The Treatment

Yes, Mickey, The Public Option Really Is That Important

Jacob Hacker is the Stanley Resor professor of
political science at Yale University. Rahul Rajkumar is a
physician in Boston, Massachusetts. 

New reports confirm that the Senate Finance Committee, one of five congressional committees writing health legislation, is likely to reject calls to create a public insurance option. That will put it at odds with its counterpart in the Senate, the Health, Education, Labor and Pensions (HELP) Committee, which has called for a public plan. (Two House committees have also reported out legislation with a public plan.)

As a result, this seems like as good a time as any to revisit some of the arguments about the public plan--and one set of arguments in particular in particular.

A few weeks ago, Mickey Kaus posed a few questions on his blog about an article we had written, describing what the world would look like without a public option.  (Mickey, we admit that the economics of
insurance markets can be boring stuff, but we're glad you were "galvanized"
enough to post a thoughtful response.) 

Here's a response to his
questions.

Mickey writes:

"But under the Dem reform plan, even without a public
option, wouldn't ‘[i]nsurance companies ...be required to offer the same
coverage to everyone, regardless of medical history'? If so, why won't these
59-year-olds with diabetes be able to find plans they can afford as much as
59-year-olds without diabetes?"

We believe that plans should be required to charge
the same rate to all people--and to accept all comers, rather than pick and
choose people based on their characteristics. (If premiums are allowed to vary
across age categories, we would also like to place serious restrictions on how
much they can vary.)  But even with community rating and guaranteed
issue, we still need the additional discipline of a competing public
plan.

To see this, we need to take a step back and think
about the three main markets in which people get insurance today. (1) the
individual market, where people buy coverage on their own; (2) the small group
market, where small employers that don't "self-insure" buy insurance for their
workers; and (3) the large self-insured group market.

The individual market is the Wild West of insurance,
featuring the highest administrative costs, most aggressive underwriting, and
most egregious practices. The small group market is not the Wild West. It's more
like one of those frontier towns with a corrupt sheriff. You can get coverage
here so long as you have a healthy workforce, but it's still expensive, subject
to a lot of limitations, and often unstable. Finally, there's the large group
market. This market works pretty well because costs are spread broadly across
many workers (offering something close to community rating,) and because it
offers stable options.  And though it too fails to control costs and improve
quality consistently, like the rest of our health care system, it's still the
best functioning private insurance market today. That's why we want to provide a
similar sort of risk pooling and administrative aggregation for everyone. 

The mechanism for doing this is the insurance
"exchange." It would provide group insurance options to small employers and
individual workers who lack access to comparable offerings, and it would use
something close to community rating. And it would be within the exchange that
the public plan that we support would be offered.

So the crucial question is: Will the exchange be the
go-to place for those who lack large-group coverage? We think it should be. But
that's not where most of the reform proposals are. Instead, they try to
encourage workers and employers to go into the exchange by providing subsidies
only through it, but don't require purchasing coverage through the
exchange.  This means that there is likely to be a substantial individual market
and small-group market still operating after reform.

The question then becomes how heavily regulated
these markets should be. It would be great if there were the same
community-rating rules inside and outside the exchange.  But we can't assume
that the bill the President signs will include a community rating requirement
for the individual insurance and small group markets. 

Indeed, it's more likely that the final bill will
end some of the most egregious practices of private insurers without enforcing
strict community rating. For one, the legislative language in existing bills is
vague enough that it leaves considerable room for interpretation.  For another,
it's hard to imagine the private insurance industry will simply roll over
without a fight and accept community rating across the board. Right now, their
business model is based on selecting for healthy individuals, excluding the
sick, and paying out as little as possible in benefits. Getting insurers to
accept community rating in the small-group and individual markets would be akin
to expecting McDonald's to sell only fat-free Big Macs. (It's instructive that the industry lobby America's Health Insurance Plans, while accepting a limited form of community rating in return for a strict requirement on individuals to have coverage, has resisted across-the-board community rating. And it's not clear how their position may change as negotiations evolve.)

What's more, even if Congress decides to go with
community rating, federal and state governments will be charged with enforcing
this intent through regulation - and monitoring and enforcement are no small
matters when it comes to an industry this resourceful and complex. There will
likely be enough ambiguity in the final bill to ensure a game of cat and mouse
between the government and private insurers for years. After all, it's not just
a matter of getting them to offer the same benefit package at the same price to
everyone-though, even this will be no small task-but it also means getting them
to offer the same "meaningful coverage" to everyone, not arbitrarily delay and
deny care to people with costly and complex conditions, publicly disclose the
services they cover and under what circumstances.   

