Why Obama Should Stand Firm on a Public-Sector Insurance Option Part I

Many Republicans in Congress are dead-set against including public sector health insurance–some call it “Medicare for All”– as a choice under National Health Reform.

The resistance is so strong that this could be the deal-breaker that prevents President Obama from gathering the Senate votes he needs to pass his plan for universal coverage this year. Nevertheless, if we want to provide sustainable, affordable, safe and effective healthcare for all, many say that the public sector option is essential. At the recent Healthcare Summit, President Obama put it this way: “The thinking on the public option has been that it gives consumers more choices and it helps keep the private sector honest, because there's some competition out there.” I agree.

Tuesday, the Institute for America’s Future released a report that makes that argument by taking a close look at what happened in Massachusetts. (You’ll find the brief on the Campaign for America’s Future website . In the past I have suggested that Massachusetts’ health care plan would serve as the canary in the coal mine for healthcare reform. These days, the canary isn’t singing a happy tune.

Massachusetts: Reform Creates a System the State Cannot Afford

In April 2006, Massachusetts passed major health reform legislation that promised to expand health coverage to all state residents. To provide that coverage, the Commonwealth turned to the state’s private sector insurers. It did not try to create a public-sector insurance plan to set a standard for private insurers—and this, the Institute’s report says, was a serious mistake.

But first, the report gives Massachusetts full credit for achieving near-universal coverage. Today only 2.6% of the state’s adult residents are–in insurance parlance– “going naked.” This is a heroic achievement. The problem is that while extending insurance to everyone, Massachusetts has created a system that neither the state, nor its citizens, can afford. Going forward, they must find a way to cut costs—either by reducing coverage, paying providers less, raising taxes, or trimming large chunks of fat from the system. Of course, one man’s fat is another man’s lunch. But Massachusetts has no choice. If it doesn’t find a way to rein in spending, the program will collapse.

In Massachusetts, healthcare has always been extremely expensive, and the disappointing news is that reform didn’t change that fact. Health care inflation remains out of control. As the New York Times pointed out earlier this week, “health spending per person in Massachusetts increased faster than the national average in seven of the last eight years. Furthermore, the gap has grown exponentially, with Massachusetts now spending about a third more per person, up from 23 percent in 1980.”

To be fair, Massachusetts’ reformers didn’t set out to contain costs: their primary goal was to cover everyone, and on that score, they came very close to succeeding. But having insurance doesn’t mean much if you cannot afford to use it.

As Diane Archer, co-director of the Institute’s “Health Care for All Project” pointed out in a conference call Tuesday morning , in 2008 “more than one in ten adults ages 18 to 64 (11%) did not get needed care because of cost..”

Archer reports that another survey conducted by the Boston Globe and the Blue Cross Blue Shield of Massachusetts Foundation “shows many people are still struggling to pay for healthcare despite more people having health insurance,” “Thirteen percent of insured residents said they couldn't pay for some health services in the past year; 13 percent of insured residents said they couldn't afford to fill a prescription in the past year because it cost too much or their co-pay was too high; and 33 percent of those surveyed ranked the cost of care their biggest health concern

It’s worth noting that Massachusetts’ menu of private plans includes “Bronze” and “Young Adult” plans with deductibles as high as $4,000—plus co-pays. No wonder so many of the insured put off getting care.

Meanwhile, according to Health Affairsin 2008 major Massachusetts insurers implemented average premium increases of 8–12 percent. This helps explain why some Massachusetts citizens remain uninsured. The state government provides subsidies to help with the premiums, but with plan prices so steep, the Commonwealth has not been able to help everyone who needs it. Archer provides some numbers: “In 2007 the state granted 69,000 citizens a waiver from having to buy insurance or paying a fine because the state agreed that their insurance options were not affordable for them.”

The state has been doing its best to fund subsidies. The Times reports that Massachusetts expects to spend $595 million more on its health insurance programs this year than in 2006, a 42 percent increase. But if costs continue to spiral the state will not be able to continue funding the plan.

Archer quotes a February 2008 Boston Globe story predicting that the cost of “the subsidized insurance program at the heart of the state's health care initiative is expected to roughly double in size and expense over the next three years—an unexpected level of growth that could cost state taxpayers hundreds of millions of dollars or force the state to scale back its ambitions.”

