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The Public Plan Is Not the Same Thing as Cost Control

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This will not be a popular post, I fear. But one of the themes I'm seeing in a lot of the commentary is that the absence of a public plan is essentially equivalent to the absence of cost control, and the presence of a public plan is pretty much the presence of cost control. For the public plans on the table, that's not true, at least not in any way I can see.

You can control costs in one of three ways: use less treatment, need less treatment, or pay less for treatment. The theory of the public plan rested on paying less for treatment, as Medicare does (though it's important to note that Medicare's costs are still rising at a totally unsustainable rate, albeit a slightly less unsustainable rate than private insurance). The problem is that the public plan no longer has the attributes that permit Medicare to pay less for treatment.

The strongest public plan on offer is in the bill being considered by the House of Representatives. This plan is limited to the health insurance exchanges, which are in turn limited to employers with fewer than 20 workers. So that's the first point: The vast majority of Americans would be ineligible for the public plan, even if they wanted it. The CBO estimates that by 2019, the public plan would have a likely enrollment of 10 million Americans — and that estimate (pdf) imagines a world in which the exchanges are opened to businesses with 50 or fewer employees, which is to say, it's more favorable than the actual bill.

The end result is that the public plan is unlikely to have a very large customer base, which means it will be unable to use market share to bargain prices far lower than private insurers. That might not matter if the plan could attach itself to the rates that Medicare uses. In the first draft of the House bill, the plan could do that, at least for its first three or four years of existence, after which point it was cut loose from Medicare. But the deal Henry Waxman cut with the Blue Dogs erased that advantage, and now the public plan, even in the House bill, is on its own. That is to say, the plan has neither Medicare bargaining power nor the sort of customer base that gave Medicare its bargaining power.

Is that an argument against the public plan? Nope. There are real advantages to the presence of a public alternative. Competition matters, for one thing, and there are a lot of states where one or two private insurers essentially control the market. Experimentation matters, too, and the public plan could be used alongside Medicare to test payment reforms and disease management programs that could pay off in the long run. The public plan could also usher in a fairly radical level of transparency in pricing and behavior, forcing private insurers to follow suit. And lastly, the public plan is something of a corporate accountability measure. Its presence in the market ensures that health-care reform won't simply be a large reward to the insurance companies absent any serious changes in their behavior.

These were the original arguments for the public plan, and they're as strong today as they were then. But they are not the same as cost control. Cost control happens when we use less treatment, need less treatment, or pay less for treatment, and the public plans under consideration don't really do any of those things. In fact, the bills under consideration don't do any of those things, though I think they're a useful first step. This step in health-care reform is largely about expanding coverage and creating a structure — with universality and the exchanges and so forth — that will make cost control easier down the road. None of the bills, on their own, really do all that much to control costs.

Photo credit: By Matt Rourke — Associated Press

By Ezra Klein  |  September 8, 2009; 11:25 AM ET
Categories:  Health Reform  
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Comments


yeah man, but treatment costs and plan costs are different things; and if you set up a mechanism to decrease treatment costs, and no mechanism to decrease plan costs, plan costs will just go up as you decrease treatment costs.

I agree that the public plan isn't the 'only' way to reduce plan costs (regulations can achieve that also, if awkwardly), but it's a very good way.

Another potential side effect of addressing treatment costs without addressing plan costs is the eventual reduction of the benefit package to becoming more of a catastrophic coverage package.

If you only squeese one side of this the other just rises.

Posted by: ThomasEN | September 8, 2009 12:00 PM | Report abuse

isn't there an inherent problem Ezra when you know a post won't be popular and you have to specify it as that?

To me the best solution to the cost issue (which should be central to everyone's focus and it seems to be Ezra's as well) is a trigger option with a robust public plan.

Let the insurers be the bad guy. Most of you seem to feed your anger off of them being the bad guys anyway. They'll go back to the 90's style of healthcare and they'll do the rationing in a style that will be highly regulated by the government.