But that's still not the end of the story.  Even
with enforced community rating in the individual market, a self-employed
59-year-old will probably still have to pay significantly more than he would if
worked for a large employer.  It is true that we've taken his diabetes off the
table as a factor, but it's still more expensive to purchase insurance in the
individual market.

The exchange will surely do a better job. But even
within the exchange, where regulations and monitoring are likely to be most
extensive, the rules could vary hugely in effectiveness depending on who's
setting the exchanges up, how it's structured, and who's allowed to buy coverage
within it. Above all, we think the exchange is likely to work vastly better and
be a much more attractive option if it includes a national public plan. The
public plan will create a strong competitor that pushes plans to focus on
controlling costs and improving value. This will in turn make the exchange more
attractive, thus reducing the scope of the less-regulated individual and small
group markets. What's more, just having the public plan will allow regulators to
go after private plans for bad practices with less concern that they're taking
away one of the few good options in an area. And yes, lastly, the public plan
will serve as a crucial backup for those ill served by private plans, allowing
them to get good coverage on similar terms in all parts of the
nation.

This last point does raise the concern that the
public plan will get stuck with a higher-risk group, which is Mickey's next
question:

"Suppose the public plan uses its purchasing
power and lower administrative expenses to cut its prices to 20% below the
leading private plans. What will the private plan do? Will it match the public
plan by cutting costs-or pursue even more vigorously subterranean strategies to
cherrypick the healthiest customers with perks?"

While we can certainly hope that private plans
will cut costs, we have to be prepared for the possibility that they'll try even
harder to cherrypick the healthiest customers. We don't think that public plan
choice can solve all the problems of the private insurance market.  That's why
regulating private insurers is so important. It's the combination of a new a
public plan and new regulations that we think will really transform the private
insurance market.

It's also this combination that will protect the
public plan against getting saddled with the highest health risks. We won't
dispute that the public plan might end up with a modestly less healthy group of
workers. As we argued in our piece, it should be a backup for those who
have trouble getting coverage elsewhere. But such modest "adverse selection"
isn't likely to diminish the attractiveness of the public plan much, since its
premiums are likely to be relatively low for what it offers even with a slightly
less healthy mix of enrollees. Extreme adverse selection that really jacks up
the cost of the public plan is another matter, but we think this is unlikely to
happen.

There are two sides to this concern. The first
relates to the exchange rather than the public plan: It is that only the less
healthy will seek coverage through the exchange, driving up the cost of
all plans within the exchange, public and private.

Again, this dynamic is least likely to occur if the
individual and small group markets are required to adopt community rating, which
will make coverage outside the exchange less attractive for low-risk groups. In
addition, it is not likely to occur if subsidies for coverage for low- and
middle-income workers are generous and available only through the exchange.
That's because, in this situation, the main reason workers and employers will go
into the exchange is because they fall below some income threshold, not because
of their health characteristics. Previous studies have shown that there is not
likely to be much adverse selection against the exchange if the exchange is
attractive to a broad spectrum of low- and middle-income workers.

The second side of the adverse-selection concerns
the choice of plans within the exchange. Even if the exchange has a broad
mix of health risks, it might be that the private plans will cherrypick the
healthiest folks within it. However, this is much less likely to occur
within the exchange than it is to occur outside it, because it's within
the exchange that the regulations and monitoring will be most extensive and
effective.

Moreover, this problem can be addressed within the
exchange through risk adjustment. That is, if an insurer enrolls customers that
are on average healthier than the others, it should pay a risk adjustment fee to
a fund that would redistribute the money to insurers whose enrollees are less
healthy. This will substantially reduce the chance that the public plan will be
saddled with a highly costly enrollment group for which it does not receive
adequate compensation.
Finally, Mickey writes:

"If the disaster
starts to happen, we can always set up the public plans later,
no?"

In theory, yes, we could just set up a public plan later.  But
this strikes us as naive.  This is a once in a generation chance to pass health
care reform.  Does anyone really think that we'll get another shot at this in
the next ten years?

--Jacob Hacker and Rahul Rajkumar

Loading Related Articles...
Article Tools
SHARE YOUR THOUGHTS

Show all 2 comments

You must be a subscriber to post comments. Subscribe today.