Some say that Archer is too gloomy.. Over at the New Republic , Jonathan Cohn objects to the Institute’s dark view of what happened in Massachusetts “Me, I’m a glass half full kind of guy. . . Massachusetts shows that it's possible to make real progress on insurance coverage in a short amount of time.”

Much as I would like to be a glass-half full kind of woman, I can’t agree. What Massachusetts shows is that in a short amount of time one can create an unaffordable, unsustainable system. Do that nation wide, and health care reform will implode within two or three years. And we will have set the project back by another decade.

The Times is blunt: despite “new taxes and fees imposed last year . . . government and industry officials agree that the plan will not be sustainable over the next 5 to 10 years if they do not take significant steps to arrest the growth of health spending.”

Archer blames the lack of a public-sector option:“By relying exclusively on private insurers, Massachusetts has little leverage to drive competition in the insurance market and rein in costs.” By contrast the universal health care plans proposed by President Obama and Senator Baucus include a public sector option that Archer calls “essential’ to put a lid on spending while “promoting accountability.”

How a Public Sector Plan Could Contain Costs

To be fair, private insurers who tried to make the Massachusetts plan work faced an enormous challenge. As this new Dartmouth interactive map shows , as of 2006 Massachusetts’ health care bills were already among the highest in the nation (click on “total reimbursement costs by state”). The Dartmouth Research   explains why: Massachusetts boasts an embarrassment of both specialists and hospital beds– and that excess capacity leads to costly over treatment. (Build the Beds and Someone Will Fill Them).

Moreover, as hospitals consolidate they have become more powerful than private insurers in many regions of the country. This is the case in Massachusetts where brand-name hospitals have managed to demand sky-high reimbursements from private insurers.

By contrast, if a national health plan offered public-sector insurance alongside private plans, there is a strong argument that the public sector plan could bring down prices, making universal coverage more affordable. Because of its sheer size, when it comes to negotiating prices, the government option would have more clout than a private insurer.

Not long ago, HealthBeat reported on a story that first broke in the Boston Globe , describing how Partners Hospital was charging insurers 30 percent more than other hospitals receive for identical procedures .  In many cases, the hospital didn’t offer higher quality; but it did have a brand name.

As the HealthBeat post explained: “Partners' dominance became clear in 2000, when executives of Tufts Health Plan had the temerity to refuse Partners' demand for a substantial rate increase. Partners countered by declaring it would no longer accept Tufts insurance at its hospitals. Within days, as thousands of Tufts customers threatened to change insurance rather than lose the right to treatment at the two famous hospitals, Tufts gave in to Partners' demands. Since then, Partners has negotiated one big pay increase after another from insurance companies fearful of a similar humiliation.

Insurers, who are supposed to act as proxy and agent for their customers, caved, accepting the higher prices and passing them on in the form of higher premiums. By contrast, if a hospital threatened a public sector insurer, Medicare and Medicare- for-all could call its bluff by threatening to exclude the hospital from Medicare’s network. Few, if any hospitals could stay in business without Medicare patients.

Too often, private insurers don’t even try to use their market power to drive hard bargains with providers because, as the Urban Institute’s John Holahan and Linda Blumberg explain ,  “Competition in insurance markets is often about getting the lowest risk enrollees as opposed to competing on price and the efficient delivery of care.” The lowest risk enrollees are usually the wealthiest enrollees, giving a private insurers an added reason to make sure that the most prestigious hospitals remains in its network.

And if private insurers competing with Medicare-for-all learned that they were paying hospitals significantly more than the government plan, they too would have to negotiate lower prices; otherwise their premiums would be too high and they would customers.

Medicare and Medicare-for-all also could use their combined clout to negotiate with drug makers. Archer observes that “the Congressional Budget Office has found that drug prices under four federal programs—including the Veterans Health Administration (VHA) and Medicaid—are on average 49 percent below the average wholesale price of the drugs. Another recent study found that the lowest price available for the top 20 drugs prescribed to seniors were 58 percent cheaper under the VHA plan than when private insurers buy drugs for “Medicare Part D, Medicare’s private plans negotiated drug manufacturer rebates of only 8.1 percent in 2007.” Rather than threatening to take a drug off their list, private insurers are more inclined to simply raise premiums to cover drug makers’ demands..

The bottom line is that while private insurers are expected to look out for their shareholders, a public-sector plan is charged with protecting “the public good”—or answer to voters and Congress..

