Without significant changes in state and federal law, a public option (whether that public option is a Medicare-like program or a something that looks like the federal employee health benefits program with coverage available from several private insurers) necessarily creates a circumstance of having two markets subject to different pricing rules and offering rules, and introduces dynamics that require significant attention to how insurance markets behave. It isn’t as simple as letting people opt for a separate public program.

A good starting point for thinking that through is the nongroup market. In most states today that is characterized by age rating and health underwriting, with insurers either rejecting or rating up persons with existing health conditions. If the public option is an alternative for all citizens, it is unlikely that it will involve age rating, and it will certainly involve guaranteed issuance of coverage. The natural result would be that younger or healthier persons would remain in the commercial market, while older or less healthy people likely would find the public plan more attractive (not incidentally, in some states that involve risk pools for the uninsurable currently subsidized by assessments on insurers, the raison d’ etre for such pools disappears and insurers might have an incentive to make their underwriting more strict than is currently the case, or to increase the slope of their age rating tables).

The same effect would occur in most states for small groups. Most states, following the NAIC model, allow use of age, industrial classification and group size among other characteristics in developing rates for small groups. This results in enormous differences in premiums among small groups (and can result in enormous volatility in premiums for very small groups when, for example, a younger worker leaves and an older worker takes her place, or vice versa). Again, the incentive would be for employees in groups composed largely of older employees to seek coverage through the public plan.

Those impacts would be magnified if health insurance remained a voluntary matter. That is, if there is no requirement to hold insurance, and the public option is a program involving flat community rating and guaranteed issuance of coverage, persons today in groups with high premiums, persons holding coverage through high risk pools, and uninsured persons who become aware of a condition creating a need for health services would move to the public option.

It is difficult to fool markets. While having two differently regulated markets might not result in the paradigmatical death spiral, the risk sorting that would occur absent fundamental changes in rules applicable in the private market would result in significantly higher average claims expenses in the public market, and significantly lower average claims expenses in the private market, meaning higher premiums in the former, and increasingly higher as the effects of adverse selection are felt in the claims costs.

To avoid that would require applying the same rules in all markets, displacing current state regulation with federal regulation of rating and underwriting, particularly in the nongroup and small group markets. Guaranteed issuance of coverage in the nongroup market, a requirement in a few states, would be obligatory in all states. Age rating would have to be prohibited in the nongroup and small group markets (large groups might be a separate subject, although there are significant enough differences in the impact of age and health status among some to not disregard them): that is, one would have to be able to acquire the same coverage at the same rate, whether one did so through employer-sponsored coverage or on an individual basis, just as one would have to be able to do so under the public option.

But if that were the case – if all insurers were no longer sorting risks by health and age, were pooling claims costs among all insureds and creating a single flat community rate of the same kind a public option would involve – then what advantage would a public option provide? Would it reside in lower administrative costs? I suspect that in an environment in which insurers were not competing based on ability to select risks or on who could tailor their age slopes or industrial factors to get the best block of insureds, the basis for competition would be only administrative costs and the cost to the insurer of health care services. One would think that in such an environment, insurers would have strong incentives to become as lean as possible and to negotiate the best possible pricing mechanisms with health care providers (and perhaps not on per unit price alone).

In the end, what is the purpose of a public option? Health insurance is available universally today, although in some cases, only through a high risk pool at a significant premium. If a public option is desirable as a mechanism to make coverage more affordable to persons whose rates appear unaffordable because they are older or sicker individuals or in an older, less healthy group, the same result can be obtained by changing the rules applicable to rating and underwriting by private insurers. If a public option is desirable to achieve lower administrative costs, changing the rules of competition among insurers by eliminating risk segmentation as a means of competition achieves that end.

If the purpose is to lower the primary input in the cost of health insurance – the cost of health care services – eliminating risk segmentation as a means of competition among private insurers would cause them to focus more strongly on how they pay health care providers and what they pay for. Of course, if a public option relied on Medicare-style pricing for health care services, it would have an insurmountable competitive advantage over private coverage, but if that is the desired outcome, there is no reason not to move directly to a single-payer system, albeit one that is not universal but rather – at least for nondisabled persons under 65 – involves payment of premiums. That is a nonstarter politically, if only because health care providers would not hold still for it.

I haven’t yet gone over to view the webcasts, but I was struck by something Don Berwick said about American Exceptionalism. I’m paraphrasing, but he said that we severely handicap ourselves by thinking we are so unique in the world that we have nothing to learn form the half century of experience of other western democracies.

I would add, in light of this discussion: Are we naive enough to think that this is the first time this (public sector competing with private)has come up? Of course it isn’t. How should we handle it? I don’t know, perhaps we should look at the Swiss or Netherlands experience.

