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Why A Public Health Insurance Option Is Essential

September 17th, 2009

The biggest flashpoint in the ongoing debate over the future of the U.S. health system is whether Congress should change the balance of power that now favors the private health insurance industry. Opponents of the idea argue that a public health insurance plan competing with private insurers would lead to inferior health care, harm providers, and drive the multibillion dollar for-profit health plans out of the market. Fears of Armageddon are without merit and inconsistent with reality.

The U.S. has a health care crisis created by the private insurance companies that some are so worried about protecting.  Health care costs are out of control, threatening the viability of American businesses and the hopes of millions of American families. More than 47 million Americans are uninsured, and according to Consumer Reports, as many as 70 million more have insurance that doesn’t really protect them.  In the past six years alone, health insurance premiums have increased by more than 87 percent, rising four times faster than the average American’s wages, according to a Kaiser Family Foundation report.  American families in the lowest income group spend 20 percent of household income on health insurance.  Health care costs are a substantial cause of three of five personal bankruptcies.

The Broken Health Insurance Market

While opponents of a public insurance plan proclaim their fealty to consumer choice and honest competition, any who dare to take the economic temperature of the existing health insurance marketplace would find few markets so clearly lacking in them. Health insurance markets are extraordinarily consolidated at the state and local level, according to the American Medical Association. In 39 states two insurers control at least 50 percent of the market, and in nine states a single firm controls at least 75 percent of the market, the AMA found. In 2007 the group reported that almost 95 percent of more than 300 metropolitan areas are highly concentrated.

What has been the result of this lack of competition?  Rapidly increasing premiums, declining service and escalating profits.  As noted above, health insurance premiums have almost doubled in the past seven years, while the number of uninsured has escalated. Without significant reform, this situation will only worsen:  premiums are expected to rise to nearly a quarter of the median family’s income by 2020

Consumers have suffered while the for-profit insurers have had record profits.    From 2000 to 2007, the 10 largest publicly-traded health insurance companies increased their profits 428 percent, from $2.4 billion to $12.9 billion annually. In addition to profit, the seven largest for-profit insurers boosted their earnings per share by repurchasing $52.4 billion of their own stock from 2003 to 2008—money that could have been spent on improving the health care system or cutting premium rates. These profit margins have come directly out of customers’ pockets in the form of escalating premiums and worsening service. The Congressional Budget Office found that overhead and profit account for 11 percent, on average, of private insurer’s premium revenue.

Moreover, one cannot expect that normal market forces will “correct” the problems in these markets.  In a competitive market, one could expect that entry would occur when dominant firms exercise their market power.  But in health insurance there has been little or no meaningful entry in the past decade into markets that are highly concentrated.  The entry barriers to these markets are substantial:  employers are reluctant to switch plans and information is not transparent making it difficult to compare plan offerings.  The time and cost to switch plans is substantial.  Moreover, dominant insurers make entry all but impossible by locking up providers through most favored nations arrangements or all products clauses that make it difficult for them to facilitate entry by making a more attractive deal with a new entrant.

We cannot hope that antitrust enforcement will correct these problems.  Unfortunately during the Bush Administration there were no federal antitrust or consumer protection actions against health insurers.  None.  During the eight years of regulatory neglect there were almost 400 mergers and the DOJ required only minor restructuring of two mergers.  Certainly there can be efforts to reverse this regulatory neglect in the Obama Administration, but any antitrust action could correct harm in only a single market and would take several years and a substantial dedication of resources.

Moreover, health insurance markets lack the essential elements of a competitive market: choice and transparency.  This is because of the lack of meaningful consumer protection regulation.  The lack of transparency is crucial   Health insurance products are complex and terms are not uniform, making it extremely difficult at best for consumers to meaningfully compare their options. Insurers make special efforts to prevent transparency and information. As Wendell Potter, a former insurance executive, testified before the Senate Commerce Committee, “Insurers make promises they have no intention of keeping, they flout regulations designed to protect consumers, and they make it nearly impossible to understand—or even to obtain—information we need.”

