Public Option as Private Benchmark

Ezra Klein has given a nice explanation of the advantages of public options in our health insurance ecosystem. He summarizes three different types of options that could develop, including a “trigger plan” (which be “triggered into existence [where] the private insurance market” failed), a “weak public plan” (which “couldn’t use the low rates that Medicare sets” and would just act as another insurer) and a “strong public plan” (which would basically be modeled on Medicare). Klein argues that, whatever public plan were adopted, “The existence of another option changes the market. Individuals will have access to private insurers, but they’ll no longer be stuck with them.”

I agree with Klein that a public option can help us achieve the trifecta of health reform–increasing access, reducing costs, and improving quality. Tyler Cowen challenged Klein today, and I’ll try to answer Cowen.

First, Cowen argues that the public plan will be very expensive, for if “public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks.” Even if that’s the case, other industrialized nations have used prospective and retrospective risk adjustment to level the playing field between plans. As I noted yesterday, even private health insurance lobbies have conceded that “spread[ing] costs for the highest-risk individuals” is necessary to guarantee coverage for all. Risk-adjustment should not be seen as a subsidy—rather, it’s a way to keep a level playing field between the public and private plans.

Private insurers’ apparent acceptance of risk-adjustment may seem irrational if you think that they are only in the business of trying to gain the healthiest customers and shed the sickest. Tempting as it is, that cream-skimming is only one part of the broad range of things that insurers do. Many large insurers make substantial “administrative services only” revenue–for example, by administering self-insured employers’ plans. (In that way they avoid financial risk from sick insures–that risk is assumed by the employer funding the plan). Risk adjustment would further reduce their incentives to avoid people with pre-existing conditions. In terms of quality, private insurers can compete with the public plan on several dimensions, including identifying good providers, incentivizing best practices, and fairly determining access to treatment and payments for providers.

It’s that last function—coverage and payment determinations—where the public plan really has a chance at improving insurance for everyone. Today’s default for private insurers is secrecy in pricing, and opaque “gotchas” buried in thick plan documents. As Uwe Reinhardt has noted,

Whatever an insurer’s base for paying hospitals might be, the dollar level of payments is negotiated annually between each insurer and each hospital. . . . These actual dollar payments have traditionally been kept as strict, proprietary trade secrets by both the hospitals and the insurers. Recently Aetna announced that it will make public the actual payment rates it has negotiated with physicians in the Cincinnati area. That this small, tentative step toward transparency made national news speaks volumes about the state of price-transparency in U.S. health care.

Medicare’s payment determinations are complicated, but at least they are done openly. A public plan should offer the same types of baselines here that Medicare currently offers in its National Coverage Determinations, which are routinely followed by private insurers. Private insurers heretofore have had little incentive to clearly explain what the exact consequences of cost-sharing in the face of illness would be. Competition from a public plan that had no profit motive to obscure those consequences might lead to “truth in labeling” like the proposed disclosure chart appearing below:

pricetransparency

As Tim Greaney has argued, the public plan is “a benchmark to hold up against private plans’ quality and cost performance.” Cowen focuses on cost competition between the public and private plans, and suggests that competition from the public plan may lead insurers to get even sneakier to offer plans at lower costs. (Cowen claims that “‘cruelty and capriciousness’ would be a comparative advantage of the private companies and maybe it would be milked more strongly in a more competitive environment.”). But more transparent quality competition could help euthanize gotcha capitalism in health care, where it really has no place.

Greaney reminds us that private insurance in many parts of the country simply is not a competitive market:

[A] majority of the country is served by a few dominant insurers. (In 16 states, one insurer accounts for more than 50 percent of private enrollment; in 36 states, three insurers have more than 65 percent of enrollment). Likewise, because of lax antitrust enforcement, most markets are characterized by dominant hospital systems and little competition among high-end physician specialists.

After fighting providers in the late 1990s, many private insurers scared by the “managed care backlash” have cozily upped their premiums and provider payments in tandem. A strong public option can shake up that status quo.

Finally, the public option has a clear incentive to keep people healthy. While churn among private insurers’ customers leaves them little incentive to keep their insureds’ healthy, the public options’ insureds will eventually be entering the Medicare program. As cost-benefit analysis influences the public option, any benefits it achieves by skimping on preventive care may well need to be budgetarily balanced against the ensuing bad health outcomes imposed on the Medicare program. Similar incentives led to extraordinary improvements in the VA program.

In short, private insurers often dominate their markets, their plans are often opaque, and they have little incentive to invest in their customers’ health for the long term. A public option will help us begin to address all those problems.

Hat Tip: Andrew Sullivan.

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