According to news reports (including this article by Jeffrey Young in The Hill), Senator Joe Lieberman is killing the public option in the Senate. And as a result, some leading Democrats like former Governor and Democratic Party Chair Howard Dean now oppose the health care bill if it is stripped of the public option (according to this report by Carrie Budoff Brown and Mike Allen of Politico). How important is the public option to expanding coverage and lowering costs?
The "public option" is a essentially a government-run health insurance program. It would not be free medical care. Premiums would be established as they are by any non-profit insurance company – premiums would have to be set high enough to cover both the cost of medical care and administrative costs. The public option would be simply one among many choices available to individuals through the exchange or (under a more expanded version of the public option) to employers for purchasing health insurance.
The importance of the public option in protecting consumers depends upon its potential to affect the the market power of two other groups – private health insurers and medical care providers. If private health insurers enjoy a monopoly, they may charge consumers whatever they want. However, when health insurers are weak and fragmented, it may also result in high costs for consumers because in that situation medical care providers may be able to charge higher fees, and the private insurers would be unable to negotiate lower prices on behalf of consumers. The trick is to create an insurance company that can drive down the prices charged by medical providers and which is willing to pass on those savings to consumers.
That is why so many people favor a public option. Despite the fact that the proposed legislation provides that participation by doctors and hospitals in the public option would be "voluntary," as a practical matter it becomes mandatory. Chains of hospitals and freestanding institutions will participate in the government program, and they will require any physicians who desires privileges at those hospitals to participate as well. Accordingly, a public insurance plan will probably automatically be able to offer consumers a sizeable network of doctors and hospitals from which they may secure medical care.
Furthermore, the government would probably be able to drive a harder bargain with health care providers, and negotiate lower prices than private insurers would – even those insurers which enjoy monopoly or near-monopoly status in a geographic market.
In theory, at least, the public option would be a very attractive element to any system of health care reform designed to drive down costs.
There are some downsides, though – and the principal one has been on display recently in the dispute over the availability of mammograms. Whatever your position on the wisdom of annual mammograms for women over 40, it is undoubtedly easier for a private insurer to deny coverage than it is for a public insurer. This issue quickly became a political football, and contrary to what many conservatives believe, the private market is far more likely to "ration" health care than public agencies are, and contrary to what many liberals believe, the private market is more efficient than the public sector at least with respect to ensuring that only the most cost-effective treatments are covered.
So – how effective will health reform be without a public option? There are a number of factors to consider. First and foremost is the need for competition in the health insurance industry. In almost every region of the country there is little or no competition among health insurers. Here is the 2007 report of the AMA on "Competition in Health Insurance: A Comprehensive Study of U.S. Markets" showing that the health insurance industry is highly concentrated in almost all regions of the country. The AMA states:
To put this in perspective, in 2000, the two largest health insurers, Aetna and United, had a total membership of 32 million lives. As a result of mergers and acquisitions since 2000, the top two insurers today, WellPoint and United, each have memberships, respectively, of 34 million and 33 million, totaling more than 67 million covered lives. Together, WellPoint and United control 36 percent of the national market for commercial health insurance. In 2004 and 2005, 28 mergers valued at a total of $53.8 billion were completed or announced, which exceeded the value of all the deals completed in the previous eight years. (Corporate Research Group, The Managed Care M&A Explosion, 2005).
Observers predict that large health insurers will continue to acquire their smaller competitors. WellPoint’s new chief executive officer stated in February that mergers will be one of the key drivers of WellPoint’s future growth. Further, in March, United announced its proposed acquisition of Sierra Health Services, the largest health plan in Nevada. The AMA has asked the U.S. Department of Justice (DOJ) to block the merger, because if the merger is approved United will control 56 percent of the Nevada marketplace (compared with its current 11 percent market share).
While large health insurers have posted very healthy profits since 2000, premiums for consumers have increased without a corresponding increase in benefits. In fact, during the same time period, consumers have faced increased deductibles, co-payments and co-insurance. This has effectively reduced the scope of their health benefits coverage.
The Commonwealth Fund believes that by providing comptetion for health insurers the public option is one element that could contribute to bringing down costs. In its December 7, 2009 Report "Why Health Reform Will Bend the Cost Curve" the authors state that the public option could reduce the administrative costs of private insurers:
Currently, nearly 13 percent of insurance premiums are accounted for by administrative costs. These costs range from about 5 percent in large firms and firms that are self-insured to 30 percent for individuals. Higher costs for marketing, underwriting, churning, benefit complexity, and brokers’ fees explain the bulk of the difference.
Both the House and Senate bills propose insurance exchanges that would group individuals and small firms into larger entities and thus drive down those administrative costs. A public option would contribute to this effort. In many areas of the country, there is little meaningful insurance competition. By providing such competition, the public option can drive down profits and force insurers to streamline other components of administration, including benefit design. The House bill would offer a public health insurance plan in the exchange, and the Senate bill would establish a public option, with states being able to opt out at their choosing. Each of these would reinforce the impact of insurance exchanges.
How big would this effect be? In tomorrow's post I will describe what the Congressional Budget Office predicts as to the magnitude of the economic effect of the public option.
Visit Professor Huhn's website on health care financing reform for links to information about proposed legislation, studies and reports, public agencies, and private organizations concerned with this issue.
