Thursday, April 23, 2009

A Public Health Plan That Looks Just Like a Big HMO---Why?

Respected health policy expert Len Nichols has published a paper, “A Modest Proposal for a Competing Public Health Plan.”

There’s this 1970s TV commercial promoting Xerox document copiers. It opens with a sales rep for a competitor saying his machine is, “Just as good as a Xerox!”

The Xerox commercial’s response is, “Then why not just buy a Xerox?”

In the paper Nichols, and co-author John Bertko, argue that a public health plan option can compete on a level playing field with private plans so long as:
  • “The rules of the insurance marketplace (or exchange) apply to all plans, and
  • “The governance structure is designed to isolate the public plans from unfair advantages and perverse incentives.”
Their paper is important because many advocates of a public health plan, including in the Obama administration, have said a private plan does not have to look like Medicare and could look like the structure outlined by Nichols and Bertko and still be quite effective in making the health care markets more efficient.

Nichols and Bertko have also done an excellent job laying out the technical issues that make the market tick.

Their primary argument seems to be that we don’t have to have the controversial version of a public Medicare-like health plan that would bring to bear the unilateral powers of government in order to make a public plan work--we can do it in more "modest" form. You will recall the Lewin Group’s analysis that found such a plan could grab as much as two-thirds of the market.

Specifically, Nichols and Bertko outline a comprehensive list of, “Conditions for Fair Competition.” The list includes:
The administrators of the public plan must be accountable to an entity other than the one identified to govern the marketplace. In other words, the authority overseeing the marketplace (exchange) and enforcing its rules should not have an incentive to favor the public plan over private plans.

The public plan cannot be Medicare. Creating a marketplace where private insurance plans could compete fairly with Medicare for the under-65 population would be difficult and complex for a number of reasons. Therefore, we believe the public plan option cannot be Medicare.

The new public plan must be actuarially sound.
This means it must charge premiums that cover its costs. The public plan may not be subsidized using additional government revenues.

The public plan cannot leverage Medicare (or any other public program) to force providers to participate. For example, the public plan cannot require providers to serve public plan patients as a condition of participating in the Medicare program.

The public plan should not be required to use Medicare payment rates. Instead it must offer rates that elicit voluntary participation, which means providers should have the same freedom to negotiate with the public plan as they do with other private carriers.

The insurance market rules and regulations governing the public plan must be the same as those governing private plans. These rules and regulations include: guaranteed issue, guaranteed renewal, modified community rating, flexibility to charge different rates on geography, risk adjustment, no pre-existing condition exclusions, marketing rules, open enrollment periods, limits or reporting requirements based on premiums to claims ratios, minimum benefit package.

The public plan cannot be granted an unfair advantage in enrolling the uninsured or low-income individuals who will presumably be eligible for subsidies in the new marketplace. This means individuals should be able to apply subsidies to the public or private plan of their choice.

Public and private insurers should be required to adhere to the same rules regarding reserve funds. All insurers operating in the exchange should be required to have reserve funds equaling their incurred but not reported (IBNR) claims. In lieu of solvency requirements (because a state or government cannot be insolvent), the public plan must also establish a Premium Stabilization Fund. This model is currently used by the Federal Employees Health Benefit Program (FEHBP).

The public plan would also need to contribute to value-based initiatives that benefit all payers. For example, if an assessment for funding comparative effectiveness research is levied, private plans and the new public plan must be required to contribute proportionately.
In other words, a "modest" public health plan could pretty much look like the current market players, the "Xerox," if you will.

The authors go on to argue that 30 states already have a similar model which often combines medical self-insurance with commercial networks—usually Blue Cross networks—to operate a publicly-run health plan for their state workers.

OK. But I don’t know of any of these state self-insured plans that are generally getting better results than the typical large private employer’s self-insured plan—or any commercial health plan. And why would they—they are just large self-insured employers using the same commercial networks the ERISA market uses. CalPERS, the biggest for example, has a partnership with California Blue Shield and the last time I looked their costs weren't anything to write home about compared to the typical Fortune 100 employer.

Just which state employee plan is a model for reducing health care costs, ridding the system of unnecessary services, and measurably reducing the "premiums" it charges its sponsors and employees?

But, you might argue, these state plans have expense ratios far less than the existing individual and small group market. Sure they do--just like a typical large employer. Now add the cost of servicing individuals and small groups and why would they be any less expensive than a private plan offered in the same "Insurance Exchange." They don't have to make a profit, one might argue. Really? A public plan would have to develop the same stabilization reserves any existing not-for-profit health plan has to build for in the down years.

There actually are plenty of examples of government going into the insurance business on a level playing field basis with the private sector. There have been a number of state workers’ compensation funds over the years as well as state sponsored physician medical malpractice funds—usually built at a time when the private sector was not creating adequate market capacity for even average risks. [I am not pointing to high-risk pools here but state sponsored insurers aimed at the mainstream market.] All of the ones I know about ended up looking exactly like the private players. The fact that none of them ever dominated the market is testament to just how similar, or ineffectual, they turned out to be compared to their private market cousins.

As an example, I would point you to the California State Compensation Insurance Fund. Founded in 1914 by the state legislature, it is a workers' comp insurer. In the mainstream market the Fund looks, acts, and underwrites just like the private players. California has always been a problematic workers' comp market--can't say having the Fund for 95 years has solved any systemic work comp problems there.

What the Fund has been though is a doormat for the private market and political regulators--carriers move into and out of California when workers comp regulation becomes intolerable for them and back in when the regulatory climate is tolerable. But the Fund has to stay no matter what and its revenue and financial stability have varied widely as a result. When the carriers are interested in being in California, they pretty much take market share away from the Fund at will.

When the day is done, it seems to me the authors are arguing they can create something that looks just like the existing private health plan market—that they can create something that looks a lot like and is “just as good as Xerox.”


Looks to me that in an effort to create a level playing field and overcome the objections to a public health plan the authors have succeeded.

But they have also just come full circle and toward what end?

About half the private health insurance market in the U.S. is in not-for-profit health plans and networks (Blues, Kaiser, etc.). Just how would a "modest" public health plan provide something materially different?


If we have anything in America that looks like a "modest" public health plan it is the various state workers' compensation funds. Here is a an article that provides a view for how well these funds are doing.


Avoid having to check back. Subscribe to Health Care Policy and Marketplace Review and receive an email each time we post.

Blog Archive