Public Health Insurance Competition – Cost Control or Political Bailout?
An Open Letter to Professor Jacob Hacker, University of California, Berkeley
Dear Professor Hacker – You have become a vocal proponent of including in national health reform a Medicare-like public insurance plan to compete, in the commercial market, with privately-run health insurers. The primary goal of letting a public plan compete with commercial insurance would be to control rising health care costs – addressing a crisis in its own right that is at least as serious as the crisis in access to care, and allowing us to pay for expanding coverage to the uninsured and underinsured.
At the time of this writing the proposal for a public buy-in plan has significant traction in the House, but is not finding much backing in the Senate. It has stirred up a flurry of public debate and – setting aside the merits of the plan for a moment – has created some excellent political theater. In particular, there has been a certain irony in watching the organizations and individuals who for years insisted that allowing commercial insurers to compete with public plans for Medicare and Medicaid funding would reduce costs for our public plans. These same groups are now claiming that the commercial insurance industry would never be able to compete on a fair basis with a public plan in the open market, and that the result will be health care Armageddon.
Although the goal of public plan competition is to control costs, it is certainly not the most direct route to universal health care that we can afford. Virtually every developed nation – and increasingly the developing world – covers all residents at half or even a third the cost of what we spend in the United States. They do so by either enrolling everyone in a public plan similar to our Medicare (a “single-payer” system), or by regulating and budgeting non-profit insurers to an extent that they operate much like a single-payer system. The public buy-in option has been developed as a half-way proposal in the hopes that it will be more politically viable in the United States, and generate less resistance from the health care industry.
I would like to focus my comments around this proposal on three areas, written from the perspective of a full time single-payer organizer who is open to a range of other policies if they move us in the right direction. Firstly, I want to contextualize this proposal against the recent history of health reform politics, and in particular the politics of health care cost control. Secondly, there is a significant discussion to be had about how effective public plan competition will actually be in controlling costs, and, as we have an unfortunate history in the United States of building health reform around cost control measures that don’t work in practice, I want to push back a bit on the evidence available to us. Lastly, since this is a plan designed for political feasibility, it is worth stepping back a bit and commenting on the likely politics of the proposal.
For an advocate of universal health reform it is actually quite shocking to look back a few decades at how what used to be considered the right-wing of health politics is now considered wildly liberal – almost beyond discussion. In the 1970s Richard Nixon proposed national price controls on health care, an employer mandate to insure all workers, and subsidies for the unemployed. Senator Edward Kennedy at the time was the lead sponsor of competing single-payer reform legislation. Fast forward two decades and President Clinton’s Health Security Act is proposing a program remarkably similar to the old Nixon platform, and the Republican Party has begun advancing a range of “personal responsibility” reforms that would limit the role of third party payers (that is insurance plans), increasing out-of-pocket spending and shrink risk pools that allow the healthy to subsidize the sick and injured. Today, many Democrats have adopted pieces of the “personal responsibility” platform, shifting from a focus on employer mandates to individual mandates, and the most radical cost control proposal being seriously considered – public plan competition – is fairly meek compared with previous decades. Furthermore, proposals for financing have become more and more regressive, shifting from income and payroll tax financing to employer premiums and finally to individual premium payments – our most regressive financing tool – as well as “taxes on sin,” such as tobacco taxes, that overwhelmingly tax low-income communities.
Along with this shifting politics of health reform, it is clear that we have begun to increasingly rely on untested proposals for controlling costs. President’ Clinton’s proposed legislation relied significantly on “managed competition” for cost control – a policy that was implemented in Florida and several other states, and which subsequent research has proven did not actually control costs. Today we are showered with ideas for controlling costs – electronic medical records, chronic disease management, pay-for-performance, medical homes, facilitating home care, dozens of plans for reducing prescription drug costs, and others. Many of these proposals have been proven to be ineffective; many are new ideas with limited evidence as to their effectiveness; and virtually all – even when successful – simply do not generate savings on a scale that would make a difference in a health care system characterized by extremely high and rapidly rising costs. When it comes to cost control, “working” may be enough to make a proposal a good idea, but only working on a large scale will allow a proposal to support expanded access to care, much less to put a dent in the health care cost crisis faced by businesses, municipalities, states, and households.
A Lewin Group study of your “Health Care for America” proposal estimated that savings from individuals and workers enrolling in a plan with costs similar to Medicare would allow the government to extend health coverage to virtually all of the uninsured at no additional cost, and that cost growth would be significantly reduced over time. A more recent and sensational Lewin Group report estimated that a public plan with Medicare prices would win the business of two-thirds of current private health insurance enrollees, premiums would fall by up to 30% for those families, and income for hospitals would be cut by 4.6% and for physicians by 6.8%. These are bold claims for cost control and sustainability! Should we believe them? And what does it mean for the health care system that the bulk of projected savings here come from reduced income for providers?