The stronger the public plan, the less likely the trigger ends up being used (because insurers would never let it come to that similar to the Medicare Part D trigger) and in turn the start up costs of a public plan (bringing about most of the costs of reform) are never realized.

Win/Win.

Posted by: visionbrkr | September 8, 2009 12:07 PM | Report abuse

The public plan and the healthcare exchange need to be there from the beginning.

Why?

Because they are both good ideas that would be hard to get through alone w/o the insurance reforms.

They will control costs, relatively modestly, at first.

However, I would expect them to become extremely popular with those small businesses.

Once the popularity becomes known, the exchanges could be expanded.

More people buy into the public option, it increases its' negotiating power, etc.

I am amazed at how short sighted the current post is. You've got to look beyond 3 years if you want a good healthcare reform bill.

Posted by: PorkBelly | September 8, 2009 12:08 PM | Report abuse

What about the lower administrative costs?

Posted by: bluegrass1 | September 8, 2009 12:11 PM | Report abuse

Dammit Ezra. I think you're missing the point: those of us who insist on a public plan do so because we do not trust the insurance companies.

We don't want an abstract system of "cost control." We want to force the insurance companies to drop their rates significantly--through the magic of competition.

Posted by: andgarden | September 8, 2009 12:15 PM | Report abuse

The post was popular with me. :)

A couple of thoughts:

-- I THINK that you've got the technicalities a little off on the public plan in the original House bill. While the rates for the first three years were going to be the "same" as Medicare, the House already had negotiated with the AMA to allow for an "opt-out" participation clause on the public option. Without mandatory participation (if you want Medicare patients, then you have to accept the public option), the legislated rates in the House bill sort of didn't matter. As you noted, without sufficient market share, and sub-standard/Medicare rates, physicians likely would have opted-out en masse. Unless of course, the HHS Secretary used the discretion granted to modify rates as needed, which IIRC, was also part of the bill. Meaning, that in practice, the rates were going to be up for negotiation anyways, or the public option would potentially not have had sufficient providers in its network. The AMA understood all of that, which is why the offered their support in exchange for the opt-out clause.

-- It'd be great to see some analysis on the legislative leeway provided by the legislation to HHS. In terms of the public option, my untrained eye reads that a number of key assumptions in the CBO analysis could be changed by HHS administratively-- such as what groups are allowed to participate after X number of years.

-- On your general arguments for a public plan-- they don't hold a lot of water. The first two, experimentation and transparency, could both be pushed via Medicare already. Adding an incremental number of covered lives via a public option doesn't materially change the government's ability to do this from a market share perspective. In terms of transparency, the government already has sufficient regulatory power to push greater transparency if it wanted. On corporate accountability-- two thoughts. One, its not clear to me what metrics insurance companies are being "checked" on with a public option. Is it cost? No one thinks anything has materially changed on cost control, so that would be a fake argument. Is it guaranteed issue/risk rating type of issues? Then why isn't regulatory oversight sufficient?

-- Finally, cost control is about political and societal will. While there are incremental improvements in the structure (e.g. comparative effectiveness), if we wanted cost control in this round of legislation, we could have it. We don't NEED this legislation first in order to effect cost control.

Posted by: wisewon | September 8, 2009 12:19 PM | Report abuse

"yeah man, but treatment costs and plan costs are different things; and if you set up a mechanism to decrease treatment costs, and no mechanism to decrease plan costs, plan costs will just go up as you decrease treatment costs."

Not if you mandate a minimum percentage of premiums being spent on medical care.

Posted by: wisewon | September 8, 2009 12:21 PM | Report abuse

Your position seems to be in line with that of Mark Warner (D-VA) in that "None of the bills, on their own, really do all that much to control costs." Warner is unique in that he has a very liberal social agenda, but is also both a very astute businessman and an able politician (and will admit to attending at least one frat keg party).

I'm not willing to say, though, that a bill that doesn't control costs should be passed with the hope that it and the financial problems it creates can somehow be "fixed" later. That sort of thinking with regard to Medicare, coupled with some bad de-regulation and flawed court decisions, is part of what's gotten us into the mess we're in.

