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One of the things that often gets missed on the debate around policies is the interaction between policies. Christina Romer mentioned this a bit in our interview, but CAP's Igor Volsky expands on the idea today.

Take two policies currently at the forefront of the health reform debate: Creating a public plan and giving the Medicare Payment Advisory Commission more authority to institute reforms in Medicare. "If MedPAC is identifying payment reforms that would lower health care spending," writes Volsky, "then the public health option could transfer those methods into the private insurance market by itself adopting these efficiencies and (through the miracle of competition) coax private insurers to do the same."

Right. In a world where you just have the MedPAC policy, you can be pretty sure Medicare will experience some cost-saving reforms. There's fair evidence that those reforms will then filter out into the private insurance market. But maybe they won't. There's no direct method of transmission or competition. After all, Medicare ensures most all people over 65. If Aetna doesn't want to institute a particular policy change, it's not as if they'll lose their 40-year-olds to Medicare.

But if a public insurance option is instituting those reforms too, then they're much harder for private insurers to ignore. After all, if they work, then the public insurer becomes cheaper and more attractive, and private insurers must either follow suit or lose customers. The public insurer, in other words, is more important because of the MedPAC policy: It increases its effectiveness. And the MedPAC policy makes more sense in light of the public insurer: It becomes potent outside the walls of Medicare.

Another public plan example comes in the insurance exchanges. There, private insurers will bid to cover people. But I've heard some concern among health wonks that all the insurers could start with bids that they know are too high -- a variant of cartel behavior, basically. With the public plan bidding as well, however, that can't really happen, as a high bid by private insurers would simply make the public plan look cheaper and more attractive in comparison. So that's a case where the public plan makes the health insurance exchange work better.

Which is why it's important that health reform doesn't get indiscriminately picked apart in the legislative process. When you lose a policy, you don't only lose that policy, but you lose the catalytic interactions it has with other policies.

(Photo credit: AP Photo/Charles Dharapak)

By Ezra Klein  |  June 4, 2009; 12:45 PM ET
Categories:  Health Reform  
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Next: Why the Public Plan Is a Fundamentally Conservative Idea

Comments

Captain Planet Reference FTW.

And I don't think that will actually happen. There are a lot of steps between Medicare adopting something and private insurance adopting it. A public plan based of Medicare would make that path more clear, but that type of public plan is the most liberal alternative option out there.

Doesn't mean there won't be a way to incorporate these reforms, or Medpac's advice in general, but I don't think it'll be as direct as you are implying.

Posted by: aaxler1 | June 4, 2009 12:59 PM | Report abuse

How does this work exactly? Which insurance company is refusing to reform, thereby lowering its costs and increasing its bottom line? I thought insurance companies were supposed to be greedy.

Isn't it more likely that MedPac will get into the mandate business, forcing insurance to cover more and more?

Conservatives don't worry that the public plan will be efficient. They worry that the competitive playing field will be anything but level. Far more subtle would be to quasi-nationalize an insurance company (which one might that be?) and make them do what you want. E.g., how TARP banks were forced to go along with the auto bankruptcies.

Posted by: lfstevens | June 4, 2009 5:13 PM | Report abuse

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