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Parsing Public Plan Proposals



July 29th, 2009

The “public plan” is today’s ultimate Rorschach test; different observers may see very different perspectives.  Particularly when the advocates leave loose ends, their opponents weave those untied threads as they will.  Nobody’s on firm ground so no concrete debate is possible.  Lots of smoke, hardly any light. 

It seems that there are some simpler clarifying questions that could be addressed to get the proponents to demonstrate that they do have specific ideas on how to get there (wherever there is) from here. Proponents should be expected to provide practical demonstrations of how a public plan could work in a real world. 

At a minimum there are four questions that need to be answered:

1. What will be the financial obligations of those covered by policies obtained through the public plan?
2. What will be the locus or locuses of competition between the public plan and private plans?
3. Will there be sufficient providers to willingly (or not) provide services under the public plan? and
4. Will there be administrative (or other) savings?

What will be the financial obligations of those covered by policies obtained through the public plan?

Number 1 is the major omission from the current debate and the source of both confusion and misinformation. For example, there is a lot of talk about 72% of Americans wanting the public plan. The actual question from the NY Times, however, was “Would you favor or oppose the government offering everyone a government administered health insurance plan — something like the Medicare coverage that people 65 and older get — that would compete with private health insurance plans?” 

Medicare is a very good insurance plan for those who are covered.  Medicare beneficiaries pay little or nothing for their hospital care, and the old HCFA rule of thumb was that the average beneficiary had received Part A services beyond exhausting their entire lifetime FICA contributions within the first three years of their enrollment.  By law, beneficiaries pay at most 25% of Part B costs. One might wonder what was wrong with the one-quarter of respondents who wouldn’t want that kind of plan. The survey question gave no specific indication of what expenses would be incurred by those covered under such a plan — in particular, whether coverage costs would be higher or lower than those under Medicare.

So what will this new public plan cost its beneficiaries?  If asked to fully pay just average expenses, Medicare beneficiaries in 2007 would have faced individual premiums of $9,244.  Arguably, a family policy based on Medicare would cost in excess of $20,000.  That’s not likely to be what public plan proponents have in mind.  Perhaps more likely is the Blue Cross Blue Shield standard option under the Federal Employees Health Benefits (FEHB) program, the plan offered to congressional representatives and the one selected by most federal employees.  The annual premium for a family under that option for 2009 was $13,445.64.  (The employer share was $9,166.56. ) 

Or maybe there will be some hybrid Medicare/FEHB plan with Medicare’s lower relative administrative costs and lower provider allowances.  Maybe a $10,000 annual family premium could be imagined (if not necessarily achieved). Defer a decision on which of those premiums is more likely to be achievable. How much will be charged to covered families?

The public plan advocates suggest there will be otherwise unspecified subsidies — that will help the uninsured poor. The opponents assume there will be otherwise unspecified excessive subsidies — to crowd out the bulk of existing private insurance plans. If there were no subsidies, even in the $10,000 family policy range, would there be much take-up by the uninsured?  This situation is akin to pre-stimulus-plan COBRA where enrollees pay the full cost.  Take-up for COBRA most recently was 27%, and those patients/families exhibited covered medical expenses equal to 145% of the expenses of pool members who remain employed and insured. Maybe 10-12 million uninsured people would elect coverage just given the new option. 

But clearly there would be a continuing trade-off: greater and greater subsidies would increase take-up by the uninsured while increasing the public costs of the program. On the other hand, one might also expect declining acceptance of paying for the otherwise deserving poor on the part of currently privately insured families whose taxes would be used for those subsidies. Some polls do suggest that some people would be willing to pay more in taxes to extend insurance coverage. None of the proponents of a public option have demonstrated that the currently insured with employment-based coverage would be willing to pay sufficient taxes to cover the bulk of the currently uninsured. 

To my knowledge, no one has plotted the tipping point where those who have employer-based insurance would switch to the public plan to at least cash in on the public plan while also trading in their current employment-based health benefits for other fringes.  (The initial CBO review of the House Democratic plan suggests a 2014 per-enrollee average subsidy of $4,600. It’s not clear whether that would translate into a family subsidy of $10,000 or more. The Joint Committee on Taxation reported that the average subsidies per filed personal income tax return in 2008 were $2,868.)