Posted by: rmgregory | September 8, 2009 12:22 PM | Report abuse

"None of the bills, on their own, really do all that much to control costs."

True. But neither did the Massachusetts reform. And yet today, there is only one state where the leaders are sitting down and getting serious about reining in health care costs without compromising quality. Where there is serious discussion of re-aligining incentives in a meaningful way.

Just saying this all follows a very predictable path.

Posted by: member8 | September 8, 2009 12:25 PM | Report abuse

This is why, in the spirit of not squandering an opportunity, taking what you can get, and getting the ball rolling, a triggered public option makes sense and the PRogressive Caucus needs to relax a bit and the Blue Dogs need to grow a pair and back it. I believe, that unless the trigger is set very loose, the industry will not be able to meet it (though if they can, great) and we will end up with a robust public option in 5-7 years.

Posted by: scott1959 | September 8, 2009 12:28 PM | Report abuse

scott,

actuaries would disagree that the cost can't be met. You can always get the cost down. Its just a matter of what gets cut from it as far as utilization goes. You need to look at states that have medical loss ratios and see how often they get paid out. Its a fairly low number and actuaries are getting better and better at estimating the cost. They'll be a "bump" in the beginning whenever pre-ex ends, but they'll get up to speed with cost control fairly quickly i suspect.

Posted by: visionbrkr | September 8, 2009 12:38 PM | Report abuse

You can control costs in one of three ways: use less treatment, need less treatment, or pay less for treatment.

Ezra has missed (I think) the fourth way to control costs: eliminate much of the unproductive administrative costs, marketing costs, underwriting costs, and profit costs from private insurance plans.

But these savings in costs can only be realized if employers of more than 20 people can buy into the program.

Hence the problem is the backroom limits being put on the public option such that it doesn't offer real competition from private insurance plans for larger employers. It is in many ways, a public option in name only.

BTW: a very large portion of large companies are self-insured. They pay a private firm to administer their plans (Blue Cross or United Health), but the risks (actual medical costs) are carried by the employer. I have not read anything that indicate how these self-insurers would be affected by any of the proposed reforms, including the public option (if it were broadened to include all potential employers).

Bottom Line: we are fighting over a public option that is toothless and a tough steak is on the plate. This 20 employee limit is stupid. It makes you wonder how the Dems can pretend that it makes a difference whether the public option is included or not. There is almost no there, there.

Posted by: JimPortlandOR | September 8, 2009 1:06 PM | Report abuse

visionbrkr sez: "To me the best solution to the cost issue (which should be central to everyone's focus and it seems to be Ezra's as well) is a trigger option with a robust public plan."

The 'trigger option' is just a smokescreen to make people think that their desired choice (read the polls!) is being offered or will be 'some day'.

We already know that private insurers haven't controlled costs. We have decades of experience behind us to show those facts. Why give them yet another turn at bat when they've been striking out, over and over? We aren't starting health insurance from ground zero.

It is a hard fact: we can't control costs with any plan that preserves the profits and management compensation of insurance companies and drug companies and also compensates providers better than Medicare already does. By what mechanism are we going to shift from paying for the parts of an automobile one by one to a system where the payment depends on the outcomes (does the car run?)

Posted by: JimPortlandOR | September 8, 2009 1:20 PM | Report abuse

Many people advocating Single Payer seem to miss this basic math also:

A one-time transition to Single-Payer would cut administrative costs and could save as much as 15%-20% on health care costs....

But health care *inflation* is a year after year *trend*.

So the math says that Single Payer, much less a public insurance plan -- neither will control long term health care cost inflation. They would only delay the effect a couple of years.

Instead we need more fundamental reform:

http://findingourdream.blogspot.com/2009/06/new-way-to-hold-down-health-care-costs.html

Posted by: jozzer | September 8, 2009 1:27 PM | Report abuse

"Ezra has missed (I think) the fourth way to control costs: eliminate much of the unproductive administrative costs, marketing costs, underwriting costs, and profit costs from private insurance plans."