These Lewin Group estimates are based on the assumption that a public plan competing in the private sector will have overhead costs similar to Medicare’s – which are much lower than overhead spending by private insurers – and that the plan will be able to pay similar prices for prescription drugs, hospital and physician care as Medicare does currently – also much, much lower than private insurers pay. Based on these assumptions of low costs, Lewin finds that large numbers of people currently covered by private insurance would choose to buy in to a public plan.
These are very contentious findings. To evaluate whether public plan competition is going to get us moving down the road towards sustainable universal coverage, I think we need to push back on three big questions.
Firstly, we need to separate out the proposal for subsidized coverage for low-income people from the proposal for public-private competition in selling full-cost insurance plans on the open market. Competition within publicly-financed health programs is taking place currently under Medicare, and in many other countries, but it is completely different from the dynamics of competition on an open market with many private payers. Secondly, we need to address separately the claim that a public plan competing in a private insurance market will save on administrative costs and the claim that it will be able to pay significantly lower prices for medical goods and services. Lastly, there is the question of under what conditions would large numbers of businesses and individuals leave private health insurance for a public plan.
Subsidized Programs Should Remain Public
There are many means-tested health insurance subsidy programs in the United States (“means-tested” meaning that only those with incomes below a certain level qualify). In Massachusetts alone there are almost a dozen. These have always in every state and nationally been passed into law as publicly-administered plans. Some states in recent years have contracted with Managed Care Organizations (MCOs) to administer select components of their state Medicaid programs, but MCOs are typically required to negotiate contracts with the state for this privilege, and operate under tight regulations. Medicare, which is not means-tested, has allowed private insurers to compete with the publicly-administered Medicare program for enrollees, but also under tight regulations. However, even when the Bush Administration began paying private plans significantly more than the traditional public program per enrollee, no more than 20 percent of Medicare recipients have ever opted for private coverage.
I was surprised to note that in your “Health Care for America” plan and subsequent writings, you propose that a national subsidy program for low-income residents would place recipients into an “exchange” allowing them to opt in to either public or private insurance plans, and you have even proposed that current Medicaid and State Children’s Health Insurance Plan (SCHIP) enrollees be moved into such an exchange. Your research begins with documenting the exceptional cost-control track record of “pure” public insurance plans in the United States and in other countries. To introduce for the first time in our history a means-tested public subsidy plan that is not publicly administered but voucherized – or to voucherize Medicaid and SCHIP, our existing subsidy programs – would be a grave mistake, with no empirical evidence to suggest that it would result in savings.
An Unprecedented Call for Public-Private Competition on the Open Market
In your writings on this proposal, you have said that “public-private competition is not a radical or new idea. It has a long intellectual and practical lineage, and is embodied today in well-functioning programs both here and abroad.” This is not entirely true! We have one example of public-private competition in the United States in Medicare, but it is financed through the tax-system and managed under a single dominant payer (the federal government). There are a number of countries with non-profit “sickness funds” (similar to our insurance plans) that in recent years have been allowed to compete on limited basis, but they are not a public-private mix. Ireland is the only country I am aware of with a public-private mix, however like Medicare it is overwhelmingly publicly-financed through taxes, and the largest private insurer in the country is owned by the Government.
The proposal that a public insurance plan might compete on the open market with many payers for the business of individuals and workplaces, is unprecedented. Medicare enrollees are not in any meaningful sense “consumers” choosing between the full-cost products being offered by private and public plans, but this is exactly what is being proposed for the broader health insurance market. It may not be a new idea, but it is not an idea that has been implemented anywhere else or seriously considered in this country until recently. There is no historical data on how such a market might function, so we are entering here the realm of projections and comparisons.
It seems clear from most evidence that a public insurance plan, even one competing on an open market, would enjoy lower administrative and overhead costs. This will be so only to the extent that a public plan does not do many of the things that private insurers do to compete – invest significant resources on screening enrollees and denial-of-coverage, on advertising and reimbursing brokers, and on paying exorbitant salaries to senior executives.
The more controversial estimates, and those upon which large claims of cost savings are based, revolve around a public plan’s ability to pay much lower rates for medical services and goods such as prescription drugs. Here we enter a bit of thicket.