The costs to be incurred by those with employer-based insurance who might want to elect a public plan option are a doubly open question.  The last Kaiser Family Foundation/Health Research and Educational Trust (HRET) survey indicated that 85% of employers offering health benefits offered one plan only. Those employers represent 48% of workers with employer coverage. The only health benefits choice those workers now have is take it or leave it. Adding a second choice would not be costless for those employers, especially if the new second choice were a multiple choice within a health insurance exchange. This does not have to be a major new expense, but it would be a new expense for those employers. 

Then there is the second question of how to convey health benefits to workers who select a plan outside the employer’s chosen source of coverage.  The simplest option would be to have employers cash out their health benefits programs á la Wyden-Bennett. Unfortunately, a simple cashing out would cascade into additional payroll taxes for both employers and employees, and federal and perhaps state income taxes for employees only. Any potential savings from the public plan could be more than wiped out by increased tax obligations. Pointy-headed economists believe that employees bear the full burden of payroll taxes, but in the short run the law could impose additional annual employer payroll tax contributions of $500-$1,000 per worker.  To retain the tax exclusions on employer health benefit costs would require legislative and other regulatory changes with respect to the IRS and perhaps also the Employee Retirement Income Security Act (ERISA).  (Employers might also face additional per worker costs if health insurers’ minimum participation requirements were breached by crowd-out to the public plan.)  These issues are not irresolvable, but so far they have been assumed away and are only just becoming part of the public plan dialogue

What will be the locus or locuses of competition between the public plan and private plans?

President Obama has become fond of the mantra that a public plan will reduce costs because competition with a public plan will keep insurance plans “honest.”  That’s not an impossible outcome, but it really depends on the venue for competition. As it happens, most health insurers are not competing for individual patients/families; they are competing for employment-based insurance contracts with employers. Their buyers are not individual patients but rather are HR personnel who primarily are looking for low prices. If a public plan or plans only competed in the individual insurance market, would that change competition in the group markets?  If the public plan or plans had to compete for group contracts, wouldn’t it (they) have to incur marketing costs whose absence allegedly is the hallmark of low administrative costs for a public plan?  In fact, even if public plans only competed for individual/family contracts, wouldn’t there be administrative costs not commonly incurred by Medicare or Medicaid? Again, a question is unresolved: where is this competition going to occur? Will it be based on price alone?  Who exactly will benefit from that competition?

Will there be sufficient providers to willingly (or not) provide services under the public plan?

While there may be many willing buyers of public plan coverage, who actually will provide covered health care services? As it happens, hospitals are literally locked into the ground. It is unlikely that many hospitals could avoid participating in a public plan option. Physicians, however, have more options. While Medicare Part B is the largest single payer for physician services, according to the National Health Accounts Medicare represented 20 percent of physicians’ gross revenue in 2007.   Previous studies by the Medicare Payment Advisory Commission (MedPAC) have demonstrated that private insurance fees for physicians are 20-30 percent higher than Medicare allowances. Therefore, Medicare may only be 17 percent of physicians’ net income, on average. 

Even this average is potentially misleading. Earlier analyses of the distribution of payments under Part B have shown that physicians’ involvement in Part B is very skewed even within individual physician specialties. For each of the nearly 100 specialties, about 10 percent of physician practices provide 50 percent of Medicare’s volume. And within each specialty, about half of the practices in total provide perhaps 10 percent of total volume.  Most physicians do have some Medicare patients, but the bulk of Medicare physician services are provided by a relatively small number of practices.  For most practices, the net revenues from Part B may be 5 percent or less of net revenues. 

Assuming that is still the case, could a public plan paying Medicare allowances expect to rely on the current stock of physicians to serve public plan subscribers? If the public plan offered docs Medicare allowances only, the answer could well be no.  Even if a public plan offered Medicare plus 10 percent, that would amount to private fees less 10 percent (or maybe less).

If participation in the public plan were required of physicians currently providing care to Medicare patients, it would make financial sense for many of those physicians to drop their current Part B caseloads.  The lessons from the early Part B reimbursement research were that physician involvement was positively associated with the ratio of Medicare allowances to private market fees. There is no reason that this result should not apply to participation in any new public plans. (The House Democratic proposal appears to include a Medicare plus 5 percent pay level plus a mandate for physicians seeing Medicare and/or Medicaid patients to also accept public plan patients.)

