The Point of the Public Plan
In a recent New York Times/CBS poll about health care reform, the dominant note was confusion. Asked, “Do you think you understand the health care reforms under consideration in Congress, or are they confusing to you,” 59 percent answered “confusing.” Asked, “Do you mostly support or mostly oppose the changes to the health care system proposed by Barack Obama, or don’t you know enough about them yet to say,” 47 percent said “don’t know enough” (30 percent said “mostly support” and 23 percent said “mostly oppose”).
But perhaps the most striking finding was the response to this question: “Would you favor or oppose the government offering everyone a government administered health insurance plan — something like the Medicare coverage that people 65 and older get — that would compete with private health insurance plans?” (tracked over five polls):
(The title of the online version of the article is “Poll: Support for Government Health Insurance Declines a Bit.” Hmm.)
Evidently all the badmouthing in the world hasn’t shaken peoples’ support for the public option, at least if it’s defined as a “Medicare”-like program for people under age 65. People know few details about the health care debate, but they know what they like. And they like Medicare, and thus also, presumably, the idea of extending “Medicare”-like coverage to everyone.
Still the poll reveals astonishing confusion about health care reform, rendering almost meaningless much of the chatter of pundits about what people believe. One of the only consistent patterns is that when polling questions explain the details of the proposed legislation a bit, as in this question, people are generally more supportive than when they’re given the language of the actual debate.
In another recent survey, just 37 percent of respondents correctly matched the term “public option” to its definition among four choices (one of which was “don’t know”). Had the respondents merely guessed and scored at chance level, they could not have done much worse. Evidently but a fraction of the American people know what the public plan—the most contentious aspect of the proposed health care reform—is.
So what is the public option? It would be a government-run insurance plan, available to people without employment-based coverage, purchased through an insurance “exchange” on which it competes with private insurance plans. There are different versions of the plan, of varying degrees of “robustness.” The most “robust” of these would (a) be able to use its purchasing power to restrain medical costs and (b) be national in scope so that coverage would be available on common terms throughout the country. Weaker versions of the plan lack one or both of these features. Respondents in the New York Times/CBS poll clearly had in mind a fairly “robust” version of the plan.
The Idea Behind the Public Plan
The purpose of the public plan, as stated by its progenitor Jacob Hacker of Yale, is (a) to “spearhead” the development of new payment and quality-improvement methods, (b) to help control costs, and (c) to provide a standard or benchmark against which private plans can be assessed. Let’s take these points in turn:
(a) As a Vehicle to Test and Evalutate Delivery and Payment System Reforms
In our fragmented, unstable insurance market, individual insurers have little incentive to undertake payment and quality-improvement initiatives that might pay off in the long run. A public plan, argues Hacker, with a stable enrollment base, would be poised to undertake such initiatives. These might include:
- Improving the use of information technology.
- Developing methods of linking payment to performance as an alternative to fee-for-service.
- Conducting large-scale comparative-effectiveness research with results shared rather than kept proprietary.
- Developing improved modes of care coordination.
- Shifting payment methods and rates to better reward primary care practitioners.
This may be true in many areas. But health care seems not to be one of them. In particular, democratic governments, when seen as responsible for their health care systems, are under constant popular pressure to improve the quality of care and the efficiency of their payment systems, and they respond positively. Indeed most industrialized countries’ health care systems are in a more or less permanent state of reform, with countries like France, Germany, and Great Britain significantly reforming their health care systems every several years (See T.R. Reid). (Here, of course, it’s once-a-generation thing.)
France has its carte vitale, a credit card-like piece of plastic that people carry and that contains their complete encrypted medical histories. The health care provider places it in a desktop machine, records any new medical information, then with a keystroke transmits all billing information to all relevant insurers. Germany now has its smart card, modeled after the carte vitale. In terms of payment efficiency, some of the other OECD countries are ten steps ahead of us, and it’s because of, not in spite of, their governments’ role in health care.
A vehicle for testing and evaluation of delivery- and payment-system reforms would be a good use of a public plan.
(b) As an Instrument of Cost Control
A public plan could help control costs in three ways:
- Since a public plan would have no underwriting or marketing costs, and wouldn’t pay profits to shareholders, it would have lower administrative costs than private insurers.
- By offering lower-priced coverage, it could compel private insurers to innovate in ways that lower their own costs, enabling them to charge lower premiums.
- With a large enrollment base, a public plan could use its market power to restrain the prices it pays for medical care.