You argue in your latest policy brief that public health insurance “obtains larger volume discounts in paying for care because of its broad reach” and that “bargaining for better rates is a critical way in which U.S. public programs and other national health systems have controlled costs.” You suggest that prices for the public and competing private plans could be set through a system of competitive bidding by region. Medicare does pay much lower prices to the same providers, for the same services than private insurers do, but it does not do some by “bargaining for better rates” or through “volume discounts.” This is because: a) Medicare does not bargain, nor do most public plans in other countries, and b) Medicare actually has less volume in most local markets than dominant private insurers.
Medicare employs what is referred to as “administrative pricing.” This means that Congress sets the rates that Medicare pays hospitals and physicians, and providers then have the option of participating in the program and accepting Medicare patients or not, on a take-it-or-leave-it basis. There is no bargaining or negotiating for lower prices involved. The only constraint on Medicare’s administrative pricing is the point at which it sets prices low enough that providers would start to leave the program, which would create queueing and access problems for enrollees. This is very different from how private insurers contract with providers, which typically does involve bargaining, negotiations, and bids from competing providers and insurers.
Furthermore, private insurers enjoy larger market share in most areas. Every year the American Medical Association publishes a report on “Competition in health insurance,” which shows that private insurers are significantly centralized. In my state of Massachusetts for example, Blue Cross Blue Shield covers roughly half the residents in the state, almost 3 million, while there are only around a million Medicare enrollees, representing one-sixth of the state. This is fairly representative of the whole country. Having a significant number of national enrollees doesn’t matter when negotiating with local providers: all that matters is the size of the network in the provider’s geographic vicinity. There is little reason to expect that a public plan, starting from zero enrollees, which was not piggy-backing on Medicare’s rate-setting, would be able to negotiate lower prices than private insurers upon entering the market without administrative pricing or market power to begin with, no matter how aggressive it was.
If we were to assume that a public plan would piggy-back on Medicare’s pricing, as the Lewin Group studies do, this leaves us with the question of where our savings are coming from. The public plan proposal is, like many other cost control efforts we’ve implemented in the past, predicated primarily on squeezing providers. John Holahan and Linda Blumberg from the Urban Institute have argued that Medicare – and any public plan on the open market riding on its pricing structure – will have considerable power to squeeze providers, it is unlikely to use that power. “The problem is that government, as a strong buyer, becomes responsible for the health and stability of the system. If it limits hospital and physician payments too strictly, it faces the risk of perhaps causing hospital closures, slowing down the introduction of new technologies…, limiting access to physician services, and affecting the quality of individuals seeking medical education.” In short, Holahan and Blumberg are raising the question of what we squeeze out of the provider system when we slash its prices. Do we squeeze out waste through greater efficiencies, or do we squeeze out quality of care, access to care, staffing levels, physician income, or other?
This is the problem with price controls, which are distinct from cost controls. Thirty states in the country used to employ hospital rate setting systems, in which the government literally regulated hospital prices charged to all payers – public and private (except in most states managed care contracts were exempt). Rate setting was designed to squeeze providers. But without relieving providers of any underlying cost burdens – administrative cost burdens or competitive cost burdens – most states were fairly timid in their squeezing, which was resulting in erosions to the delivery system. In short, most states had something approaching the “all-payer” system you recommend, within a regulatory framework that frankly gave the state much more power to squeeze providers than a competing public option would – but public officials responded exactly as Holahan and Blumberg describe. As a result there is only mixed evidence about whether hospital rate setting controlled overall costs, almost all of these programs were deregulated over the 1980s and 1990s.
In short, I believe there are real administrative savings to be had under a public plan option that would allow it to compete in the private market, all other things being equal, but the claims of vast savings available by setting low rates are not so straightforward. These savings have to be carved somewhere out of the delivery system, but without relieving providers of wasteful administrative or competitive requirements, we will just be robbing from our quality and access infrastructure to feed expanded insurance coverage. Price controls are a blunt instrument, and our extensive experience with them thus far has not been promising.
The Need for a Level Playing Field and the Regulatory Landslide
A final critique of the public plan proposal has been that private insurers will recruit healthier enrollees, leaving high-risk and high-cost patients to the public plan. This has happened extensively ever since Medicare began facilitating public-private competition to enroll seniors. Within the context of a tax-financed system like Medicare, this just means that private Medicare plans are overcompensated and enjoy a public windfall (or they are allowed to expand benefits and lower costs without having demonstrated efficiencies beyond the public plans). In the context of a public plan competing on an open market, however, disproportionately attracting high-risk and high-cost patients would mean the public option would have to increase its prices, which would make it increasingly unappealing for relatively low-risk and healthy enrollees. The end result would be a health reform that enables the private insurance industry to reduce its risk-exposure and enhance its income base, without providing significant efficiencies or savings for the system as a whole.
