One of the most controversial parts of the Obama health reform campaign platform was its pledge to create a new Medicare-like public health insurance offering that would “compete” with existing private insurance plans, and put pressure on them and on providers to hold down costs.

It would do this mainly by using Medicare-like pricing leverage to achieve significant discounts from hospitals, physicians, and others on their services, as well as through lower administrative overhead. The public plan has been the most polarizing element of the president’s plan, since it starkly divides advocates of a much broader public role in health financing from the dwindling and demoralized advocacy base for “market-based” solutions.

Last month a Lewin study forecast that if the plan paid Medicare rates, it could offer premiums 30% below those of available private plans and attract 43-130 million people to the plan. The low displacement number reflected limiting eligibility to the individual and small-group market and the self-employed, and it pulled 32 million insured people out of the private insurance plans. The higher displacement number reflected no limits on eligibility and would pull 119 million people out of private coverage. If the public plan paid commercial payment rates, the attraction would unsurprisingly be far smaller: 10-12 million insured people would switch. If the major outlines of the Lewin study are even partially accurate, the attractiveness of the public plan depends overwhelmingly on replicating Medicare’s payments rates and, presumably, payment methodology.

Problem 1: Limited Provider Participation

There are numerous practical problems with the public-plan option. An important constraint may be the degree of provider participation. For those without insurance, the new public plan might provide them access they do not have. For the more than 160 million people who already have coverage and provider preferences, however, the attractiveness of the public plan hinges not merely on cost, but also on whether they have to switch doctors or hospitals in order to enroll.

Presumably, provider participation in the new public plan would be voluntary. So one is driven to ask: what if they gave a public plan and nobody came? For many primary care physicians, appeals to patriotic duty might not be enough. Medicare’s inadequate payment rates are a major reason why many primary care practices are not economically viable and why young physicians leaving training are steering violently away from primary care practice. Many hospitals will think twice about signing up for a possible 50% increase in their public book of business, since they are already losing $30 billion treating publicly funded patients.

Many federal policymakers still do not seem to grasp that we stand on the cusp of a major physician access crisis for Medicare beneficiaries, not to mention the access crisis for those newly enfranchised by health reform. They should not be surprised if a significant fraction of physicians decline to participate in a new public plan at Medicare rates. Historians will tell present policymakers that it took “cost-plus” payment incentives to assure broad participation when Medicare was created in 1966. “Cost-minus” payment might end up offering public-plan subscribers an embarrassingly sketchy provider network.

Problem 2: Sustainable Economic Gains

Even if that problem is overcome, a second important question is: how sustainable are the economic gains from a significant shift to public financing? Are they merely one-time savings? The New York Times, in a tepid April 6 endorsement of the public plan alternative, said, “A public plan might do a better job of slowing the growth in health costs, although Medicare has not been notably successful in this regard.”



The New York Times assessment was actually somewhat generous. A recent study for the New America Foundation by Richard Kronick showed that “excess” per capita growth rate of Medicare costs (that is, growth beyond inflation) was 20% higher from 1971 to 2005 than that of private insurance (2.4% per year vs. 2.0%), and that when Medicare achieved reductions in its costs, they lagged the private sector’s reductions by four years (an expensive gap on a Medicare spending base now over $500 billion). (See Kronick’s chart above.)

Medicare’s crushing cost advantage on payment rates was more than cancelled out by the program’s negligible influence on utilization. From 1975 to 2005, the ratio of Medicare’ s per capita utilization to that of private insurance in both hospital admissions and physician widened by 50%. How savings are achieved and whether they are sustainable actually matter in health policy terms.

While the private insurers’ record of per capita cost growth of 2% beyond inflation has not been exactly dazzling, tilting the payment system back toward reducing unit payment rates and away from utilization and care management would be a gigantic step backward for health reform, particularly as many private plans have begun to get traction engaging subscribers in managing their own health risks. Medicare payment’s framework is fundamentally obsolete — after-the-fact, event-driven payment under an acute care model for a population increasingly affected by chronic disease. Flushing a huge amount of new dollars through the present Medicare payment methodology would be a waste of scarce societal capital.

Problem 3: Capacity At CMS

There’s another important factor weighing against a public plan: bandwidth at the Centers for Medicare and Medicaid Services (CMS). One reason why the Health Insurance Portability and Accountability Act (HIPAA) took twelve years to implement was that CMS could only assign 6 FTE staff to a task that, if done effectively, could have markedly reduced administrative costs across the health system. Allocating scarce CMS staff to creating a new public plan would carry an important opportunity cost: an inability to staff out the reform of Medicare payment to improve accountability for resource use and care coordination.

