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.

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.