No, that does not control costs. It buys you a couple years.

Posted by: ab13 | September 8, 2009 1:31 PM | Report abuse

Hi Ezra,

To be frank, I think your post is a little patronizing. I doubt any progressive wonks here are unaware that compromises by Schumer and Waxman significantly kneecapped the public options potential to control costs. But lets not dismiss the fact that the potential is there.

Surely there are altenative ways to control costs without a public option, such as mandating that a certain minimum percentage of premium payments go to actual care versus profit of administration. I can understand your and President Obama's frustration with those who have reduced a significant reform package down to a single component.

That said, I think the biggest appeal of the public option no matter how watered down it is, is this: It is much easier to change a policy down the line (say relaxing the percentage of premium payments used for care) than it is to kill a program. I think the fears of many progressives is that any regulations put in place could be systematically dismantled down the road just as the finacial regulations were.

Posted by: brooklynpsu | September 8, 2009 1:34 PM | Report abuse

Jim,

you misinterpret why MOST that want the public option actually want it(its to reduce cost). Its not to "get back" at an insurer (which may be your reason??) but its to control costs. You can cyphon off most of the insurers profits which these plans mainly do and that's fine.

But when you cyphon off doctors profits wouldn't many rather become other professionals? (engineers, financial planners, lawyers) When you take away hospitals profits (by the way an average margin of around 2%) then hospitals will close. Ya maybe some will file for bankruptcy protection but some won't.

When you cyphon off pharma's profits how is innovation affected?

Using your example if you don't have a mechanic then how good is your car when it breaks down?

Also everyone knows that the driver in cost is utilization. You can blame insurers, doctors, hospitals, pharma and everyone else but Medicare but utilization is what drives cost. Get utilization down through safe, effective, goverment approved ways and then costs will come down.

Also in most cases ERISA based plans (your large self employed example) are exempt from mandates although I expect that hasn't been determined yet and you'll get big business railing against you if you try to make it not exempt. ALso many large employers reinsure over a set amount based upon their employee base so they're not carrying all the risk.

Posted by: visionbrkr | September 8, 2009 1:36 PM | Report abuse

A not-for-profit price maker in a regulated insurance market may or may nor control the costs of the things insured. But it clearly will control the costs of the insurance.

When government mandated purchases and government subsidies are included, a market that only has for-profit participants has strong "win-win" solutions - even without direct collusion - in which the participants ratchet up prices. These oligopoly outcomes approach monopoly results are due to the fact that in the face of inelastic demand, price increases will substantially increase the total flow of income through the market.

The existence of a not-for-profit baseline option changes the game dramatically, increasing the elasticity of demand for the for-profit insurance and therefore reducing the incentive to engage on oligopolistic games that approach a monopolistic outcome.

It also contributes to some important medical service cost control measures, for example by providing public treatment and outcome data for large numbers of adult patients below the age of 65 ... and, yes, those cost savings are only realized if they are exercised.

But for insurance costs, it is absurd to claim that there is no cost benefit from having a not-for-profit price maker in the market.

Obviously there are a variety of ways that this price maker offering can be structured, and just as obviously, what the health insurance companies are fighting for is to make sure that no effective not-for-profit price maker is present.

Posted by: BruceMcF | September 8, 2009 1:46 PM | Report abuse

Surely there are altenative ways to control costs without a public option, such as mandating that a certain minimum percentage of premium payments go to actual care versus profit of administration. I can understand your and President Obama's frustration with those who have reduced a significant reform package down to a single component.

Posted by: brooklynpsu | September 8, 2009 1:34 PM | Report abuse


If you read any of the bills you'd know that there is that wording in the legislation. Each piece of legislation has an 85% medical loss ratio. For every dollar in premium that comes in, 85 cents MUST go back out in claims otherwise insurers must refund policyholders. That's what a medical loss ratio is.

