The Fact of My Ignorance

In all my discussions with people about current healthcare reform proposals, by far the Public Plan is probably the most thoroughly misunderstood.  I have encountered very few individuals, amongst either reform supporters or opponents, who have anything close to a correct conception of what the “public plan” is or what it’s designed to do.  I read an article on the Huffington Post the other day in which the author admitted that until very recently, he had thought the public plan being debated was a “medicare style unrolled plan”.  This is probably the general public’s perception as well.  A part of me feels that there’s very little excuse for this since the bills and summary sheets have been available for months now, but I acknowledge that this issue has been so skewed and twisted by politicians, pundits, and the media that finding the truth can be difficult.  So here are the facts, as best as I can find:

What is the public plan?

The public plan is simply a health insurance plan, administered by the government, that has special permission to sell their plans nationally.  It will not offer free care to anyone.  It’s not a “medicare or medicaid style plan”.  It will not provide “universal healthcare”.  It will have premiums and co-pays just like any other plan which it will base on the market.  And perhaps most importantly, it will not be funded with tax-payer money and it will not be allowed to draw money from the general fund.  It will be self sustaining.  That last fact seems to be very difficult for many people to grasp and in conversations with healthcare reform opponents, many of them have admitted that they simply don’t believe me on that point.  So here are more references than you could possibly need to demonstrate this fact:

“Public option must be financially self-sustaining, as private plans are.  Public option will need to build start-up costs and contingency funds into its rates and adjust premiums annually in order to assure its financial viability, as private plans do.” - From the official bill summary

The House Bill will, “Finance the costs of the public plan through revenues from premiums.” - Kaiser Family Foundation (select tri-commitee bill and insurance pooling mechanisms)

“H.R. 3200 would require a public plan to be self-sustaining and independent of the federal treasury.” - The American Medical Association

“…but as long as the public plan charged premiums that covered its costs (as it is supposed to do under the proposal), those amounts would be offsetting…” - CBO Analysis

“Participants [in the public plan] would pay actuarially determined premiums set at levels required to pay the full cost of coverage under the public plan.” - Lewin Group Analysis

Public plan has “Reserves [and is] self sustaining w/o public subsidies” - ITUP summary sheet

“The secretary shall establish geographically-adjusted premium rates for the public health insurance option … at a level sufficient to fully finance the costs of health benefits provided by the public health insurance option; and administrative costs related to operating the public health insurance option… the Secretary shall include an appropriate amount for a contingency margin… Limitation on Funding – Nothing in this section shall be construed as authorizing any additional appropriations to the Account, other than such amounts as are otherwise provided with respect to other Exchange-participating health benefits plans.”  - HR 3200 pages 119-120

I really hope this puts this issue to rest.  There are no reputable organizations I have come across that are claiming that the public plan is subsidized by the government or is a “medicare-for-all” kind of plan.  This is not really a debatable issue so I feel I can speak strongly.  If you have heard someone claiming that the public plan is tax-payer funded than you can be sure that that individual is either uninformed, lying, or a delightful mixture of the two.  If it was publicly funded I would surely oppose it, as would the AMA, and most people involved in healthcare policy.

Once we have established that the public plan is self-sustaining, then many of the frightening myths about healthcare reform are invalidated.  Namely the ideas that this represents socialized medicine, that it will bankrupt private insurance, that abortion coverage by the plan would mean our tax dollars are paying for abortions, or that it would usher in long lines and rationing.  (See The Top 7 Craziest Myths about Healthcare Reform).

So Why is It Important?

The question remains, why would we need to have a government plan with these special privileges?  Well here’s my understanding of the issue and the explanation I’ve heard and read most often:

The problem this is meant to address is the issue of health insurance premium inflation. Everyone acknowledges that market forces are malfuctioning in the insurance market, primarily because there’s a lack of competition. In some rural areas there is only one insurance company available and in most places around the country there are only two or three. This means that patients are not able to shop around for insurance that offers them lower premiums for the same coverage and doctors aren’t able to drop insurance companies that don’t pay them enough for their procedures. Which is why insurance companies are raising premiums, paying doctors less, and simultaneously making record profits.   The AMA has an article about this problem here, Here’s one of the many studies on the subject here, And here’s an interesting case study about it here.

This problem is a big contributer to rising premium costs, and rising premium costs are a problem for everyone since the more uninsured people there are in the country, the more people we have getting free (and inefficient) care at the emergency room, and the more money tax payers have to shell out to hospitals for this uncompensated care.  In a study funded by Americas Health Insurance Plans in 2006, the insurance companies themselves acknowledged that market consolidation and the resultant artificial price inflation was a major contributer to rising premium costs.  They estimated that of the 8.8% yearly rise in premium prices, 1.1% of it was due to market consolidation.  Keep in mind that the goal is not to reduce premium growth to zero, but rather to reduce it until it’s equal with wage growth, which generally hovers around 5.5% in the US.  This means we only need to cut 3.3% off of our premium growth to make our nation’s financial future look a whole lot rosier and introducing competition to the scene would eliminate 1.1% or a third of what we need.  And keep in mind these are the Insurance companies’ numbers.  Other estimates are far higher.  So at the very least, if we can bust up these oligopolies and monopolies we could get a third of the way to solving a large part of the healthcare crisis and the benefits would likely be a lot greater.  Furthermore, premiums have been growing artificially higher for years and years.  Introducing competition to these consolidated markets would not only prevent future artificial growth but would also reverse years of unnecessary premium growth, leading to a very large initial drop in premium prices.

So one solution to this problem would be to deregulate the insurance industry, allowing them to sell insurance across state lines, thus increasing competition and lowering premiums. I have had many healthcare reform opponents suggest this to me and many republican politicians are pushing it as an alternative to the public plan.  The problem is that doctors and hospitals hate this idea. For two reasons. First, hospitals and doctors’ offices are already swamped trying to figure out which insurance companies cover what and filling out all the different forms each insurance company requires to ensure compensation.  It is not uncommon for a small practice to hire 5-6 employees solely for the purpose of managing insurance company calls and paperwork, and that’s when they’re only dealing with 3 or 4 companies. Imagine if there were hundreds. It would instantly bankrupt most private practitioners and many hospitals.  The second reason doctors and hospitals are opposed to this idea is because right now the only way doctors have a say in the insurance industry (since there are little to no functioning market forces) is through lobbying their state governments to regulate insurance companies. If insurance companies could sell across state lines then they’d all congregate in the state with the least number of regulations and physicians in all other states would have zero say in how the insurance companies in their area opperated.

So if we’re not going to deregulate the insurance industry the only other good idea for putting downward pressure on premium prices that anyone has come up with is what Obama is proposing, a nationwide public plan that anyone could buy into. It would give the insurance companies competition, even in rural areas, effectively forcing them to lower their prices to compete.  Despite the public perception this plan has as some kind of anti-capitalistic bastion of inefficiency, the public plan is designed to fix malfunctioning market forces, increase competition, and increase patient choice.  And analysis by the CBO, Kaiser Family Foundation, Lewin Group, and ITEP all say it will do just that.  The invisible hand can’t move us towards efficiency in the absence of choice and competition.  Healthcare reform opponents often talk about market-based reforms but reforms based on preserving current markets support a system that inhibits market competition.  We need to break the monopolies and the public plan is one of the only feasible ways of doing that.  In that sense it is one of the strongest “pro-market” idea out there.

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