Will there be sufficient physicians to provide services under a public plan?  Without subsidies for the costs of coverage, public plan enrollment might not be overwhelming, and voluntary participation by docs might prove sufficient.  However, the prospect that physicians might wind up treating their currently privately insured patients under a public plan for allowances 10 to 20 percent lower than current private fees might dissuade many physicians from volunteering for participation in that plan.  And if forced to choose between requiring physicians to participate in a public plan in order to keep their existing Medicare and Medicaid patients, it would make financial sense for many docs to walk away from their involvement in CMS programs.  (This would be especially relevant if the sustainable growth rate, or SGR, situation is not resolved.  Arguably, private insurer allowances have already equilibrated with Medicare allowances to maintain a sufficient supply of physician services for subscribers. Contingent on sufficient ultimate public plan demand, insurers might try to apply additional downward pressures on private allowances.)

Thus, it is possible that significantly lower physician costs might not be available to a public plan.  Would there be sufficient other cost reductions to keep a public plan competitive?  The common argument is that a public plan would have much lower administrative costs (and those lower costs would provide an incentive for private insurers to restrain if not reverse administrative cost growth).

 Will there be administrative (or other) savings?

The differences in definitions of administrative costs may exaggerate actual differences between Medicare and private health insurance efficiencies.  But another major factor in apparent administrative cost differences has to do with the different populations insured under the two types of plans. Medicare, simply, pays much larger average bills. More than 20 percent of Medicare patients will be hospitalized in any one year.  For private health insurance, the hospitalization rate is somewhat less than half that number.  Specifically, in 2007, 46 percent of Medicare expenditures were for hospital costs.  With respect to private health costs, 28 percent went to hospitals.

Processing costs per claim won’t be very much different, but administrative costs relative to benefit payments have to be much smaller for Medicare compared to private insurance.  As it happens, under private policies approximately 72 percent of covered health costs are paid through insurance; the comparable Medicare statistic is 79 percent. 

Medicare also retains other administrative advantages not available to private health insurance.  There are no family policies; for the most part, enrollment is a one-time event; for the most part, there are no births; there are very few out-of-area benefits to worry about; physicians are required to bill Medicare carriers directly, so there are no patient-submitted bills; the Treasury Department and the Social Security Administration handle collection of payments and distribution of funds, etc.  Not all of those advantages may be available to the administrators of a public plan.

In Creating A Public Plan, The Details Matter

A public plan is not out of the question, but actually implementing such a plan remains a genuine concern. The public plan proponents have focused on potential advantages without paying as much attention to the question of how and whether such advantages can be achieved.  The opponents of the public plan similarly take advantage of the disconnect between today’s actual practices and the imagined future ones to highlight that there has been no convincing map presented for getting the country from where it is to where it might be taken. 

The initial onus rests with the public plan proponents: spell it out so the rest of us can follow the money.  At that point, there will undoubtedly be some obvious warts, but with a good plan, those warts can be dealt with.  Hand-waving except for small children has never been very persuasive.  From all accounts, the public plan proponents can do much better.

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1 Response to “Parsing Public Plan Proposals”

  1. iBlogWestHartford Says:

    The most important part of health care reform is winning – without giving away the store, the farm, the house, and three of the four kids. And WITH a strong public plan.

    We just did it in Connecticut. With tremendous grass-roots support, we took on the insurance industry and the Republican Party and our own governor and we won. So it can be done.

    On July 20th, our state House and Senate successfully overrode Republican Governor Rell’s veto of the SustiNet health care reform plan – one of the most ambitious plans for universal health care anywhere. The SustiNet law mandates the creation of a nine member committee to be known as the SustiNet Board. The board, co-chaired by State comptroller Nancy Wyman and State Healthcare Advocate Kevin Lembo, will lay out the steps for implementing a plan to provide health insurance to the state’s 325,000 uninsured and to broaden the range of insurance options available to employers.

    The centerpiece of SustiNet involves making the state employees plan self-insured, then opening it up (with quality care and sliding-scale affordable rates) to: the uninsured; Medicaid recipients; small business employees; nonprofit employees; municipalities; and individuals who have unaffordable or inadequate employee –sponsored plans.

    According to health economists Jonathan Gruber of MIT and Stan Dorn of the Urban Institute, SustiNet will return $2.80 to employers and employees for every dollar invested by the state.

    In the insurance capital of the country, with a Republican Governor, a broad-based coalition of small business owners, providers, faith leaders, union leaders, health care advocates and other stake holders beat the odds.

    If we can do it here, you can do it there.

    More about SustiNet is at: http://www.healthcare4every1.org.

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