Posted by: visionbrkr | September 8, 2009 1:53 PM | Report abuse

Ezra wrote: Experimentation matters, too, and the public plan could be used alongside Medicare to test payment reforms and disease management programs that could pay off in the long run. --

There are your cost cutters, they just happen further out than we want them to. That's a problem, but unless we find people willing to see their ox gored for the greater good, we aren't going to get to cost cutting sooner than market forces (established by the competitive presence of a public plan) and comparative effectiveness studies allow.

But this is such a silly discussion to still be having. We know that costs have to come down. We know that doing that will take time. So, if we don't have that time (and I'm not sure that's the case but I'll stipulate that it is) then we need money from outside the healthcare system. Luckily for us, we live in the richest country in the world so we know that the money exists. It exists in the military budget for sure. It exists in marginally higher taxes - defining taxes loosely enough to include closing loopholes and lowering charitable deduction rates. It exists in an economic recovery that will raise revenue. It's out there and if we have to tap those sources because we would rather to continue to allow the insurance, hospital, pharmaceutical and biotech industries to have the run of the economy, then that's what we'll have to do.

Posted by: eRobin1 | September 8, 2009 2:23 PM | Report abuse

"But one of the themes I'm seeing in a lot of the commentary is that the absence of a public plan is essentially equivalent to the absence of cost control, and the presence of a public plan is pretty much the presence of cost control."

But one of the themes I'm seeing in a lot of the commentary is straw men. No kidding a public option isn't the only way to reduce cost control. Is there anyone who's paying attention who thinks that? We're spending way more than any other major nation (e.g. ~2.5x per capita compared to UK and Japan) to get comparable, arguably inferior results (e.g. if you look at PYLL we're at the bottom of the heap among major countries). There's a lot of ways to reduce costs.

Nonetheless, a public option -- especially a robust public option -- would be an excellent move that would reduce costs.

Posted by: crust1 | September 8, 2009 2:27 PM | Report abuse

I understand that the bills under consideration contain a different methods to control costs including varios forms of the public option (excluding Baucus) and regulating medical loss ratios among others.

My point was that medical loss ratio regulations are easier to dismantle/eliminate without generating a public backlash than it would be to eliminate a public option. That is why progressives are working so hard to get our foot in the door, even if the structure of the public plan is less than ideal.

Posted by: brooklynpsu | September 8, 2009 2:31 PM | Report abuse

visionbrkr...I think you are dreaming. The industry can not control the costs. They never have. Look at their attempts and failures over the last 30 years. I have been along for the ride and involved in all of them. Temporary successes maybe, but in the end, the roller coster continues, trend in excess of CPI rules the day. I guess maybe you are saying that the trigger will finally scare them into doing correctly what they have been trying to do all along? Maybe. Again, if it does, great. But I have my doubts.

Posted by: scott1959 | September 8, 2009 2:33 PM | Report abuse

Ezra--

If I'm not mistaken, everyone who is self-employed or uninsured, as well as employees of small employers will be eligible for the public plan in 2013.

That's enough people to give it clout.

Secondly, a few years later (3 or 5--can't remember) people who work for large corporations can switch to the public plan.

Why the delay?

Large employers pay and average of 75% of premiums. If people leave a large employers plan many are going to need subsidies from tax-payers to pay 100% of their premiums on their own.

Won't employers be payingn into the subsidy pool? Yes, but they'll never pay as much as the 75% of premiums that they now pay. Now, they are getting some busienss value for that money--they're able to attract and keep better employees.

Paying into the pool doesn't help their busines, adn many can't afford the amount they are now spending on health benfits,
So it's pretty certain that, when no longer
supporting their own employees, they will pay less.

We wouldn't be able to afford the subsidies if everyone in America could go into the public plan at the same moment.

As Gawande says, we have to phase this in over years. .

Posted by: mahar1 | September 8, 2009 2:37 PM | Report abuse

The question nobody asks about the public option is, "Who is funding the people who invented the exaggerations about how important it is?" The answer to that type of question is usually found when you ask yourself, "Who benefits if this bill does not pass?"