The degree of ongoing harm to consumers is substantial.  In testimony before the Senate Commerce Committee, Consumers’ Union characterized the insurance system as plagued by “a swamp of financial shenanigans”—including a lack of transparency, conflicts of interest, and deceptive practices—and called on regulators and enforcers to step up actions to “prevent egregious consumer ripoffs.” To combat this conduct, State Attorneys General, Insurance Commissioners, and private parties have brought over 50 cases securing potentially over $1 billion in damages and fines since 2000.  Insurers have been found liable or settled charges for a wide variety of fraudulent and deceptive conduct including: utilizing falsified data to calculate reimbursements, refusing to pay for visits to providers erroneously listed as in-network; wrongfully denying claims for sick patients; failing to pay reimbursements in a timely manner; overcharging customers for premiums; refusing to cover emergency treatment; failing to provide notice of rate increases; ignoring customer complaints; and various other similar methods of denying needed care while maximizing profit. There are countless complaints by hospitals and physicians that preapproval provisions prevent them from providing adequate and safe care. 

 This record of countless enforcement actions is all the more remarkable when one considers that self-insured plans – which make up almost half the health insurance industry – are not subject to state regulation and have limited liability in the courts. Even under employer-sponsored plans, insurers regularly employ an arsenal of tools on behalf of employers to deny coverage and shift medical costs to consumers.

No other industry has such a comprehensive record of violating consumer protections. Take the recent scandal involving Ingenix, the UnitedHealth Group Inc. subsidiary that for years ran a database that has been discredited. New York state investigators found that health insurers, including Aetna Inc., Cigna Corp. and WellPoint Inc., contributed to and made use of a system that consistently low-balled reimbursement calculations for out-of-network care by doctors and hospitals. Families paid the difference. A California investigation revealed a common practice in which multiple insurers retroactively canceled policies of patients who developed costly illnesses. The insurers based these many of these decisions on thin allegations that consumers had provided incomplete medical information on their original applications.  

 The Need for a Public Plan

The lack of competition and record of egregious deceptive practices demonstrates the need for a public plan.  A public plan offers the promise of being able to enter these markets currently controlled by monopoly or oligopoly for-profit insurers.  The entry of the public plan, based on a nonprofit model and with greater efficiency and lower costs, will disrupt the cozy life of these dominant insurers.  This will force down premiums in a fashion that antitrust enforcement will never achieve. 

A public plan will be the type of competitive “maverick” in the market that offers the potential to restore competition. Unlike the current for-profit insurers, a public plan does not have the need or incentive to raise and protect its profit margins.  Nor does it have any incentive to flout or manipulate regulations.  Its concerns are not profit, but the public health. 

Moreover, a public plan will set a model of consumer protection compliance, not abuse.  With a public plan, the rival insurers will not be able to compete down the level of consumer protections or engage in collusive practices to harm consumers, such as the Ingenix example.  Rather, the public plan will serve as a model of consumer protection compliance.  The marketplace will then compel rival insurers to meet those standards or face the potential loss of consumers.  As President Obama put it, the check of a public plan would keep health insurers “honest.”

Overall, competition from a public plan would force insurers to respond to market forces, reducing prices and improving consumer protections.  Those who survive the competitive battle will be those with reasonable premiums and superior customer service.  As the Urban Institute puts it, “Incentives for them to innovate in the areas of cost containment and service delivery will be enhanced by the presence of a well-run and effective public plan.” 

The Misplaced Criticism of the Public Plan

Health insurers decry the emergence of the public plan.  That is not surprising.  No competitor likes competition, especially when they are able to exercise market power, avoid regulation, and reap supracompetitive profits.  To counter competition, the opponents suggest that competition with the public plan will ultimately lead to the demise of the private health insurance market.  Their arguments are inconsistent with the economic realities of these markets. 

