The Public Health Insurance Option

The public health insurance option is a component of the House health care reform bill (HC 3200) created to, in the words of the President, keep the insurance companies "honest" by engendering price competition. It has been criticized by some as unfair competition, and others believe it to be creeping socialism.

We don't know, of course, what impact the public option will have. We can be sure that there will be significant unintended consequences arising from the public option if it survives public debate, and currently it looks very much like it will not survive in whatever final form health care reform legislation takes.

The President betrayed his true feelings about the public option when he so quickly signaled, at the first sign of stiff opposition, that he was willing to surrender on that point. Current posturing about the public option is an exercise in backpedaling designed to unruffle the fur of the far left. The Senate bill does not contain a publicly funded, government-sponsored insurance plan, opting instead for non-profit cooperatives, a clear signal that the public option won't survive a Senate vote.

On the outside chance that the public health insurance option does make it into whatever legislation is finally passed, let's review what HR 3200 actually creates.

What's good about the public option:

• The public plan will allow physicians to participate on the same two levels currently seen in the Medicare plan; that is, they can participate as "preferred" providers, who will accept the payment rate as set by the public option plan (analogous to "accepting assignment" in Medicare), or they can sign up as "participating, non-preferred providers," analogous to Medicare participating providers who do not accept assignment. This latter designation allows the non-preferred physician to charge more than what the public option allows, but caps that additional amount, probably at the same rate as Medicare, which is, I believe, 120% of Medicare's rate.
• Physicians will not be forced to participate. There will be an opt-out clause.
• Physician reimbursement will increase at least 1% per year. This is in contrast to Medicare, where physician pay rates have been scheduled to be cut significantly each year, according to a schedule created by Congress years ago, which Congress has overridden every year since.
• Premiums will be set according to actuarial realities; that is, contrary to what many fear, the Commissioner of the plan will be required to charge premiums at rates set to actually cover the cost of providing insurance. This means premiums will not be artificially low, consequently gutting the insurance industry, as well as causing market disequilibrium (artificial supply/demand construct).
• The public option will exist only on the individual health insurance exchange. It will not compete with group health plans. This is good because individual plans are currently priced to favor the insurance companies (oligopoly market, creating economic profit at the expense of the consumer). The public option will move the market toward perfect competition. On the other hand, the group insurance market is probably too fragile to compete with the public option, mostly because employers would leave their current plans in droves to purchase cheaper rates from the government.
  
• Perhaps the best aspect of the public option is that the Commissioner of the plan will have the freedom to experiment with reimbursement mechanisms in order to incentivize improvements in quality and patient outcomes; for instance, increasing reimbursement for primary care physicians who create "medical homes" (that's a whole 'nother blog).

What's wrong with the public option:
Aside from the general caveats, which, prejudiced as they may be, are probably accurate , there are specific problems I can point out. In terms of the general caveats, they are the charges being lobbed at "government-run" health care by its detractors; for instance, the government has a penchant for breaking everything it tries to fix. In attempts to make health care more efficient the government will create layers of bureaucracy, and run the business like a courtroom or a legislature instead of like a business, ironically increasing the cost astronomically rather than saving money. Charges like these are unsubstantiated only because they are predicting a future as yet unrealized. However, the government's track record is dismally clear. Even President Obama himself pointed out that the government-run postal service is imploding while private enterprise mail delivery (FedEx, UPS, DHL) is thriving.

Now onto the specifics:

• The legislation sets initial reimbursement rates at current Medicare rates. The government really believes that Medicare reimbursement is generous. I know because I read the outpatient hospital payment updates published in the Federal Register every year (you think HR 3200 is bad at 1018 pages . . . the proposed 2010 updates to the outpatient prospective payment system was over 1800 pages this year!). But I can tell you that no physician in his/her right mind will accept 100% of Medicare. Most contracts with private insurance plans peg reimbursement as a percentage of Medicare, usually somewhere between 110% and 130%. Why would a provider, who successfully negotiates with Aetna and Blue Cross for, say 115% of Medicare, agree to accept straight Medicare rates from the public option? Unfortunately for the public option, the law creates a provider escape clause, and I predict most providers (at least the good ones with full waiting rooms) will exploit.
• Providers other than physicians (e.g. hospitals, nursing facilities, ambulance companies) have a take-it-or-leave-it reimbursement option: they can agree to accept Medicare rates or they can opt out. Big providers like hospitals are used to taking Medicare rates, and they will generally feel intimidated by the government's market dominance to accept these rates.
• From an economic perspective, setting rates artificially at Medicare reimbursement levels will cause supplier shortages. As I said above, Medicare rates are too low already. In a real free market, suppliers would stop producing if the price was set artificially below the cost of production. In the whacky health care world, we adjust our losses by shifting costs onto our paying customers, in this case, the private health insurance plans. This in turn creates artificially high prices for these customers. Or, another way to look at it is as a hidden tax tacked onto your health insurance premium.
• The plan will truly be run by the government, including the Dept. of Treasury creating a special bank account for the plan. As we said above, the government does not know how to do anything efficiently. It creates additional layers of bureaucracy, and regulatory hurdles, and a slavish devotion to process with complete disregard to outcome. The government would be better off hiring private insurers as contractors to deliver these services, just as they already do with Medicare (NOTE: you may think Medicare is a pure-bred government-run health care plan, but in all actuality, it's only government-funded. CMS pays private companies, like Blue Cross, to administer the program for seniors).
• I am afraid the the most devastating unintended - but certainly not unforeseen - consequence of the public option will be the demise of employer-sponsored group health insurance plans. American industrialists are a creative bunch, getting where they are in part because of their problem-solving skills and their stick-to-it-iveness. Employers will find a way to bump their employees off of group plans and into the individual insurance market, where they will pick up the public option. Let's face it: the dreaded 8% (of payroll) penalty that will be levied against employers who do not provide health insurance to their employees is a BARGAIN compared to the true cost to employers of providing health insurance in the first place. For this reason, if for no other, I would prefer the Senate's solution of creating non-profit coops to compete against the private insurance industry.

The Public Option introduces some good ideas to the health care reform debate, but as a complete package, I am afraid that the dangers outweigh the promises. This is probably a moot point, since I predict the public option will be excised from the final bill.