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Understanding Insurance: Will a Public Option or Co-op Get Us Where We Want?

Posted Feb 25 2011 9:00am

Editorial by Debra A. Smith, DO, MIHM, MBA

Dr Smith is president-elect of the American Osteopathic College of Occupational and Preventive Medicine, and adjunct assistant professor at the University of North Texas Health Sciences Center— Texas College of Osteopathic Medicine in  A “public option” (ie, allowing individuals to purchase government run health insurance) has been proposed as a solution for achieving universal health coverage in the United States. Politicians have told us not to fear a public option because government-run programs such as Medicare work well—without any of the dreaded rationing of care that critics claim would occur. Recent town hall meetings have demonstrated that many elderly Americans are satisfied with their Medicare coverage and will fight fiercely to protect it.
Medicare does provide good benefits—with the working population paying for current retirees. Today, however, Americans are living an average of 4.3 years longer than they were in 1965, when the program started.1,2 In addition, the percentage of the US population receiving benefits has jumped from 9.5% at the program’s inception to 13% today3—a 37% increase.
As more and more “baby boomers” retire, the Medicare-eligible population is projected to expand to 16% by 2020 and to 19.3% by 2030.3 According to a May 2008 speech by Richard W. Fisher, president and chief executive officer of the Federal Reserve Bank of Dallas, the present value of unfunded liabilities for Medicare Part A (hospitalizations) is $34.4 trillion; for Medicare Part B (physicians), $34 trillion; and for Medicare Part D (drug benefits), $17.2 trillion.4 These numbers represent a grand total of $86 trillion of unfunded entitlements that our children and grandchildren will be paying for us.4
Increased longevity and demographic shifts account for part of the funding dilemma. The continued expansion of benefits and increased demand for costly new medical technology account for the rest of the problem. Given the extent of our current obligations, is the proposal of another publicly funded healthcare program responsible?
There are three things that people want in any health plan. First, the plan should be responsibly administered and financially solvent. Second, it should provide good coverage at an affordable price. Third, the plan should not bankrupt the country, the insurance companies, or the individuals paying for it. A key issue to keep in mind is that a public program must be underwritten correctly or it will lose money. Nationwide, health insurers have been operating with only about a 2% profit margin in recent years.5,6 Although we want everyone covered, do we really believe that government is more efficient than the private sector?
Nonprofit and For-Profit Private Options
Where is the money in private health insurance going? About 85% of each premium dollar goes to pay claims (ie, the medical-loss ratio), and roughly 10% goes to administrative costs.7Highmark Blue Cross Blue Shield, a nonprofit insurer based in Pittsburgh, Pennsylvania, has an explicit policy to keep its medical-loss ratio near 90%.7 Nonprofit insurers are granted this special tax status because they provide a needed public service. Nonprofits are good for the insurance industry because they help keep the for-profit insurers honest in premium pricing. Conversely, the for-profit insurers have incentive to reduce administrative costs to remain competitive in the marketplace and eke out a profit. The for-profit competitors force the nonprofits to keep their administrative costs from ballooning.
Politicians claim that public health programs have cheaper administrative costs than programs in the private sector. An examination of the evidence, however, casts doubt on that assertion.
via Journal of Osteopathic Medicine:  Understanding Insurance: Will a Public Option or Co-op Get Us Where We Want ?
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