The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

A Hybrid Health Care System: Good Politics; Unrealistic Policy

Posted by Alan on April 6, 2009

When it comes to topics as complex as health care reform, the legislative dance generally involves two steps.  The first focuses on educating decision makers. It’s a sincere effort to learn the facts, understand the options and identify the trade-offs. Yes, there’s a political element to this phase, but there’s more often a genuine desire to learn about the issue.

The second step in the dance is when the actual language is drafted. This is the phase in which partisanship dominates, where the goal is to win, not educate. Yes, compromises will emerge, and hopefully they’ll be informed by the educational phase that went before, but this is when decisions get made. Which means it’s when political muscle matters more than the ability to educate.

We’re still in the educational step — for now. But the step is coming soon and outlines of the political phase are becoming clear. As I’ve written before, one of the key issues will be whether there should be a government-run health plan competing with private carriers for consumer’s premium.   Proponents see this hybrid approach as a way to drive down costs while keeping private health plans honest. Opponents see it as a big step to government takeover of the health insurance industry.

The Lewin Group published a study today that bolsters the argument of opponents. Entitled “The Cost and Coverage Impacts of a Public Plan: Alternative Design Options” the report attempts to quantify the impact a federal offering would have on private competitors (and on the income of providers). And that impact is substantial. The study assumes health plan offers coverage comparable to the Blue Cross Blue Shield Standard Option within the Federal Employee Health Benefit Plan (meeting President Barack Obama’s promise to offer all American’s access to the same coverage as members of Congress).  If this government competitor sets doctor and hospital reimbursement at the same level as is used by Medicare, the Lewin Group predicts over 131 million Americans would enroll — approximately 119 million of them shifting from private plans.

If the government alternative is made available only to individuals, the self-employed and small businesses the impact is significantly less, but still substantial.  The study estimates 42.9 million Americans would enroll in the government offering — 32 million of them moving from private plans.

While several factors were taken into account by the study’s authors, John Sheils and Randy Haught, the most impactful driver was cost. The theory is that the federal-plan would impose Medicare reimbursement rates on doctors, hospitals and other medical care providers. This gives the public plan a 30-to-40 percent premium advantage over comparable coverage offered by private carriers. The reason: as noted by in the study “payment levels for hospital services under Medicare are equal to only about 71 percent of what is paid by private health plans for the same service.” Indeed, this reimbursement rate covers “only between 92 percent and 95 percent of the cost of the services provided by the hospitals.” 

When it comes to doctors, the Medicare reimbursement rates are about 81 percent of that paid by private carriers.  The study assumes the public plan would have a further pricing advantage due to lower administrative costs resulting from there being no need to earn “insurer profit and insurance agent and broker commissions and fees.” But the big savings comes from the reduced claims costs.

Today, hospitals and other providers make up for the shortfall in revenue received for services to Medicare patients by increasing the fees charged to their insured patients. While this hidden tax raises the costs of premiums, it impacts on private carriers is somewhat equal. Since the Medicare population is distinct from the commercial market, the playing field remains level.

If the government were to step onto the field as a player, however, the dynamic changes. Now a competitor gains the pricing advantage — and that advantage would grow over time. As the public plan attracts more members, providers will see an increasingly negative impact on their income. The severity of the impact depends greatly on whether the public plan is open to all employers or only small businesses, the self-employed and individuals. If everyone has access to the public plan, the ability to shift costs to privately insured patients is greatly reduced. Under the latter scenario, providers could more than make up for the government’s underpayment by charging higher rates to large group insureds while also benefiting from a reduction in the number of uninsureds.

The likelihood, however, is that all Americans will have access to the public plan. President Obama has clearly linked health care reform to his economic recovery efforts. Large companies (think the auto firms) need the relief offered by the availability of a public plan — especially a public plan offering a 30-to-40 percent premium advantage.

The spiral would kick in rather quickly. As the public plan attracts more members, rates charged by private plans would go higher driving even more insureds to the government offering. Eventually, the only health plan standing would be the government’s.

Some might claim that the public plan would be unable — or unwilling — to use Medicare reimbursement rates. But why? The entire purpose of the government coverage is to drive down costs. Voluntarily paying providers more than Medicare would run counter to the governing agency’s mission.

There’s some caveats to this bleak scenario. It’s a good idea to be skeptical of all studies that estimate the future impact of unknown legislation. I’m not questioning the authors motivation or scientific rigor, but studies like this are, ultimately, educated guesses based on assumptions that may not come to pass and whose unintended consequences cannot, by definition, be anticipated.

Nonetheless, the study does raise the likelihood that the coming debate over whether there should be a public alternative available in the private market is the wrong topic. The Lewin Group Study underscores how difficult it will be for the government to maintain a level playing field while it competes on that field. And once the playing field begins to tilt in its favor, the result is inevitable: eventually the public plan will be the only player on the field.

