A Public Option for Failure

Up until this week, I had been rather agnostic about the public option.  Before looking at the philosophical issues: should the government set prices in the health care market place? What level of competition should there be in the health insurance marketplace?  Should a massive government entity be involved in the health insurance marketplace? There was always a basic question: would it work?

The other questions are of course tied in to the basic question.  A public option that effectively imposed price controls by using Medicare rates would be more effective than one that had to use negotiated rates.  But even in the most conservative scenario, the public option would basically work.  Most hospitals and physicians would contract with the public option at slightly reduced rates to commercial payers to maintain a positive image.  The medical management in the plan would not be top of the line but would certainly be better than a pure indemnity plan that many individuals currently buy restraining  some of the overall cost growth.  A public option might also use a different pricing methodology so long term members don’t have to shop around for a new plan every few years.  The plan probably wouldn’t pay the cost of capital but would cover its operating expenses1.  In other words the plan would basically achieve most of its goals.

But this conclusion ignores the one fact that is so obvious many of the mainstream analyses and myself missed: the public option would have a 535 member board that can’t make the tough decisions.  The latest example was one of the most prescient.  On Thursday of last week, the house overwhelmingly voted not to increase Medicare part B premiums. The true fiscal cost of this act is limited because the premium increase for most Medicare members is capped at that year’s social security cost of living increase.  But the symbolism is important, Congress can’t take health care  away once it is given.

Many will argue just as the House did that retired Americans live on a fixed income and any premium increase the takes money directly out of their pocketbook.  Of course the President has pointed out that most working Americans raises have been transferred to insurance premiums so everyone has taken a hit from the raising cost of health care.  Everyone now except those on a government plan.  If Congress will cave into the small increases that either don’t affect people because someone else pays or because they earn a substantial amount in retirement how can it credible argue that it will keep subsidies to the public plan at a sustainable level?   And what the changes that will be needed to keep unsubsidized premiums competitive like indexed deductibles and out-of-pocket maximums?  These changes will certainly be voted down in the name of consumer protection.

Congress has shown its true colors, short term vote chasers and not long term stewards.  That’s fundamentally why the public option needs to be removed from any successful reform effort.  It’s not that the government couldn’t run a health plan.  Medicare proves that it can.  The government can’t actually provide the structure for long term sustainability of health plan. Medicare proves that too.

Disclaimer: I am employed by Ingenix a subsidiary of United Health Group and these are my views and not the views of Ingenix or United Health.

1The plan would make enough money each year to pay for adverse experience, for example more claims than expected because of a flu pandemic, but not enough to pay back a hypothetical loan on the money to start the plan.

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