The Public Plan Option for the Under-Age-65 Market—The Biggest Health Care Controversy on the Hill

Since when was a two-tiered health insurance system a Democratic policy goal?

Among Democrats in the Congress and at the White House there is a great deal of interest in creating a government-run health plan in the under-age-65 market. Such a plan would compete with the existing private health insurance market in a head-to-head showdown between private and public health insurance.

Such a plan was part of the President Obama's campaign health proposal—albeit limited to the small employer and individual market. We are told the President’s greatest interest here is in “keeping the private health insurance market honest.” That is, creating competition in order that private insurers do a better job of controlling costs.

While most observers assume that this would mean paying providers at Medicare—or even Medicaid—rates the administration says not necessarily.

The respected and non-partisan Lewin Group recently issued a report evaluating the idea, “The Cost and Coverage Impacts of a Public Plan: Alternative Design Options.” It looks to me to be a credible job. They made the assumption providers would be paid at Medicare rates—a logical conclusion if the objective is lowering costs.

Among Lewin’s findings:

• “If the public plan is opened to all employers…at Medicare payment levels we estimate that about 131.2 million people would enroll in the public plan. The number of people with private health insurance would decline by 119.1 million people. This would be a two-thirds reduction in the number of people with private coverage (currently 170 million people).”

• The study also examined what the proposed plan might do to provider reimbursement rates. Lewin says that if current Medicare payment rates were to be used for a public plan option, physicians would see their net income drop by $33 billion (-7%), and hospitals would see their revenue fall by $36 billion (-5%) in just 2010.

• “If Medicare payment levels are used in the public plan, premiums would be up to 30 percent less than premiums for comparable private coverage. On average, the monthly premium in the public plan for a typical benefits package would be $761 per family compared with an average of $970 per family in the private market for the same coverage.”

• “If as the President proposed, eligibility is limited to only small employers, individuals and the self-employed, public plan enrollment would reach 42.9 million people. The number of people with private coverage would fall by 32.0 million people. If private payer reimbursement levels are used by the public plan, enrollment would be lower, with only 10.4 million people switching to the public plan from private insurance.”

• Medicare premiums would be lower than private premiums because of the exceptional leverage Medicare has with providers. Medicare pays hospitals about 30 percent less than private insurers pay for the same service. Physician payments are about 20 percent less than under private coverage. Also, because Medicare has no allowance for insurer profits or broker/agent commissions, administrative costs for this population are about one-third of administrative costs in private health plans.

As Lewin found, a government-run Medicare-like plan in the commercial market covering those under-age-65 would save an enormous amount of money.

It would do so in two ways:

1. By eliminating the higher expense factors that private health plans have in order to do business. Right at the top of the list are costs built into insurance plans to pay brokers and agents, health plan profits, as well as state and federal taxes.
2. By paying providers less. Simply, the government plan would pay providers just as they now pay for Medicare and Medicaid—Lewin presumed providers would be paid at the Medicare level that is typically 20% to 30% less than what providers get from private plans.

All at once, in what would be almost a simple wave of the hand, doctors and hospitals would see their reimbursements cut by 20% to 30%.

Provider cuts would be across the board.

Doctors and hospitals that provided unnecessary and wasteful care would see their reimbursement cut 20% to 30%. However, providers delivering appropriate care would also be cut 20% to 30%. That would be sort of like the difference between carpet-bombing and laser guided bombs—somewhat effective but totally inelegant as a solution.

But cutting provider payments across the board in a government plan would reduce the cost of providing insurance to the two-thirds of the population that Lewin estimates would ultimately gravitate to the public plan because these provider cuts and overhead savings would make the cost of insurance about 20% less.

But there is also a concern that a public plan would lead to two-tiered health care for those under-age-65. That is the proverbial “push it here and it pops out there” result.

Today, the concern goes, 85% of our under-age-65 citizens arguably get access to first class health care because they have insurance. Granted, it may be a level of health care that produces enormous waste but at least 85% of us get it while 15% of us under the age of 65 struggle because they are uninsured.

If a public health care plan is created the current equation may just get turned upside-down. The two-thirds of the market Lewin estimates may shift to the public plan may no longer be in first class—they may be in coach.

The first tier would be composed of those in the public plan—presumably a public plan that balanced its books as Medicare does now by cutting provider reimbursement as needed to meet the federal budget. Doctors and hospitals would be “negotiating” with the federal government for their reimbursement to serve these people—not a long list of private insurers. And, it’s hard to see how any discussion between the “thousand pound gorilla” that is government and health care providers would be other than a very unilateral discussion.