CMS needs to participate meaningfully in evaluating new comparative effectiveness information and redesigning Medicare’s coverage and payment determinations, to develop a new primary care payment methodology and to develop better methods of coordinating post-hospital care. Creating a new public health insurance plan from a standing start could burn up a healthy fraction of limited CMS staff and senior management bandwidth.

Problem 4: Resiliency of the Private Insurance System?

Finally, one has to wonder about the resiliency of the private health insurance system, given what’s already happening to it. Health insurers are staring down a deep dark well. They have already lost nine million privately insured lives due to the recession. Just two insurers, UnitedHealthcare and WellPoint, lost nearly a million commercial lives in the most recent fiscal quarter. With those lives go operating margin. Private plans also seem destined to lose a large chunk of their present Medicare Part C (Medicare Advantage) payments if, as seems likely, Congress follows the Obama budget proposal for reducing the gap between Part C rates and the cost in the traditional program.

To compound these losses with a further potential loss of 20-60% of their remaining commercial lives would risk destroying the economic foundations of the industry. Launching a new public plan into the health insurance industry at this moment would be like lobbing a grenade into a room full of flu victims. The damage would be unpredictable, instantaneous, and possibly irreparable.

And it would not merely be the publicly traded insurers like UnitedHealthcare and Humana who would be damaged. Far more vulnerable are the relatively thinly capitalized integrated health maintenance organizations (HMOs) like Kaiser, Group Health of Puget Sound, Geisinger Health Plan, Harvard Pilgrim Healthcare, and Health Partners in Minneapolis, which are at least a decade ahead of their fee-for-service neighbors not only in health information technology (IT) innovation, but also in care-system experimentation and redesign. Many Blue Cross plans in the Northeast and Midwest would have difficulty recovering from damage to the individual and small-group business that sustains them.

If we want to consider seriously a single-payer option, which would involve deliberately sunsetting the private health insurance industry, let’s have that discussion up front and see where it leads. To back into a single-payer system by inadvertently blowing up the private insurance system would be irresponsible, with the potential for significant collateral damage to the health care delivery system along the way.

Option: Leverage Existing Public Plans

Is this an argument for doing nothing? No, it isn’t. An attractive alternative is to leverage the two public plans we already have. Congress has already authorized a significant expansion of the Children’s Health Insurance Program (CHIP) into the middle class: 70% of new CHIP beneficiaries will likely enroll in private health plans. An obvious solution for the nearly 11 million uninsured baby boomers already exists: extend Medicare eligibility on a voluntary basis to as early as age 55, with subsidies for low-income boomers who cannot afford the rates. Some of those folks could enroll in Part C private plans if they wish to do so.

Option: Make Insurance More Affordable

What can be done to make private insurance more affordable for the currently insured? How about reforming the health insurance supply chain? Create, as Candidate Obama promised, a sophisticated, user-friendly, Web-based health insurance exchange, with Web-based decision-support tools to help people pick the best health plan for them. Let businesses and individuals sign up directly for coverage, and bypass the costly intermediaries who take a surprisingly large chunk of the health premium dollar. Let’s also explore how to get from our present, incredibly costly, and only partially automated claims management system to a real-time, Web-based, end-to-end electronic system, whose savings McKinsey recently estimated at $30 billion a year.

I remain optimistic that health reform can be accomplished this year, despite the continued economic challenges. To do so however, the Obama team and congressional leadership will have to forswear the potential for an ideologically polarizing fight with a fragmented industry. That fight might please a resurgent Democratic base, but it could also galvanize providers and insurers, as well as risk-averse consumers, and lead health reform back to gridlock. It’s not like businesses or families are marching on Washington demanding yet another health insurance option. The game just isn’t worth the candle.

Health reformers would be smart to trade the radioactive “public plan” bargaining chip for concessions from the industry and to focus their attention on finding an employment-friendly financing plan, and on Medicare payment reform. In Medicare payment policy, the government already has tremendous leverage over private insurance markets and providers’ behavior. Let’s devote more energy to devising ways of using that leverage responsibly, not only to reduce excessive cost growth but also to refocus on better coordinated and more thoughtful care for all.