Thursday, November 26, 2009

Public Option Perils

This morning I read an argument against the public option that I consider too important not to share.

Insurance greed 2 In the current battle over health reform, progressives may have set themselves up for trouble by pinning all their hopes on the creation of a government-run insurance plan. A public plan is not a bad idea -- indeed, it could be a critical element in successful reform -- but it could also easily turn out to serve the opposite purposes from the ones progressives intend.

All the proposals receiving serious consideration in Congress allow employers to continue to insure their workers and dependents directly. They also call for new "insurance exchanges" as an alternative means for individuals and employee groups to purchase coverage. If there is a new government-run plan, it would be one of the options in those exchanges.

The great danger is that the public plan could end up with a high-cost population in a system that fails to compensate adequately for those risks. Private insurers make money today in large part by avoiding people with high medical costs, and in a reformed system they'd love a public plan where they could dump the sick. Although the proposals before Congress aim to limit insurers' incentives to skim off the best risks, the measures are unlikely to eliminate those incentives entirely.

Entry into the public plan for the eligible employed would be a two-stage process. First, employers would choose between paying into the exchange and buying insurance directly to cover their workers. Unless the exchange is such a good deal that nearly all employers take it, firms with a young, healthy work force would tend to buy insurance on their own, while those with higher-cost employees would go into the exchange's pool. As a result, the pool would suffer "adverse selection" -- it would get stuck with a higher-risk population.

Second, within the exchange, the government-run plan would compete against private insurers, yet it would likely abstain from the marketing strategies used by private plans to avoid high-risk enrollees. This double jeopardy of adverse selection could then more than nullify the advantage the public plan derives from its lower overhead (as a result of less money going for salaries, profits, and marketing).

How should a public plan work? According to one model, the public plan would resemble traditional Medicare and have lower costs than private insurers by dint of its lower overhead and greater purchasing leverage, which would enable it to pay doctors and hospitals less. On that basis, it could underprice private plans and attract an immense enrollment (131 million people, according to one estimate).

Some supporters favor this approach because they see it as a step toward single-payer, which is exactly what the opponents fear. Squeezed by the public plan, providers might raise prices for patients insured by private plans, sending those plans into a death spiral.

But a Congress that is not about to adopt single-payer is unlikely to adopt a Trojan horse for single-payer. Some compromise proposals -- such as Sen. Charles Schumer's -- offer a second model, calling for a "level playing field" between private insurers and the public plan, including limits on the latter's ability to flex its purchasing muscle. But tight controls on its bargaining power might doom it entirely if it faces severe adverse selection.

Here's the delicate political problem: Depending on the rules, the entire system could tip one way or the other. Unconstrained, the public plan could drive private insurers out of business, setting off a political backlash not just from the industry but from much of the public. Over-constrained, the public plan could go into a death spiral itself as it becomes a dumping ground for high-risk enrollees, its rates rise, and it loses its appeal to the public at large. Creating a fair system of public-private competition -- giving the public plan just enough power to offset its likely higher risks -- wouldn't be easy even if it were up to neutral experts, which it isn't.

In any event, the success of a reformed insurance system is going to depend more on general features of its design, such as the rules that apply to all insurers and in particular whether premiums will be risk-adjusted (providing a bonus to plans with higher-risk enrollees and imposing a tax on other plans). A key question is whether the exchanges will serve nearly all employers, creating broadly shared risk, or remain on the margins as limited, high-risk pools… [emphasis added]

Inserted from <The American Prospect>

I hate to admit it, but he does have a point.  The public option could be fixed with a few key amendments.  First, tie it to Medicare rates, not negotiated rates, adjusted for rural inequity in the cost of service provision.  Second, make it available to anyone who wants it, such as people dissatisfied with their employers’ plans.  If we cannot get a public option worth having, we may be better off to pass the insurance regulation and the subsidies, but not the individual mandate.  If we celebrate a bad bill, the GOP wins.  Until we pass single payer, our work is not done.

9 comments:

Infidel753 said...

It's important to remember that the current reform is a first step and not a final one. Inevitably there's uncertainty about how it will all play out in the real world. The public option might turn out to be a dumping ground for the sickest, or it might be so attractive that it would drive private plans into a death spiral, as others have argued. Until it's actually in place, we won't know, even if Congress tries to bias the system in one direction or another.

We have to assume that in a few years Congress will revisit the issue in order to fix whatever problems have arisen with the new system. If the public option has become a dumping ground for the sickest and only employers with healthy workforces are still providing insurance, for example, the incentives will have to be adjusted. Congress will also need to think more clearly about what the ultimate goal is.

We'll probably get a better final result if it's done in a series of increments like that than if we try to get to the end-stage in one jump. Systems that evolve and respond to feedback during the process usually work better than utopian concepts designed and imposed all at once.

TomCat said...

Infidel, your points are well taken, but none of those increments will make it as long as the GOP can strangle all progress in the Senate.

TRUTH 101 said...

I wondered about this since it was brought up and my answer was that the public will end up with the biggest risks anyway through public aid anyway.

If we run away from every idea because there may be a possibility it will be exploited or work too well we'll never do anything.

Infidel753 said...

but none of those increments will make it as long as the GOP can strangle all progress in the Senate.

If even the current reform is able to pass, that will show that they are not able to strangle all progress, even now. If the current reform brings some benefit, public opinion may shift to make it safer to vote for further reform. In a couple of years Obama may have given up on his bipartisanship fantasies and become more willing to exert pressure to get things done. It's even possible that the Democrats may enlarge their majority in the Senate a little in 2010, especially if the reform brings benefits and the Republicans keep sabotaging their own moderate candidates.

If we try, we might not accomplish anything. If we give up, we definitely won't accomplish anything.

Stephanie said...

The public option isn't perfect, but it won't destroy the fabric of things as it's often portrayed. In fact, anyone can see what it will and won't do, by looking at what it is and isn't doing NOW in Ohio. http://cli.gs/z3AtaY/

TomCat said...

Truth, that's not the concern I have. Rather it is that a public option, so weakened by cave-ins as to be virtually unworkable will be a GOP propaganda target when it doesn't work. I say that we follow Grayson's recommendation, change the Senate cloture requirement to 55 votes, and then pass a strong public option that will work.

Infidel, perhaps you misunderstood. I'm not giving up. I want a strong public option. If not I want government subsidies for all who cannot afford health care, strong insurance regulations and dropping the mandate that requires those adults who do not want insurance to buy it.

TomCat said...

Stephanie, I want something more than a plan that just won't destroy the fabric. I want a whole new landscape.

Infidel753 said...

I get that. I'm just saying that the only way to do that is incrementally. Based on how tough it's proving to pass even the existing legislation, it seems obvious that nothing much more radical could have gotten through under the current circumstances. A limited first step that brings some benefits will shift the political ground and make it easier to take the next step, and so on.

TomCat said...

OK, but just as we can use incremental benefits to to make it easier to take the next step, would it not be wise to avoid including depriments that the GOP can use to tear it down?