Recognizing this, both the Lewin Group’s evaluation of the Health Care for America proposal, as well as your most recent policy brief, strongly recommend that any legislation implementing public plan competition would have to include a wide range of provisions to “level the playing field” between public and private insurers, and prevent cherry picking, cream-skimming, or “risk selection” as it’s known in the technical literature. In fact, virtually every country in the last two decades to introduce new competition into its publicly managed health care systems have at the same time passed reforms designed to prevent or significantly reduce risk selection.
Preventing risk selection means taking away many of the tools that insurers have at their disposal to avoid the sick and recruit the healthy, and it also means removing to the greatest extent possible the incentive for insurers to risk select. In the words of Wynand P.M.M. van de Ven et al, “it is suicidal for [an insurance plan] to become known for providing the best care for chronically ill, because… it will be flooded by individually who predictably generate more costs than revenues. Furthermore, “while an individual [insurance plan] can gain by selection, for society as a whole selection produces no gains.” This is roughly the future of a competition-based health reform in which risk selection is the norm.
Specifically both the Lewin Group and your policy brief recommend mandating “guaranteed issue” – requiring insurance plans to accept all applicants, regardless of their risk profile or health status; “community rating” – requiring insurers to charge the same premium price for all applicants, regardless of their age, health status, or risk; “standardized and defined benefits” – so that insurers cannot design benefit packages intended to serve low-risk residents well but high-risk residents poorly; and limits on marketing, which insurers often target to low-risk, low-cost communities.
In order to remove the incentive for health insurers to risk-select, you have recommended implementing “risk adjustment” legislation, which would require plans that recruit low-risk enrollees to compensate plans covering higher-risk enrollees; or even some level of “risk sharing,” by which plans that face high actual costs would be subsidized by plans facing unexpectedly low costs. Medicare has for years implemented risk adjustment for competing private and public carriers, although its risk adjustment scheme has for most of those years been too limited and recently completely overridden by large subsidies to private Medicare Advantage plans.
Here I think you have it on a series of fundamental reforms to how competition in our health care system operates that would ensure, at minimum, that a public plan option would do no harm, and at best allow it to thrive. Furthermore, our market for health insurance is riddled with price discrimination and inequalities – these measures would make significant strides towards eliminating those discriminatory practices, which punish patients who are older, living with chronic illnesses, female, people of color, and many other social and biological identities.
These reforms are also, however, extremely tough political battles, and there is little sign that their importance to a public plan proposal has been recognized by legislators or even advocates. They bring us into the realm of regulating the private insurance system to the extent that it begins to function like a national health program – as many countries with non-profit “sickness funds” do.
Health Care for America NOW (HCAN) – the large national coalition pushing for a public plan option – makes no mention in its principles or literature of risk adjusting, community rating, or the many other essential components you have articulated for public insurance competition; MoveOn.org has just launched a campaign targeting Congress asking for “a ‘30% off’ coupon for high-quality health care, redeemable by everyone if Obama's public health insurance option passes” drawing on the Lewin Group’s most recent study; and yet, Obama’s public health insurance proposal does not include the range of protections discussed in your briefing, without which those large savings are extremely improbable (and even with them, what costs will the 30% be cut out of?).
I would suggest to you that every cost control proposal – if it will work – faces a difficult political fight. This is certainly true of single payer reform, which brings with it the most comprehensive cost controls that we have evidence for, but it is true – proportionately – to all other cost control measures. I believe your concern to make a public plan option work has led you down the rabbit hole of other measures that begin to approach single payer in their political position. If momentum for public plan competition takes us down this path and opens up political opportunities where before there were none, this would be a great achievement for our country.
I would greatly like to hear your opinion on where you believe you – and the movement represented by HCAN – would stand if faced with public plan legislation, minus the “level playing field.” I believe such a bill would have the potential to fail as effective cost control, which means ultimately that we would be failing to pass a sustainable expansion of access to health care.
Thank you for all of your writings on this important subject and your consideration of this open letter,
Sincerely,
Benjamin Day
Executive Director
Mass-Care: The Massachusetts Campaign for Single Payer Health Care
33 Harrison Ave – 5th floor
Boston, MA 02111
Phone: 617-723-7001
Fax: 617-723-7002
This is the third of seven open letters on national health reform. The first was titled “Why Has the Press Failed Us In Reporting on Health Care Reform?” – the second was titled “The Intimidating Politics of Controlling Health Care Costs: Why We All Face the Single Payer Reform Dilemma” and subsequent letters will address the “cost control industry” in the United States and the problem with trying to do more to spend less; a discussion of whether we want the health care Congress has, and whether a public clearinghouse for private insurance would be an effective proposal; whether individual mandates are a viable road to universal health care; and a discussion of what the chances are that national health reform will reduce health disparities.