The public plan opponents argue that Americans normally don’t respond to lack of competition by creating a government-run entity, such as a grocery store or a gas station. But those aren’t oligopoly markets with high entry barriers in which prices and profits have escalated rapidly.  Besides, health care is a different kind of marketplace. As a society we have an obligation to make sure people have access to affordable health care.  Moreover, grocery and gas station businesses are essentially transparent, unlike the health insurance business, whose customers do not know what their premium dollars will get them. The primary goal of for-profit insurance companies is to make money for their shareholders. Because they have successfully shielded their coverage rules and policies from public inspection by labeling them trade secrets, they can use egregious practices to deny coverage with inadequate accountability.  

The opponents also suggest that the public plan will drive its rivals from the market, perhaps through predatory conduct.  This claim is simply inconsistent with the strong position of these powerful dominant health insurers.  The major health for-profit health insurers – United, Aetna, Cigna, Wellpoint, Humana, and others — have tremendous financial reserves.  In addition, as publicly traded companies they can call on the market for even greater financial support.  The nonprofit Blue Cross firms, which dominate dozens of markets, have tremendous financial reserves.   Simply, these firms are not about to be driven from the market by the emergence of a public plan.

Insurance companies complain that the proposed public health insurance plan will have unfair advantages and drive them from the market. These claims bear little relation to market realities. These firms are well-funded, sophisticated, and endowed with tremendous financial and human resources. As a former federal antitrust enforcement official, I know that they complain for the reason every competitor complains when a new rival arises – competitors never like competition.

Opponents of a public plan suggest that a plan will become too powerful and will exercise concentrated buying power that will hurt the quality of care.  Unlike for-profit firms, a public plan has no incentive to cut corners and prevent providers from giving their patients quality evidence-based care, because its ultimate goal is public health, not private profit. Nor does it have any interest in sideswiping regulations and shortchanging consumers.  Free market proponents argue that private health insurers should be lightly regulated to give Americans the best value. We have seen the results of that sort of regulatory neglect in many industries in the past eight years; the harm to all Americans, businesses and the overall economy could not be more profound.

Lawmakers from both sides of the aisle in Congress should recognize that there is no way to achieve meaningful health reform that does not include substantial structural and regulatory changes.  Initiating health care reform in the existing environment will not work without a component, such as a public health insurance plan, that revives genuine competition by offering Americans a meaningful choice and setting benchmarks on costs, service and consumer protection.  Incremental reforms without this essential component will be smothered by dominant health insurers that have decades of experience manipulating the market.

Editor’s Note: For another view on the public option, see this article published earlier this week by Health Affairs.

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2 Responses to “Why A Public Health Insurance Option Is Essential”

