The Volokh Conspiracy - Health Reform: The Public Plan Option

Yesterday's Wall Street Journal has an interesting piece comparing government-run and private health insurance plans. The piece is by Kerry Weems, who was, until recently, the acting administrator of the Center for Medicare and Medicaid Services (CMS) and Benjamin Sasse, a professor at the LBJ School at the University of Texas, who served as the assistant secretary for planning and evaluation in the Department of Health & Human Services. The context of the article is the proposal to create a "government-run health-insurance option, or 'public plan,' to compete with private health insurance."

The Obama Administration's case for a public plan was concisely stated by Governor (and HHS Secretary-nominee) Kathleen Sebelius in her responses to question 5 from the Senate Finance Committee.

The President wants to make health care affordable for families and businesses. We want to give Americans a choice of which health insurance option works for them. While the President discussed proposals to ensure that Americans had benefits as good as Members of Congress, his campaign plan also proposed a public option alongside private insurance options in a National Health Insurance Exchange. He recognizes the importance of giving the American people this choice, which will also challenge private insurers to compete on cost and quality, not cream-skimming and risk selection. At the same time, he recognizes the importance of a level playing field between plans and ensuring that private insurance plans are not disadvantaged.

You can get a feel for the politics of the proposal, and the competing arguments here.

Weems/Sasse sketch out the basic dispute as follows:

Some lawmakers support or oppose a government-run health-insurance option for purely ideological reasons. Others are open to it because they are pragmatic and -- laudably -- want to be persuaded by data and facts. These moderates have been much influenced by the supposed fact that a public plan such as Medicare is more efficient than commercial insurance. Advocates of the public option routinely ask, "Aren't Medicare's administrative costs a fraction of those of private insurers?"

But the comparison between public and private plans is a false comparison. Private insurance and public benefits are not the same business. For all its warts, private insurance tries to manage care. Medicare is mostly about paying the bills presented to it.

Weems/Sasse offer four reasons why the the higher administrative costs associated with private plans is "money well spent."

First, private insurers must build provider networks. These networks can include high-value providers and exclude low-quality providers. Except for certain circumstances, including criminal acts, Medicare is forbidden from excluding poor quality providers. It lets in everyone who signs up. So one question to ask is, will the public plan have Medicare's indifference to quality -- or invest in the cost of a network?

Second, private insurers must negotiate rates. Medicare just fixes prices using a statutory and regulatory scheme. And anyone who imagines a public plan would be less costly than private plans must keep the following issue front and center: In the many procedure categories where Medicare's statutory price does not cover full provider costs, shortfalls are shifted to private payers who end up subsidizing the public program. So, will a public plan negotiate rates or simply use fiat as a means of gaining subsidies from private insurance?

Third, private insurers must combat fraud -- or go out of business. Indeed, these payers have every incentive to invest in antifraud personnel and strategies down to the point where return and investment are equal. But anyone who thinks that a public plan could serve as a "yardstick" for the private sector needs to consider Medicare's dismal record with regard to fraud, waste and other abuse.

Fourth, private insurers must incur the administrative cost of marketing. Medicare, of course, does not need to market. A public plan competing with other alternatives would have to market itself to the public, and this means tax dollars used to advertise against private plans. Or the public plan could "compete" by using heavily subsidized marketing channels not available to private insurers, such as Social Security mailings, welfare offices, unemployment check stuffers, and the constellation of government-funded "advocacy organizations."

In the next few posts, I will address each of these claims, and the broader issues raised by the proposal. To summarize, the issue is whether a public plan will be a maverick, a monopsonist, or much ado about nothing.

	[David Hyman, April 15, 2009 at 2:05pm] Trackbacks Health Reform: The Public Plan Option Yesterday's Wall Street Journal has an interesting piece comparing government-run and private health insurance plans. The piece is by Kerry Weems, who was, until recently, the acting administrator of the Center for Medicare and Medicaid Services (CMS) and Benjamin Sasse, a professor at the LBJ School at the University of Texas, who served as the assistant secretary for planning and evaluation in the Department of Health & Human Services. The context of the article is the proposal to create a "government-run health-insurance option, or 'public plan,' to compete with private health insurance." The Obama Administration's case for a public plan was concisely stated by Governor (and HHS Secretary-nominee) Kathleen Sebelius in her responses to question 5 from the Senate Finance Committee. The President wants to make health care affordable for families and businesses. We want to give Americans a choice of which health insurance option works for them. While the President discussed proposals to ensure that Americans had benefits as good as Members of Congress, his campaign plan also proposed a public option alongside private insurance options in a National Health Insurance Exchange. He recognizes the importance of giving the American people this choice, which will also challenge private insurers to compete on cost and quality, not cream-skimming and risk selection. At the same time, he recognizes the importance of a level playing field between plans and ensuring that private insurance plans are not disadvantaged. You can get a feel for the politics of the proposal, and the competing arguments here. Weems/Sasse sketch out the basic dispute as follows: Some lawmakers support or oppose a government-run health-insurance option for purely ideological reasons. Others are open to it because they are pragmatic and -- laudably -- want to be persuaded by data and facts. These moderates have been much influenced by the supposed fact that a public plan such as Medicare is more efficient than commercial insurance. Advocates of the public option routinely ask, "Aren't Medicare's administrative costs a fraction of those of private insurers?" But the comparison between public and private plans is a false comparison. Private insurance and public benefits are not the same business. For all its warts, private insurance tries to manage care. Medicare is mostly about paying the bills presented to it. Weems/Sasse offer four reasons why the the higher administrative costs associated with private plans is "money well spent." First, private insurers must build provider networks. These networks can include high-value providers and exclude low-quality providers. Except for certain circumstances, including criminal acts, Medicare is forbidden from excluding poor quality providers. It lets in everyone who signs up. So one question to ask is, will the public plan have Medicare's indifference to quality -- or invest in the cost of a network? Second, private insurers must negotiate rates. Medicare just fixes prices using a statutory and regulatory scheme. And anyone who imagines a public plan would be less costly than private plans must keep the following issue front and center: In the many procedure categories where Medicare's statutory price does not cover full provider costs, shortfalls are shifted to private payers who end up subsidizing the public program. So, will a public plan negotiate rates or simply use fiat as a means of gaining subsidies from private insurance? Third, private insurers must combat fraud -- or go out of business. Indeed, these payers have every incentive to invest in antifraud personnel and strategies down to the point where return and investment are equal. But anyone who thinks that a public plan could serve as a "yardstick" for the private sector needs to consider Medicare's dismal record with regard to fraud, waste and other abuse. Fourth, private insurers must incur the administrative cost of marketing. Medicare, of course, does not need to market. A public plan competing with other alternatives would have to market itself to the public, and this means tax dollars used to advertise against private plans. Or the public plan could "compete" by using heavily subsidized marketing channels not available to private insurers, such as Social Security mailings, welfare offices, unemployment check stuffers, and the constellation of government-funded "advocacy organizations." In the next few posts, I will address each of these claims, and the broader issues raised by the proposal. To summarize, the issue is whether a public plan will be a maverick, a monopsonist, or much ado about nothing.