However, the economics of cost control are complex. A major reason for our runaway health care costs is a fragmented demand side, i.e., the fact that there are so many purchasers of health care that most have little power to negotiate prices. Adding in another buyer (particularly if the exchanges are statewide rather than national, as in the Senate bills, and if enrollment is as small as the CBO projects it will be) in the form of a public plan could fragment the demand side still more, causing higher, not lower, prices. So it’s not altogether clear what the public plan’s effect on medical prices would be.
Insurance premiums, however, may be a different matter. A recent AMA survey found that of 314 metropolitan markets 94 percent were controlled by one or two insurers and that in 15 states one insurer had at least 50 percent of the market. Given the near-monopoly of insurers in many markets, the public plan could be a necessary complement of mandates, since if everyone is obligated to buy insurance, that would increase insurers’ market power still more and premiums may skyrocket. Given the for-profit nature of U.S. health insurance—a status the proposed reform would do nothing to change—a public option to counteract this enhanced market power may prove a public policy necessity.
But there are many moving parts in the proposed legislation. The three House bills and the Senatate Health, Education, Labor and Pensions (HELP) committee bill contain “prudent purchaser” clauses that, as in Massachusetts, empower staffs of the proposed exchanges to bargain over premiums and set standards plans must meet in order to offer insurance through the exchanges. (The House bills propose a nation-wide exchange; the Senate HELP committee bill proposes state-wide ones.) In other words, the exchanges in these bills utilize their broad risk pools to influence premiums (as in Massachusetts where premiums for plans on the exchange have actually fallen by 6 percent this year) and ensure a critical minimum level of quality.
But the Senate Finance committee bill inexplicably lacks this provision. An amendment by John Kerry to add it was reportedly blocked by Olympia Snowe who argued that such oversight would be “too much government” (see Jonathan Cohn). But if such a provision isn’t in the final bill, there could be a serious problem of rising premiums absent a public plan.
(c) As a Standard or Benchmark for Assessment of Private Plans
When stating the purpose of the public plan, politicians and commentators routinely say it’s to keep the insurance companies “honest.” What does this mean? The envisioned reform would prohibit insurance companies from denying coverage on the basis of pre-existing conditions, end rescission, end annual and lifetime payment caps, limit policyholders’ out-of-pocket expenses, guarantee renewability, etc. Won’t the insurance companies be legally obliged to keep “honest”?
The problem is that under the proposed reform health insurance companies will still be for-profit entities. Which means revenues they receive above cost will still be profit to be distributed to shareholders. Which means these companies will still be under pressure to cut costs however possible. Which means incentives to deny claims or avoid insuring high-risk individuals won’t go away. Which means insurers will have incentives to try to get around the regulations.
Thus even if reform is enacted, Hacker argues, private insurers will have incentives to tailor “their benefits or provider networks to discourage less healthy people from enrolling.” For example, they might market disproportionately to the young. The public plan, he says, “creates an institutional ‘check and balance’, encouraging private plans to uphold high standards of quality, affordability, and access.”
The Point of the Public Plan
Hacker’s vision of a “hybrid” system in which private for-profit insurance companies compete side-by-side with a public plan may work beautifully, but it’s untried. All other countries that combine a mandate and regulations to achieve universal coverage don’t have a “public option” and nearly all finance basic health care through not-for-profit insurers. That means that revenues above cost aren’t distributed to shareholders but are funneled back into the activities of the companies (e.g., to lower policyholders’ premiums in the following year, as in Switzerland), and firms compete on quality of product rather than by cherrypicking the healthy and denying claims.
The core issue that reform needs to address is an inherent contradiction between the product people want and the product an unregulated for-profit individual insurance market can provide. Cost-cutting to enhance shareholder value means denying claims when possible and avoiding covering high-risk individuals—features incompatible with the product people want, which is a secure financial guarantee of access to health care so that when they face life-and-death medical situations they’ll neither die because care was denied them nor go broke (or watch their family go broke) paying for it. It’s a product that a rich society can provide, as seen in most other OECD countries. But to get it we need to get around our for-profit insurance industry, since we’re clearly not willing to sacrifice it. The point of the public plan, from a public policy perspective, is to get around this handicap.
The point of the public plan, in the public mind, is rather different, judging from the polls: it’s to provide once and for all the product our current system so woefully lacks—secure access to health care throughout life. But this robust version of the plan—the version that polls so well—isn’t what’s on the table. As proposed in the bills passed out of the relevant congressional committees, the public option won’t be an option for very many people.