  1. James Says:

    Implications of a Government-Run Health Plan

    The administration’s strategy to sell health care reform to the country has shifted from emphasizing health care reform to selling health insurance reform. President Obama and the House leadership insist that a government-run option is essential to ensure competition in the health insurance market. Sounds credible – more options, more choice, more efficiency, better health care. Others argue that a government option is merely the first step toward the ultimate goal of a single-payer system. So, how will a government plan affect the health insurance market?
    For a government plan modeled after Medicare to be competitive, either it must be more efficient or it must have certain advantages over its private rivals. Will a government plan be more efficient than its private counterparts? Last week the president brought us the US Postal Service as an example of a government agency competing against private firms. How well does the Post Office fare against FedEx and UPS? On July 28, the Government Accountability Office placed the Post Office on its High-Risk List of federal agencies in need of transformation due primarily to a projected operating deficit of $7 billion in 2009.
    Is delivering the mail different from delivering health care? Our best evidence concerning the operation of a government-run health plan is Medicare. Administrative cost for private health plans averages around 8-10 percent of revenue. Advocates claim that Medicare costs are lower, in the range of 2-3 percent. Why are Medicare’s administrative costs so much lower? First of all, Medicare does not have a capital reserve. Private plans are required by law to have reserves in the event that their spending exceeds revenues, but Medicare relies on the taxpayers to make up any difference between revenues and expenditures (as taxpayers now are). Secondly, Medicare does not spend money to establish provider networks. Any provider willing to accept Medicare patients is in the network. In addition, Medicare spends little to combat fraud and abuse. In four of the past five years, Congress has refused to fund requests to expand the audit powers of the program. As a result the improper payment rate for the two government health programs, Medicare and Medicaid, are 7.6 and 10.5 percent, respectively. Properly accounted for, private research indicates that Medicare’s true costs are no different than for private insurance.
    If a government plan is not more efficient, what advantages will it have? The government plan will not need to negotiate payment rates. It will set them legislatively. In its analysis of the current House bill, the Lewin Group, an independent health care consulting firm, argues that a government plan would pay providers much less than private plans for the same services. They estimate that hospitals would receive 68 percent and physicians 81 percent of what private insurers pay. (Physicians who agree to see both Medicare and government plan patients would receive 86 percent.) With lower reimbursement rates, premiums for government plan enrollees will be 20-25 percent lower.
    The president has repeatedly said that if you like your private insurance, you can keep it. For many the reality is quite different. Many private employers will drop their private plans leaving their employees no choice. The Lewin Group (2009) estimates that one-third of Americans will be enrolled in the government plan, whereas only 28.8 percent will remain in private plans (down from 55.7 percent). And those who keep their private insurance will pay higher premiums. The 38.5 percent of hospital patients who have private insurance are charged 22 percent more than the cost of the care they receive to make up for the losses on the care hospitals provide to the uninsured and enrollees in the various government insurance programs. A government option available to everyone will substantially increase below-cost care. To cover the losses, private insurance patients will have to pay 35 percent over the cost of their care for hospitals to remain financially viable. In other words, private plans will be forced to raise their premiums by as much as 10 percent starting a death spiral with fewer and fewer Americans covered by private plans.
    To avoid this scenario, some suggest health insurance cooperatives. If the government provides the start-up funding, does not require them to maintain an adequate capital reserve, sets reimbursement rates to providers, and forces providers to accept co-op enrollees, the co-op is no different than the government plan. Many in the left wing of the Democrat Party have agreed to co-ops in principle because they feel that there is no difference between co-ops and the government plan in practice. If co-ops receive no special government favors, then why advocate them over private co-ops?
    The private health insurance market has its inefficiencies. Pre-existing condition exclusions are the most notable. But this problem was created by government involvement that expanded employer-provided insurance. Solving this market imperfection does not require a government-run system. The standard term life insurance has level premiums regardless of health status because these policies are sold with guaranteed renewability features. Health insurance can be provided the same way.
    In sum, reforming the health insurance industry is essential if we are to increase coverage and improve access. But the implications of a government option are detrimental to many Americans who currently receive their coverage through private plans.

  2. dkberry Says:

    Insurance isn’t the root cause of the health care dilemma as public plan proponents want Americans to believe. The cause is misalligned reimbursement systems developed by that bureaucratic bastion … CMS … and the Administration’s buddy … the AMA.

    CMS’ FFS misalligned reimbursement program coupled with AMA’s RUC finagling … results in the government only paying 50 – 80% of their health care bills… forcing providers to eat some of the under and slow payment … and shift a like amount to private plans so they can survive.

    This same evil is the cause for the decapitation of America’s primary care system but Administration public plan proponents don’t want to address CMS failures. To them across the board reimbursement cuts to created head room for providing public coverage puts the burden on providers and those who will lose services when capacity dies some more.

    If in … “39 states two insurers control at least 50 percent of the market, and in nine states a single firm controls at least 75 percent … then the easy answer is to open up the borders and sell policies across state lines. Get rid of all those junky minimum requirements that state legislatures insist are necessary but fail to deliver value… just cost.

    Simple as that … sell cross state borders … and kill FFS. Make the government pay its bills like everyone else. Done.

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