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Fears of the public option are overblown

Posted Oct 29 2009 11:00pm

Revival of the so-called public option in health reform legislation has big business in a big tizzy. I listened in on a Business Roundtable briefing yesterday where two talking points were hammered on repeatedly:

  • The public plan will result in cost shifting to the private market, raising costs for businesses that provide insurance
  • The public plan will stifle innovation (e.g., in new treatments) by focusing on cost above all else

I’m slightly puzzled about why the Roundtable (which represents large businesses) feels so strongly about this. First, it is far from inevitable that a public plan would result in cost shifting. Second, the innovation argument is at best a mixed bag. Maybe a public plan would reduce the introduction of costly new technologies (and maybe not). But it might bring innovations in another area where they’re needed: cost control.

Big employers assume that the public option would undercut commercial premiums. Let’s examine that notion a bit.

There are three main ways a public option could conceivably offer a lower premium than competing private plans:

  • Lower administrative costs: public plan proponents point to research that shows Medicare administrative costs are lower than for private plans
  • Lower reimbursement rates to providers: the government might impose rates on providers or use its power to extract lower rates
  • Lower utilization of medical services: government might provide more effective medical management

It’s unlikely that the public option will have a significant cost advantage, at least initially:

  • Administrative costs:
    • A public plan would incur many of the same administrative costs as private plans, e.g., marketing, claims management, medical management, provider profiling. It’s hard to see why these would cost the government less than the private sector
    • One reason Medicare administrative costs are low is that the government does little to manage medical costs.  As a result higher medical costs offset the administrative savings. Traditional Medicare also does little marketing and doesn’t pay commissions whereas a public plan probably would spend in these areas
    • A public plan would have some advantages, namely no need to pay taxes, or earn a profit. (Of course you could say the same for non-profit health plans)
    • Reimbursement rates:
      • If a public plan passes, it probably will not allow the public option to impose rates on providers (e.g., Medicare rates). Instead the public plan would negotiate with providers, just like private payers. The public option is not likely to be the largest player in many regions and therefore it seems unreasonable to expect it will be able to obtain deeper discounts than others. This is especially true because only a small slice of the population will even be eligible to participate in the public plan.
      • The public option will face political pressure (e.g., from doctors) not to push too aggressively on rates, and Congress has demonstrated its sympathy to providers on this point as illustrated by its failure to adhere to the Medicare Sustainable Growth Rate rules, which it overrides nearly every year
      • If the public plan manages to push rates down –because it is focusing on price more than its competitors are—private plans are likely to seek and obtain contracts that match the public plan’s rates. This is different than the situation with Medicare and Medicaid, where commercial plans understand they must pay more than Medicare and Medicaid rates to keep providers viable. They won’t feel the same way when they’re competing with a public plan
      • The public plan will find it politically untenable to offer a narrow provider network, which is the most straightforward way to control costs. That will provide an opportunity for private insurers to offer narrower, lower priced products
      • Utilization management
        • There is no reason to expect that a public option would do a better job managing utilization than private payers. Medicare, for example, does a poor job today
        • To the extent that sicker patients choose a public plan, they would drive utilization up. It seems to me this could happen since private plans would like to avoid these patients whereas the public plan presumably would not

Interestingly, not all businesses oppose the public option. I spoke today with John Arensmeyer, founder and CEO of Small Business Majority (SBM). He told me his group has chosen not to make the public option their “signature issue” but that “it’s one component to provide additional competition and choice, especially in states that are dominated by one or two carriers.”

In a poll of its members –who like small business people are mostly Republicans and independents– SBM found that 70 percent favor the establishment of a public option while only 19 percent want a system with private payers only.

SBM’s very sensible small business prescription for healthcare reform includes the following:

  • Cost containment: Reduce costs throughout the system and level the playing field
  • Choice: Create more coverage choices for businesses and employees, and make the healthcare system more competitive
  • Convenience: Simplify the system for busy small business owners
  • Coverage: Guarantee affordable healthcare coverage for all Americans

I still can’t figure out why big business is so against the public option. I personally don’t think it’s going to be such a big deal one way or the other.


I  asked the Business Roundtable spokesman a follow-up question yesterday and just got my answer:

Q: How certain are you that introduction of a public plan will lead to cost shifting? Will that cost shifting occur right away or will it develop over time?

A: Depending on how the legislation is ultimately drafted, it could lead to cost shifting immediately. For example, if the legislation permits the public plan to use the Medicare rates, there are several studies that have already demonstrated that providers shift costs to employer-sponsored coverage to compensate for inadequate Medicare payments.   If the legislation does not specify rates, it is presumed that any public program is likely to reimburse providers at a lower rate and have a lower cost of doing business.


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