Outcome Uncertain
No one knows exactly what will happen if a public plan is enacted. There’s a question of whether the envisioned “hybrid” system would be stable or would evolve toward something different, like a single-payer system, as conservatives fear. People often cite the coexistence of the post office and for-profit parcel delivery services like UPS and Fedex as proof that a government enterprise, even a taxpayer-funded one, won’t necessarily run private sector firms out of business. But the postal example actually illustrates something else: that a government-run enterprise and private sector firms tend to offer different products. In the case of postal service, the post office handles the basic product, routine mail delivery. This might be analogous to the public plan which would offer a standardized insurance product sufficient for everyone’s basic needs, including secure knowledge that one won’t die for lack of care or go bankrupt paying for it. The for-profit parcel carriers, on the other hand, handle supplementary products like overnight delivery. This might be analogous to for-profit insurers that provide supplementary health insurance like coverage for private hospital rooms, private nursing, dentistry, non-traditional medicine, etc., as is offered in many other countries. So I suspect that if a public plan competes against private insurers the market would segment. For basic health care coverage, people will be attracted to the transparency and stability of a government-run plan. For frills not available through the public plan they’ll turn to for-profit insurers.
The narrow enrollment rules in the House bills and the Senate HELP committee bill seem designed to prevent the system from evolving toward a single-payer system. Still it’s possible that in the very long run our system of employer-provided insurance will completely collapse, in which case the public plan would be there as an option. Should everyone choose it, we would have, de facto, a single-payer system.
On the other hand, the public plan could fizzle. It’s possible, as Paul Starr argues, that unless the exchanges have effective risk-sharing mechansims, so that all incentives for insurers to cherrypick are gone, the public plan could become a repository for more expensive, high-risk individuals. Its financing would then skyrocket, its political support would ebb, and the health care system would probably be made worse. The public plan would provide a place for insurers to offload high-risk cases, while opening to insurers a field of less expensive, low-risk individuals now mandated to buy insurance.
Is the Public Plan Necessary?
In a July 30th letter, 57 members of the House threatened to oppose a health care reform bill if it doesn’t include a robust public option. If they’re serious, with these numbers they could kill health care reform.
The thing is, the public option is not a pillar of reform, such that if removed the entire edifice of reform would collapse. At best it’s a very good idea. The pillars of reform are (see Paul Krugman):
- Regulations, so that everyone is covered without regard to preexisting conditions and claims can’t be denied, etc.
- Mandates, so that regulations are economically viable for insurers.
- Subsidies, so that mandates are economically viable for low-income individuals and small businesses.
- Competition, so that the insurance market produces a product of a price and quality that people want.
The public plan is an aspect of one of these components, competition, but not its major aspect. The major aspect is the exchanges. And theoretically, depending on a host of factors not fully worked out, the exchanges could provide the type of insurance product we need.
It now appears that a compromise involving either opt-in or opt-out rights for individual states might be struck. Such a compromise might be desirable, not just becuase it mends political fences but because it would create an experiment in which we could see what actually happens when a public option exists.
The Senate Finance committee bill (the Baucus bill) is problematic. But it’s not the final bill. It will be blended with the Senate HELP committee bill and then with a House bill. And the resulting final bill will almost certainly be vastly better than the status quo.
Yes, the ideal may be to provision basic health care coverage through not-for-profit means—by government or by not-for-profit insurers. But given our peculiar political contraints, the achievement would be impressive nonetheless. The final bill will:
- End denial of coverage becuase of preexisting conditions.
- End rescission.
- Limit annual and lifetime out-of-pocket expenses.
- Require automatic renewability.
- End lifetime payment caps.
- Expand coverage to nearly everyone.
Systematic Wrongness II
Systematic Wrongness
Four Instruments
Where the Economy is and Where It's (Apparently) Going
Some Reality about Deficits
Armageddon: The Aftermath
The Hype
How to Explain It
Is Health Care Reform Popular?
The Point of the Public Plan
The Context of Health Care Reform
Addendum
Is Low Life Expectancy the Fault of Our Health Care System?
What Americans Believe
American Health Care: Best in the World?
Is 76.5 Large?
NBC-WSJ Poll
Inside the Asylum
More About Bubbles
Why Did Economists Miss the Housing Bubble?
Why Has Monetary Policy Been so Ineffective?
The Geithner Plan
Is 22.2 Large?
Economics: A Theoretical Divide
The New Deal and the Great Depression
Stimulus By the Skin of Our Teeth
The Interregnum
Postmortem
Obama and McCain on Tax Cuts and Health Care
Religion and the New Atheism
Memes and (the movie) Blow Up
The Selection Task
Home