So the debate is really whether Americans want a private health care system or a public system for all. There is no middle ground. The hybrid approach won’t last — eventually it will become a public system. So while the hybrid approach is attractive politically, it’s a false choice from a policy perspective.

There’s a legitimate debate to be had over whether the government should replace private carriers. That’s the debate lawmakers should have — especially while we’re still in the educational phase of the legislative dance. Calling for a mixed system sounds nice, but it’s not really an option. And health care reform is too important to debate fantasies.


7 Responses to “A Hybrid Health Care System: Good Politics; Unrealistic Policy”

  1. Mark said

    The government today can currently walk away saying they balanced the Medicare budget by cutting reimbursements to providers and facilities. It’s easy to do, they are the government and the fall back position as Bob Copeland points out is the private sector picking up more and more of the shortfall. It’s hard to see any long term savings without a significant change in the way medicine is practiced in this country.

    No one is talking about drilling into where substantial costs lie such as severe premature babies and end of life care. These are somewhat untouchable subjects to date but without addressing these issues and other similar ones I think getting the cost of healthcare under control will be more talk and finger pointing.

    • Dave Wood said

      You are right Mr. Mark. The real problem in American health care is COST, not the uninsured, not quality, not the private insurers. We pay double what Europe pays and if you think health care is expensive today, YOU AINT SEEN NOTHIN BABY! Wait til the baby boomers retire with their 40 inch waist lines, and addiction to drive thrus. estimates that the current shortage of nurses (200,000) will grow to one million in the next decade. All the chronic diseases will double in number as all those cheeseburgers finally take their toll.

      And if we don’t invest in reducing obesity in the younger folks today, that bill will surely bankrupt the states, who already spend 30% of their budgets on health care.

      The Federal govt. is too big, too cumbersome, too corrupt to take on all these smaller local issues. We need a local authority to manage health care, and then have that authority face the voters every two years.

      Tough decisions need to be made and even Obama is incapable of making them. Pass the buck to a new local authority and let each one tackle their own problems. Each state is unique, and needs unique answers. Obesity is HUGE in Mississippi, not so much in Utah. Calif Doctors spend double what they do in Seattle according to medicare payments. Read more about my idea at spaprogram dot org…..I am a one man show. Spread the word

  2. jimmy1920 said

    I think that any reform plan that perpetuates the current system of disparate provider reimbursement based on the patient is fundamentally flawed. A doctor or hospital should be paid the same regardless whether they treat a poor person, an old person or an employed person.
    That is not to say that all providers should be paid the same. They should be paid for performance. And their performance should not vary according to the patient they treat.

  3. Bob Copeland said

    One of the issues that could affect the success of any government run program is whether doctors and hospitals are willing to accept (or can survive on) Medicare-level payments for 100% on their patient base.

    A local hospital group advised me that their split was 45% Government funded patients (Medicare/Medicaid) and 55% Commercial. The group costs shifts onto the commercial customers the full increase in inflation each year on 100% of their patients, thus driving up the cost of private coverage at twice the rate it otherwise would require (year after year after year…).

    If they could not do that, one wonders whether their Medicare reimbursement rates could be increased at a sufficient level to offset the lost revenue formally charged to the commercial customers. And, if Medicare has to increase its reimbursements, there goes the presumed cost savings.

    It is hard for me to imagine substantial savings resulting from a government takeover of the healthcare system, other than marketing/broker expenses, insurer reserves/profits and some economy of scale savings, since so much of the money spent of healthcare is payroll and technology.

    Doctors, nurses, technicians, hospital workers, clerical workers all need to make a living. They will not be willing to demand less salary (especially unionized workers) under a government program.

    The cost of technology will not decrease as we will continue to use the latest technology to diagnose medical problems.

    The likely result will be rationing of healthcare services such as has been seen in Canada, England and other countries with global healthcare budgets.

    The unforeseen consequences of a government run health system will be quite amazing to watch.

  4. Squibcakes said

    I would add that medicare part A and B are also unsustainable. I believe the medicare hospital trust fund is already in the red and is projected to be out of money in 2016.

    Congress cannot kick the can anymore… the money is running out.

    The way i see it, to have a public / private competition one would need to level the playing field by either establishing prices centrally so that the government cannot dictate price while the private sector must negotiate, or to have all players including government negotiate. The latter is more problematic since it would essentially be a giant competitor. But the former is problematic because of the problems with central planning – pushing money in the right places by the decision of a few, rather than the market – i.e. efficient allocation of resources. plus the only docs and hospitals that would want to particpate would be those that are new to the profession or are otherwise hungry for patients.

  5. Mark said

    And we haven’t had a discussion about how pharmacy would be covered. The current Medicare D program is not sustainable long term and unless Washington wants to negotiate with Pharma there is no simple solutions.

    Would all physicians and hospital have to participate and could they opt out like they currently do? Lots of good discussion lies ahead and I think the more it’s looked out the more complex the decision makers will find it to be.

  6. Squibcakes said

    Thank you. You’ve nailed it right on the head. Couldn’t have asked for a more perfect analysis.

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