This is why Medicare reformers are beginning to insist that when setting fees for physicians, Medicare should hike fees for primary care doctors, family practitioners and palliative care specialists who provide essential services–while paying less for some very lucrative services that provide only marginal benefits to patients. Medicare also is being asked to take a hard look at the comparative effectiveness of many treatments. Very likely it will soon begin taking “effectiveness” into account when setting co-pays, lowering co-pays for the most effective treatments while hiking co-pays for pricey products and procedures that are less effective. Over time, this means that these treatments will become less popular, saving the system huge sums, without lowering the quality of care.

How a Public-Sector Plan Would Set a Benchmark for Quality

When it comes to improving quality, a public sector plan could set standards that would serve as a blueprint for regulating private insurers. Granted, in Massachusetts, private insurers are regulated—but only up to a point. They must cover everyone who applies for insurance, and they cannot charge individuals different prices for the same coverage based on pre-existing conditions. But they can—and do—charge older customers more than younger customers. This helps explain why many who need healthcare most—those in their late 50s and early 60s– cannot afford it. In many cases they earn too much to qualify for a state subsidy, but too little to pay stiff premiums–and so find themselves frozen out of the Massachusetts plan.

If national healthcare is going to provide affordable care for all Americans, insurers will have to be tightly regulated, and a public sector plan could serve a model for what is expected of insurers. For instance, it is unlikely that a government plan would discriminate against older customers; one would expect that it would charge everyone in a community the same premium, regardless of age. (After all, Social Security requires that everyone, young or old, contributes the same percentage of his or her paycheck to the pool)

In order to protect the public sector plan against unfair competition, regulators would have to insist that private insurers also charge everyone—young or old, sick or healthy, the same premium for a given plan. Otherwise, private insures who charged younger customers less would wind up cherry-picking the healthiest customers, leaving the public plan with the oldest, most expensive patients. If regulators didn’t have a government plan to worry about, they might well let insurers set their own rules, a reason why we need a government plan to, as the president puts it, “keep the private sector honest.”

Ultimately, the public sector plan would “set a benchmark” Archer explains, and private insures that wanted to compete would find themselves measured against that benchmark. For example, the government plan would create a standard for “what” insurance should cover, and how much companies could charge for that coverage. .

Hybrid public/private reform plans like the President’s normally insist that private insurers offer coverage that is at least as comprehensive as what “Medicare for All” offers. No more Swiss Cheese plans (filled with holes)– and presumably, no more high-deductible plans because they, too, would give private insurers an unfair advantage, attracting healthier, wealthier patients. Finally, in the battle for market share, private sector insurers would have to keep premiums relatively low—no more overpaying for services or products and then jacking up premiums to cover the cost.

In the second part of this post, I will ask whether it is fair to ask private insurers to compete with a public sector plan, and explain that I disagree with the Institute’s report on just one significant issue: whether Medicare is already far more efficient than private insurers.

2 thoughts on “Why Obama Should Stand Firm on a Public-Sector Insurance Option Part I

  1. Extremely valuable addition to the discussion by sharing Diane Archer’s new critical report on the MA Plan and by expanding on these very solid and persuasive arguments for the ABSOLUTE imperative for a public insurance option akin to Medicare Part E (E for everyone–thanks, Pat S, for coining this phrase). There’s clearly a critical responsibility to ensure that a Public-Sector option is a central piece of national reform.
    As you say in so many words, without a Public-Sector option, reform will largely be a charade (as it now is in my state of Massachusetts) for all the reasons you describe here and in Part 2 of this topic.
    Maggie, you really hit the nail on the head and exposed rhetoric versus reality related to the MA Plan with your reply to a reader in the comment section of Part 2. Your insights are so important that they bear repeating here in the context of this post:
    “We Don’t Have Enough Money to Cover Everyone Unless We Make Structural Reforms to Cut Spending. Covering Everyone First is Not An Option.
    This is the lesson that Massachusetts teaches.
    In fact they are not “covering everyone”– they are giving everyone insurance that many people cannot afford to buy or if they buy it, can’t afford to use.
    This is “pretending to cover everyone.”
    Well said, Maggie.

  2. Ann–
    Thank you for the kind words.
    And I appreciate the fact that you are a medical professional who is actually in Massachusetts, seeing what is happening.
    This gives you great credibility.