In this case, perhaps it is more complicated than that. What unites some progressives is not a shared concern for uninsured and uninsurable Americans but a shared resentment toward the insurance industry. Since the industry has made noises about how bad the public option these resentment based "progressives" have united in support of that option so strongly that they oppose a bill that does not include the option.

Essentially, the insurance industry is playing poker with people who don't know it is possible to bluff. They have cried and whined about a small issue with the goal of directing the argument there.

Posted by: BillTibbitts | September 8, 2009 3:01 PM | Report abuse

Well done at tackling that strawman, Ezra.

The public option is justified simply by virtue of providing, even in a diluted fashion, an alternative to state-mandated extortion on behalf of private health insurers, i.e. an insurance bailout.

Having the IRS penalize those who do not tithe to the Church of Blue Cross Blue Shield will deliver the Speaker's chair to Congressman Boner in 2010.

Posted by: pseudonymousinnc | September 8, 2009 3:03 PM | Report abuse

scott,

the industry is already starting. Horizon BCBS of NJ has mandated in many of their newer plans that the maximum they will pay for outpatient surgery on an out of network basis is $2000. Anything over that is not covered. I'm sure the surgery centers will complain but they need to be reined in. I read online of a person (and I'm sure this is common) who had a choice of two outpatient surgery centers one that was in network and one that was out of network. The out of network one was a "friend" of the family so he went there. The costs of the procedure were 10x and it was all his responsibility after a high out of network deductible. The person blamed the insurance instead of his "friend" who then filed a lawsuit against him. Nice friend indeed.

Posted by: visionbrkr | September 8, 2009 3:05 PM | Report abuse

mahar1,

and hence you have come to the realization of "employee dumping". See the examples from TENNCARE below:

http://www.nytimes.com/1999/05/01/us/tennessee-talks-of-paring-plan-for-uninsurables.html?pagewanted=all


The most telling line from the article is from the director of TENNCARE back then, Brian Lapps Sr.

Meanwhile, the Tenncare director, Brian Lapps Sr., is suggesting that some beneficiaries of the program are exploiting it. The poorest recipients, Mr. Lapps says, could help pay for their care if they would only curb their use of cell phones and cigarettes.

''We have a spoiled population that wants everything for nothing,'' he said in an interview.

Sounds like not much has changed since 1999.

Posted by: visionbrkr | September 8, 2009 3:17 PM | Report abuse

oh and here is a more telling line from the article:

But enrollees are an issue, too, Mr. Lapps said. ''There are a lot of responsible poor out there,'' he said. ''But there's a portion who drive up to the doctor's in a BMW. The question has to be raised: What is their purchasing priority?''

Posted by: visionbrkr | September 8, 2009 3:19 PM | Report abuse

visionbrkr...again, the industry has been trying many of these sorts of things in the past and the end result is still costs escalating above the rate of CPI. Your example is interesting, but even when ALL care is in-network, the plans are failing. Don't be such an apologist for them.

Posted by: scott1959 | September 8, 2009 4:37 PM | Report abuse

Ezra, aren't you missing something.

The weak public option will, indeed, fail to save on provider costs. What it can prevent is *insurer* costs going up.

The employer-based and the individual-based insurance markets are two different things. The individual-based market will triple or quadruple with universality. That virtually guarantees premiums will rise.

The only ways around this are to either cap premiums by regulation (which I believe was stripped from the House bill) or to provide a nonprofit competitor with no incentive to raise premiums above costs.

Posted by: tyronen | September 8, 2009 4:59 PM | Report abuse

Greater transparency in pricing and behavior also has the potential to reduce costs, no?

I'll grant that it isn't inevitably so. But I'd say that greater transparency will usually tend to result in a more efficient operation over time. It becomes easier to identify flaws and fix as needed. When flaws are obscured they usually aren't fixed.

Posted by: JPRS | September 8, 2009 5:02 PM | Report abuse

A bill with no public option will be an enormous political mistake for the Democrats, because they will be mandating that everyone must pay the private insurers, and people who can't will be picked-up by the taxpayers.

Posted by: Lee_A_Arnold | September 8, 2009 8:21 PM | Report abuse

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