Acavale: I disagree with your assessment of how insurance works best. You are talking about an actuarial model, where the young and healthy pay next to nothing and the sick can’t even get covered. We’re even so goofy about this that we charge women of child bearing age higher premiums than their male cohort, as if the women get pregnant on their own!

Societal (social) health insurance is the only reasonable way to go. We are all in this together. If my neighbor gets rheumatoid arthritis, I expect to chip in societally to help him or her through. I call BS on thsi rugged individual stuff that keeps getting tossed around — until it’s your own family.

Cheers,

—And why might health care reform be endangered by the attractions of the expansion of Medicare—a program that’s popular with its beneficiaries and has low administrative costs?

Medicare is popular; surveys show its beneficiaries more satisfied than those with private insurance. However, the move of almost a quarter of these beneficiaries to Medicare Advantage suggests that the traditional FFS program may be losing some attraction—and not necessarily just because of benefit limitations. Medicare patients are finding access to care increasingly difficult because of low FFS payment rates. At the same time, Medicare’s seemingly lower costs, compared to private insurance, might look more problematic in the competitive market envisioned by Daschle, Baucus, and others.

Medicare’s administrative costs are lower, although less dramatically so than supporters have claimed, at around 5 percent of total expenditures, versus some 10 percent for large group insurance (excluding premium taxes and commissions). However, an under-65 Medicare option, with lower medical costs per claim, would have a higher administrative cost percentage—perhaps twice as high—potentially eliminating most or all of the gap.

Relying on MedPac’s estimate that, in the Medicare Advantage program, traditional FFS is 12 percent less costly than private insurance, may not be a good idea, either. The difference is largely due to the additional benefits provided by the MA plans, combined with political insistence on offering private insurance options in rural areas. In fact, urban PPOs are only slightly more costly than Medicare FFS, while HMOs nationally underbid FFS. The comparisons are especially remarkable given the estimated 10 percent cost-shift from government payers to private insurers. In other words, an under-65 Medicare option with no cost shift would likely be more expensive than private sector HMOs and PPOs.

The no cost-shift assumption is unlikely to be made by insurers evaluating reform proposals, however. Given their experience of Medicare payment over the past decade, insurance companies are likely to fight tooth and nail against a potential Medicare competitor with payment rates that they may have to subsidize. And with the deep pockets and political skills of insurance lobbyists, this is a fight that could leave reform truly wrecked.

While the idea of public plan option seems good from afar, the MA plan has run into major problems, not because their plan did not cover enough individuals (quite to the contrary) but because these newly “covered” individuals could not find any primary care physicians participating in such plans. This is where the Republicans’ question, whether a public plan would mean that everybody will be on Medicaid, seems to be the right question to ask. Because if it is so, then lack of access problem will only worsen, unless these folks are willing to be part of a Walmart-style assembly-line medical care system, where a physician-extender will be “processing” them according to some arbitrarily set “national standard” by a DC-based “health board”.

If a Bernie Madoff carries it out, it is termed a “Ponzi scheme”; but if the government runs a similar scheme, it is termed “Medicare”. How long do we think we can keep using tax dollars from our most productive citizens to pay for ever-increasing needs of our seniors? And the pool of taxable workers keeps getting ever so small, not to mention the ever-increasing pool of Medicare eligible people. It would benefit the country if the Obama administration is honest about the choices all of us have to make going forward. Perhaps, those who feel strongly about a “universal, public plan” option must be open about the fact that it would mean significant rationing of care in the very near future, and almost complete loss of the patient-physician relationship.

In essence, the concept of “insurance” works best if one pays for one’s needs based on each individual’s requirements, in my opinion. In order to achieve an optimal result, policy makers must look beyond the current idea of status quo versus public plan option, and be willing to explore different ideas of health coverage. Clearly, the direct involvement of the main stakeholders (patients and physicians) is desperately needed, and the concept of paying for services based on value to the individual receiving the services must be of prime importance. To meet this end, there has to be absolute transparency in transactions, and the ability to purchase value-based and timely care. One of the main reason for the current dismal situation is the concept of price-fixing by the government and private payers, which blinds the consumer (patient) to the actual cost of care he/she is receiving, and encourages all types of providers to engage in volume-based practices. Under this system, there is no value for quality of service or for patient-physician relationship. Therefore, in my opinion, a government-run, public plan will eventually create a similar situation, but with the added problem of loss of access to care. So let’s be careful what we ask for – we might actually get it!

Are you CRAZY? What planet do you live on? Medicare has been a GODSEND FOR MILLIONS of American seniors, and a public option will be the same for millions of Americans under 65. Our current health unsurance system is broken, bloated, immoral and unsustainable.

Sheesh. Unbelievable. (Only in America would this baloney fly.)