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A more modest vision for the public plan

Jacob Hacker and Diane Archer make the argument for the public option with negotiated rates. Medicare rates would be better, they say, but the public plan can still play a host of valuable roles, some of which people don't really talk about.

One of those roles is "a cost and quality benchmark," which sounds a bit anodyne, but could prove extremely important. In the exchanges, different insurers will offer different prices for coverage. In theory, competition between the insurers should drive those prices as close to the basic cost of providing insurance as possible. But a few insurance market experts I've spoken to are skeptical that that will happen. They believe, instead, that the insurers basically know what the other insurers will charge, and everyone will inflate their prices a bit, particularly at the beginning, when no one is quite sure what the prices should be and most participants in the market will be subsidized by the government.

The public plan, in this scenario serves as an "honest pricer." Regardless of whether anyone even uses the thing, it can at least be relied on to price insurance as close to the basic cost of insurance provision as possible, as it has no incentive to pad its profits. So long as the public plan is there with an honest price, private insurers can't afford to use inflated prices, as they'll lose market share. In that way, the public plan doesn't necessarily succeed on its own terms, but it succeeds in bringing down prices across the market.

A lot of liberals hoped that the public plan would prove a dominant insurer in its own right. Given the limits on who can participate in the exchanges, and the limits on the public plan's ability to partner with Medicare for pricing leverage, it's hard to see the public plan playing that role. But it can serve as something of a corrective: If the market begins to fail, consumers have somewhere to go, and because consumers have somewhere to go, the market will have to right itself. It sounds a bit zen, but the public plan might well work by not working. If it in fact creates a competitive market, fewer people will use its services because they'll be able to get good deals elsewhere, too. And that would be a good thing.

By Ezra Klein  |  November 6, 2009; 10:00 AM ET
Categories:  Health Reform  
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Comments

"insurance market experts"

Ezra,

It'd really be nice to see you get more specific on your sourcing. In this case-- insurance market experts, to me means, either 1) current/former industry execs 2) Wall St. analysts that cover insurance companies 3) academic that have, as the PRIMARY focus, health insurance company practices. I highly doubt you spoke to someone who's either #1 or #2, and think its likely you spoke to a general health economists, who's probably not actually an insurance company expert.

Can't you make it easier for your readers to know the reality? You overuse of the words "expert" and "universally" are problematic, IMO.

On the merits of the post, this rationale for a public plan is just crazy. There are plenty of industries that have too few players that allow for price signaling. Airlines, milk producers, the list is long. The government's role is to ensure that they are competing fairly, and there is robust competition. Its amazing to hear a logic for a public option that basically says that the role of government isn't regulation itself, but actually needs to be a competitor.

Posted by: wisewon | November 6, 2009 10:31 AM | Report abuse

I think that this bill, if it passes, will be modified before it's actually implemented. After implementation, it will be further modified because the cost controls in this bill are too weak to actually make a significant difference. The real cost problems start at the providers not the insurers. So future congresses will be very tempted to implement their own ideas about making health care more affordable for individuals, businesses and government. Therefore, I don't think it will make much difference what kind of public option is passed at this time. We are going to try for universal coverage first and then tackle true cost containment and affordability later. I'm ok with that.

Posted by: marvyT | November 6, 2009 10:55 AM | Report abuse

"So long as the public plan is there with an honest price, private insurers can't afford to use inflated prices, as they'll lose market share."

But as you point, what can 60% of people do when they cannot get out of their employee sponsored plan? Yes, we know the right price but if all insurances offering are inflated for companies; why does it matter knowing that price?

Will we be able to pull all of those insurance companies to 'court'? What would court say? Don't cartel but can it dictate that price must be as PO?

Pretty soon, people will realize these PO prices are prices in 'air' which are not in their reach and they are not applicable. So forget it. It is like knowing that the same drug is cheaper in Canada. But knowing that and even knowing the price, how does it change my life if the Pharmacy next to my house can only sale that drug at 'triple' the price?

Sometimes you know, these Congress folks know that they all are shame, without any common sense and still we have to endure Pelosi's of the world.

Posted by: umesh409 | November 6, 2009 11:04 AM | Report abuse

"In theory, competition between the insurers should drive those prices as close to the basic cost of providing insurance as possible."

I don't understand why arguments like this are so popular among health reformers. The basic cost of providing insurance is determined by the _cost_of_care_. As long as each insurance company negotiates charges with each provider, costs for insurers will vary...and so will their premiums. Insurers with higher costs of care who want to compete in a given market will have to cut something else -- such as weekend customer service lines or number of examiners (which will increase delays in payment)

A public option -- whether weak or robust -- won't change that and there is nothing about the concept that will make our dysfunctional model more sustainable.

Posted by: Athena_news | November 6, 2009 11:39 AM | Report abuse

Is it reasonable to assume that anything our cowed Congress legislates will be something that insurers can game? By gaming, I mean achieving levels of profit that keep Wall Street happy. You can't get honest "insurance" while the profit motive makes it desirable to devote the energies of the best thinkers money can buy to scamming the system. Just isn't going to happen.

Posted by: janinsanfran | November 6, 2009 12:59 PM | Report abuse

Your entire thesis depends on insurers charging inflated prices to boost profits, which we know is not true given the low margins they're earning today.

and this bit: "everyone will inflate their prices a bit, particularly at the beginning, when no one is quite sure what the prices should be" is very misleading. If no one is sure what the prices should be it's because there are so many new people in the market and the new regulations make future costs very uncertain. That uncertainty requires an additional risk margin. You seem to be implying there is something nefarious about an insurer increasing the risk margin when the amount of risk increases, which is absurd.

There is very little reason to believe there is unfair competition going on now, so really this whole post is just silly. The problem is cost, not profits or oligopolistic pricing.

Posted by: ab13 | November 6, 2009 1:06 PM | Report abuse

It will also provide clues to how well the risk sharing provisions are working, since the Public Plan is expected to attract people who require more health care.

If the risk sharing doesn't work then the whole idea of the exchange will have failed since "cherry picking" will continue.

Posted by: cautious | November 7, 2009 12:53 AM | Report abuse

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