THE TREATMENT NOVEMBER 5, 2009
Jacob S. Hacker is the Stanley B. Resor Professor of Political Science at Yale University, author of The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream, and an occasional contributor to The Treatment.
Diane Archer is the director of the Health Care Project at the Institute for America's Future and the founder and past president of the Medicare Rights Center.
How short memories are in Washington. A few weeks ago, when it looked possible that Nancy Pelosi could marshal enough Democratic support to create a “robust” public insurance option with rates tied to Medicare’s, everyone was talking about the big savings and reduced premiums that a series of estimates by the CBO showed this option could create. Then, the concern was that the public insurance plan would put private insurers out of business by using the government’s bargaining power to drive too hard a bargain with providers, creating an “un-level” playing field.
Now, however, the punditocracy is abuzz about the latest CBO estimates that show that the public plan eventually embraced by Pelosi--one that would negotiate rates with providers, rather than base them on Medicare’s--might actually charge higher premiums than the average private plan. No matter that the CBO estimates clearly state that the higher projected premiums reflect its expectation that the public plan will disproportionately enroll less healthy Americans--which might be seen as a virtue, since these are folks private insurance tends to serve most poorly. And no matter that a subsequent CBO letter to the House stated that even a public plan with negotiated rates would still place “downward pressure on the premiums of private plans.” Suddenly, in the commentariat, the public plan isn’t a fearsome predator. It’s a complacent kitten. Initially not worth having because it would be too strong, it’s now, according to critics, not worth having because it would be too weak.
In truth, both the initial fears and current dismissals are overblown. The CBO’s declining estimates of savings certainly make a strong case for having the public plan use modified Medicare rates, as we have long argued. It’s a shame the House will not be considering a bill that shows how substantially a public plan can contribute to freeing up federal dollars to help Americans afford coverage. But we should keep in mind that the prime argument for the public plan has never been about a particular payment formula. It has been that a public insurance plan is vital as an institutional check on private plans, its role evolving to reflect the emerging weaknesses (or strengths) of regulated private competition. Put simply, health reform is much more likely to succeed with a public health insurance option, even one with negotiated rates, than if private insurers are left to run the show.
Let us start with the obvious: No one knows for sure the exact role that the public option will play. CBO may be correct that the public plan will attract a less healthy pool of enrollees, and that risk-adjustment (paying plans with higher-cost patients more) will not fully compensate for this. And it is surely correct that the public plan will have lower administrative costs than private plans. (It should be emphasized that if the public plan has higher premiums primarily because it’s attracting less healthy enrollees, then it is still reducing average premiums and hence federal subsidies for premiums. That’s because average premiums would be even higher if the people enrolled in the public plan enrolled in private plans. That’s what the CBO’s more recent letter discussing “downward pressure” on private premiums implies.) But while the CBO estimates are rightly the authoritative source for Congress, they are by no means infallible. CBO has made clear that an unusually high level of uncertainty attaches to its analysis of the public plan.
Take the CBO’s projections that the public plan would pay the same rates as the private sector. Nothing in the bill requires this. The Secretary of Health and Human Services, empowered to negotiate rates for the public plan, is simply barred from paying more than private plans do. The Secretary may end up being able to negotiate lower rates than the CBO projects. (When this issue was being debated in the House Energy and Commerce Committee, Secretary Kathleen Sebelius actually suggested that she could get better rates than Medicare, which raised more than a few eyebrows.) If the public plan is able to obtain more favorable rates, it will not only lower its premiums and increase its membership. It will also, through competition, bring down private plan rates. Private insurers overpay preferred providers at least in part because it’s a way for the insurers to keep competitors out of the market. But if a public plan is now in the mix, the game changes, and insurers may finally feel pressure to drive greater efficiencies.
The same uncertainties surround the CBO’s prediction that the public plan will attract just one in five Americans within the health insurance exchange because of its higher projected premiums (down from earlier estimates of one in three). After all, the price of coverage is only one reason why people choose a health plan. The vast majority of older and disabled Americans enroll in the public Medicare plan--even though by choosing (excessively subsidized) private Medicare private plans, many can get broader benefits for less than they pay for Medicare plus supplemental insurance. By the same token, nonelderly Americans--even healthy non-elderly Americans--might be willing to pay a little more for a public plan if it offers the same transparency and accountability the public Medicare plan offers. Healthy people might choose the public plan because they will have the security of knowing that if they get sick or injured and need costly care, their plan will not be conjuring up ways to deny them needed coverage. (To be sure, if the private plans were required to be transparent about the services they covered and the rates they paid, it might be a different story. But the current congressional bills do little to require they disclose this data to enrollees.) And, of course, the more healthy people join the public plan, the more bargaining power the public plan will have and the more public plan rates will come down.
The public plan is also critical to reform as a cost and quality benchmark, one that is particularly crucial if private premiums accelerate upwards. The insurance industry has threatened that premiums will skyrocket if an individual mandate is not tough enough. It may be an idle threat, but if a final reform bill ends up looking more like the Senate Finance bill than the House bill, it might not be. In most local markets, competition is likely to be anemic, and regulation of insurers inadequate. There will be little to prevent insurers from raising rates as they have threatened.
Having a public plan in place should also help keep down the rate of growth of health insurance premiums over time. Over the past twenty years, the public Medicare plan has had a substantially slower rate of growth than private insurance. The CBO report on the House bill states that private insurers are better at controlling utilization than a public plan would be. But, to date private insurers have failed to prove their value at cost control and demonstrated they have strong incentives to delay and deny needed care rather than drive efficiencies in the system.
And remember: If the private plans continue to misbehave, drive up costs excessively, and otherwise engage in practices that are detrimental to our health security, Congress can later decide to strengthen the public plan and give it greater leverage to rein in costs and serve as a check on private insurers. Creating a public plan down the road is not realistic; that's one reason we seriously doubt any proposal to trigger the public plan would really work. Strengthening an existing public plan would be a far more likely prospect, especially if the public plan is proving its value in the market, as we believe it will.
What’s more, as far as payment and delivery system innovations are concerned, the public plan is really the only tool available for testing and implementing reforms in the market for the non-elderly. Private plans are notorious for keeping their innovations private--when they have them--and have little financial incentive to improve health care if it will not increase their bottom line. Yes, we can continue to rely on the public Medicare plan to test innovations. But working families have somewhat different needs, and it seems appropriate to pursue delivery and payment reforms more broadly, through both Medicare and a public plan focused on those younger than 65.
In short, it’s no time to be despondent about the fate of the public insurance option. For sure, pegging rates to Medicare and obligating Medicare providers to accept these rates would be far preferable, and a public plan with negotiated rates may do less to keep the insurers honest and drive down costs. But it’s still immensely valuable to give Americans an out--another choice--to let the insurers feel the heat of not being the only game in town. The fierce and continuing opposition of the insurance industry suggests that they think that a public option will prove a serious counterweight in an increasingly consolidated private market. The overwrought pessimism of the pundit class should not aid them in their cause of protecting themselves from a public-spirited competitor.