Medicare has a history of rarely if ever cutting benefits instead continually tinkering with payments to providers—payments very few providers find adequate.

On the positive side, even a 20% to 30% cut in reimbursements by a government plan paying at Medicare rates would be better than getting nothing from those who can't now pay. Lewin does assume this advantage would be somewhat limited with the number of those uninsured only cut to about half under an Obama campaign-style plan.

The second tier of coverage would be for those who could still afford to pay the higher premiums for the better reimbursing private plans. It is likely that the higher reimbursement levels providers of these plans would get, as well as the likely desire for private plans to keep their customers happy by granting them better access to care, would create a “first class cabin” for health care. Just as it is in Great Britain where citizens can opt out of the public system, those wealthy enough to be able to afford, or have their employer pay for, private insurance will have it.

A government-run health plan for those under-age-65 would also do nothing to bring our long-term Medicare entitlement costs under control. This is a plan for the under-65 market—it would do nothing to solve Medicare’s solvency problems.

In fact, a government-run plan for the under-65 market would likely make matters worse for Medicare’s long-term fiscal outlook.

Today, the government making lower provider payments for those covered under Medicare is possible because health care providers have a huge private population of under-age-65 people to shift costs to in order to make up for the lower payments they get from the government. The private pay market has been large and rich enough to absorb these shifts from Medicare providers, which have generally kept the provider community whole.

But with two-thirds of the population in a Medicare-style government-run plan, cost shifting would no longer be a tenable way for the private sector to subsidize the public sector. Medicare providers would pretty much be on their own with a much reduced ability to shift costs.

It’s also ironic that Democrats have been fearful of doing anything that would create a two-tiered Medicare system for seniors. The reasoning goes that if the rich and powerful are in one plan and everyone else is in another there will not be the political will to sustain a solid Medicare program for regular folks. That reasoning has always made political sense to me. And, it has been at the core of their opposition to the privatization of both Medicare and Social Security.

Which makes the notion that Democrats would now support what will almost certainly evolve into a two-tired system of health insurance for those under-age-65 perplexing.

A public health insurance plan of the kind envisioned in Lewin’s analysis is perhaps one way to pay for covering more people by cutting out insurance company overhead and reducing provider reimbursements by 20% to 30%.

It is also a way to change the American health care system—for consumers, providers, and insurers—in a dramatic way. “Push it in here and it pops out there.”

America’s health care system is unsustainable because it is too expensive partly because of the high overhead produced by so many competing health plans. But mostly it is unsustainable because we waste so much money on unnecessary and wasteful care.

Fixing that problem, and therefore crafting a sustainable system will require entirely new incentives and a focus on paying for value.

It is also entirely possible that insurers, who would be desperate to survive in competition with a “Medicare for all model” would create their own “coach product” by doing everything in their power to just whack provider reimbursement levels to Medicare levels irrespective of which providers create value and which ones waste money. What would they have to lose?

Making the politically problematic decisions that would end the waste in our system is proving to be very hard. It’s entirely possible there will be proposals to create a government-run health plan to compete with the private sector and leave for another day dealing with the enormous waste already embedded in the system. Already, the Congressional Budget Office has said that programs that the administration claims will deal with this waste—introducing health information technology, comparative effectiveness reviews, prevention, and wellness—will have only minor impacts on spending.

If we kid ourselves into thinking that a public health plan program will by itself create real savings—instead of artificial savings produced by underpayments—and continue to avoid the real issue of value for what we pay, we will only end up with a two-tiered health care system (coach for most and first class for a few) for those under-age-65, providers just as underpaid in most of the working age market as they now are in Medicare, and nothing done to stem the unsustainable cost of Medicare’s entitlement benefits.

For providers this would be a disaster—at least two-thirds of the under-65 market would now be paid at Medicare rates and the best providers would be hit as hard as those who under perform. At worst, even the private health plans could be desperate to drive the rest of the market down to Medicare payment levels in an attempt to avoid losing two-thirds of their market share. There would also be about no one left to shift costs to!

I’m trying to understand how a government-run health plan alternative in the under-age-65 market that focuses on payment rates to control costs, absent changes that produce a value-based payment system, would be any kind of policy victory for Democrats—or the rest of us.

Since when was a two-tiered health insurance system a Democratic policy goal?

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