tax levied on all workers.) Able to drive private insurers out of business? Check. Medicare dominates the over-65 market.

If you are against the public option, you should be deeply, fundamentally, bitterly against Medicare.

Of course, not even the most strident opponents of reform are saying that Medicare should be eliminated. Not only would that be political suicide, but it would create an enormous policy catastrophe. Can you imagine putting 40 million seniors, all of whom have high expected health-care costs, into the individual market? Or can you imagine shifting retiree health-care costs back onto American companies?

Instead, the opponents of the public option are billing themselves as defenders of Medicare. House Minority Leader John A. Boehner (R-Ohio), for example, claims in a news release that projected reductions in the growth of Medicare spending mean "fewer choices and lower health care quality for our nation's seniors."

Let's leave aside the travesty this makes of traditional Republican claims to care about fiscal discipline and just focus on the issue at hand. If Boehner is against cost management targets for Medicare, he should be against the entire concept of a health insurance company. The point of a company is to provide products whose cost is less than the value placed on them by customers. The point of a health insurance company is to provide health care at a lower cost than customers are willing to pay in premiums. Any private insurer in Medicare's situation -- with costs that will balloon well beyond its premium revenue -- would take the obvious step of targeting cost savings through greater efficiency and adjusting payment schedules. If you don't think that Medicare should do this, you should be trying to prevent all insurers from managing their costs -- which is central to the very existence of a profit-making health insurance company.

Indeed, opponents of health-care reform, such as Martin Feldstein writing in the Wall Street Journal, are claiming that the very attempt to manage health-care costs constitutes rationing, at least when the government does it. Numerous commentators, such as David Leonhardt and Uwe Reinhardt, have pointed out that all health-care systems, including our current one, necessarily involve rationing. We'll focus simply on the implications of Feldstein's argument.

In Feldstein's preferred universe, "[p]hysicians and their patients would continue to decide which tests and other services they believe are worth the cost." But with an insurer paying the bill, that means that physicians and patients are free to produce and consume any health care they want, and the cost will only show up in higher premiums paid by the patient's employer the next year. (In this universe, of course, end-of-life counseling would be covered, along with any other service that the physician and patient might want, but that's a whole story of its own.)

We already have this type of insurance plan. It's called a conventional fee-for-service plan, where the patient can elect any service from any provider, and the insurer has to pay (except for a copayment). And it's been destroyed by market forces. According to a Kaiser Family Foundation study, in 1988, 73 percent of people covered by employer-based plans had conventional health insurance; in 2008, that figure was 2 percent. Why did this happen? Because private health insurers shifted toward managed-care plans, primarily preferred provider organizations and health maintenance organizations, that use either gatekeepers or differential payment schedules to contain costs. According to Feldstein's definition, that is, private health insurers are rationing.

So if you believe that physician and patient alone should decide what care to provide, then you should be trying to outlaw managed care, which is the foundation of the private health insurance industry.

Are opponents of health-care reform really going to say they want to eliminate Medicare, ban health insurers from managing their costs and outlaw managed care? Of course not, because they can't possibly want all those outcomes. Instead, they simply want to sink health-care reform by any means necessary, and consistency of logic or principle only gets in the way.

But let's assume for the moment that some critics do want reform but are simply opposed to the public plan. In this view of the world, it's okay for the government to regulate health insurance, but insurance itself should be delivered by private companies.

Imagine health-care reform without a public option: Insurers have to charge the same price regardless of customers' medical history; everyone has to buy insurance; and poor people get subsidies to help them afford it. From the insurers' perspective, they get more than 40 million new customers, they subsidize the old and sick by overcharging the young and healthy (who have to overpay because of the mandate), and the government even pays people to buy their product. There are no new competitors (additional choices for customers), and there is no pressure to reduce costs. What could be better?

This type of reform, with no mechanism to reduce long-term costs, would still be a significant achievement, especially for the millions of uninsured. But it's only a temporary solution because rising costs would force the government to go back to the drawing board (to pay both for Medicare/Medicaid and for those subsidies). This is why the public option seems to be on the Obama administration's preferred-but-not-absolutely-critical list. The true alternative to a public option isn't "no public option"; it has to be some other lever to force private insurers to reduce costs. Saying that people can get all the care they want and private insurers will simply pass on the costs as higher premiums is not a solution.

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