The Issue With the Public Option

As I was reading Paul Krugman’s column this morning, it struck me that I hadn’t commented on the “public option”. One brief aside on the column itself. Dr. Krugman laments:

On the issue of health care itself, the inspiring figure progressives thought they had elected comes across, far too often, as a dry technocrat who talks of “bending the curve” but has only recently begun to make the moral case for reform. Mr. Obama’s explanations of his plan have gotten clearer, but he still seems unable to settle on a simple, pithy formula; his speeches and op-eds still read as if they were written by a committee.

If Democrats don’t want a “dry technocrat” as president, they might think about not nominating them so frequently. By my reckoning in four of the last six cycles the Democratic candidate has been a “dry technocrat” and the remaining, Bill Clinton, was only saved from the characterization because he was colorful not because he wasn’t a technocrat.

But back to the public option.

I think that both sides of the question have made reasonable points. Those who support a public option (assuming they do so as something other than a stalking horse for a nationwide single-payer plan) point to a lack of competition among insurance companies in individual markets. They’re right. A public option would be valuable to the degree that it promotes competition.

But the opponents are right, too. It’s hard to see how a federal insurance program will compete on a level playing field with private insurance companies and, if it doesn’t, why the private healthcare insurance companies shouldn’t fold up their tents and silently steal away.

For example, what would the public plan do if it had exhausted its budget? If it can appeal to the Congress for more money, it doesn’t operate on a level playing field with private companies. If it can’t appeal to the Congress, there’s the possibility that it might not be able to pay its claims.

Note, too, that there’s a serious constitutional issue with the public plan. As things stand private insurance companies are regulated by the insurance boards of each state in which they operate. Would the same be true of the public option? If not, it doesn’t compete under the same rules as private insurance companies. If so, how would that work, exactly? State officials would issue orders to federal officials? Really?

This suggests that there’s something at work in the public option that I’ve complained about here before: the search for a master stroke, a grand over-arching solution. Right now, this very minute, the only thing preventing California (not to pick on poor California—it’s just as true for Illinois or Missouri) from having its very own single-payer system is California. Its legislature could enact such a plan any time it cared to. That it has not, presumably unwilling to take the political heat and recognizing that it’s beyond the state’s ability to pay, should give us pause.

That’s something that both American and European critics of our healthcare system frequently fail to appreciate. The proper comparison to the United States isn’t France or Germany. It’s the European Union and the European Union doesn’t have a single, consolidated healthcare system, either. Our states resemble sovereign countries more than they do departments of the federal government.

Under our political system the proper place to fight out reforms to the healthcare system is state by state, legislature by legislature. That would require spade work that I suspect advocates of sweeping reform aren’t willing to do.

That’s why as a rule my recommendations for reform have been rooted in things that could actually be done within the strictures of our system, e.g. changing the rules under which Medicare subsidizes medical education or modifying the way the Food and Drug Administration regulates pharmaceuticals.

35 comments… add one
  • PD Shaw

    I read over at Kausfiles that a public option would probably be administered by private contractors. I don’t know who that would be other than private insurance companies, and if that’s the case I am deeply confused by the public option. If the public option is borne of distrust over the insurance industry, this reintroduces it. If the assumption is that the government can oversee the insurance company administration in a way that furthers the public good, then you’ve made the case for private markets with regulatory oversight. Surely, Kaus has this wrong.

  • IMO much of this discussion is a comparison of the speculative ideal government-run system with current actual systems. So, for example, when you consider the extraordinarily high cost of administration of current private insurance companies, I think it’s pretty likely that even a real, live government-run system could improve on them. Would it? As Brother Verdon might point out, they don’t have incentives to do so.

    I think that the extremely low administrative costs of, say, Medicare, are mostly just a case of comparing apples and oranges. If you exclude enough costs from consideration, anything could look pretty darned efficient.

  • Andy

    For me, the elephant in the room is cost control. I don’t have any ideological problem with a public option, but IMO that is a secondary concern to cost control.

    So my problem with the current proposals are that they are not sustainable since they don’t have any significant cost control. The revenue streams they rely on for funding will be outpaced by the rising costs of the benefits – a point the CBO has made pretty clear. So in ten years or less we’ll be faced with cutting the benefits, further raising taxes, or borrowing more money.

    IMO, there is no plan that is viable without systemic cost control. We don’t have any revenue streams than can keep up with rising costs. Any plan that doesn’t put cost control front-and-center is therefore unsustainable and irresponsible. These public option bills are really just benefit increases which is likely to make the cost problem worse, not better.

    So, I don’t have any problem with a public option. I don’t even have a problem with single payer. I strongly support extending coverage to all Americans through whatever means as long as the systemic problems with rising costs are fixed.

    There’s another serious flaw in the proposals. They rely on a mandate with a penalty. For most businesses that penalty would be 8% of payroll. Now consider that the average business already pays 10% of payroll on health care and, because of rising costs, that figure is going to double in a decade or two. These plans therefore incentivize employers to drop their insurance and without cost control, the incentive will only get larger over time. Maybe in a world without skyrocketing costs a mandate/penalty system would work, but as it stands such a system is likely to make things worse, not better.

  • Yes, Andy, that’s pretty much my view of healthcare reform as well: cost controls first. Furthermore, I think that costs actually need to be reduced not merely that the rate of increase needs to be reduced.

  • I’ve suspected from the start that the ‘public option’ was trade goods. I assumed (perhaps wrongly) that it was meant to act as a threat and to draw fire. Then once it had been thoroughly vilified we’d trade it away for the rest of the health care agenda.

    Interestingly it has drawn fire, it has become the focus of probably 90% of the opposition, and it could be traded away. The White House has certainly sent enough signals to this effect.

    I think what went sideways on the WH was that so many on the Left became so passionately devoted to the notion. This despite the fact that no one really knows what it is.

    I’m reminded of a heated contract negotiation for a type of rights that no one on either side of the negotiation understood. We were fighting and no one knew what the hell we were fighting over.

  • steve

    I can live with or without a public option. There are alternatives. I do have a broadly academic interest in seeing the public option pass. If it could be run without extraneous governmental cash, it could help add data to the government run vs private sector run debate.

    Your point about single payer is the same point I make about free market reform and HSA’s. Any red state that wanted could have passed such a reform long ago. They have not. Given that there single payers and hybrids in the world, and no free market models, does that imply that no one really believes they will work?

    Steve

  • Drew

    Andy and Steve –

    I would suggest to you that “public option” and “single payer” by their inherent nature are inconsistent with cost control……. outside the crutch of rationing. Medicare and Medicaid are in fact the public option subset in our current health care system, and you know their financial performance. Similarly, Social Security is the public option subset of our pension system. You know its financial track record and reliance on repeated tax increases.

    I don’t understand how you can not be opposed to them, yet desire cost control.

  • Brett

    But the opponents are right, too. It’s hard to see how a federal insurance program will compete on a level playing field with private insurance companies and, if it doesn’t, why the private healthcare insurance companies shouldn’t fold up their tents and silently steal away.

    Could it be a quasi-public-private entity like the Post Office, in which it would be required to at least break even and do something like the Universal Service Obligation the Post Office has?

    In order to avoid the issue of it receiving public funding and driving the private insurance providers out of the market (assuming you care about such things – I don’t, but then I see it as a way to get to single-payer), you could either give everyone a voucher that they could use to buy health care (or do an HSA requirement) coverage (either from a private company or the public plan), or give people who can’t afford to pay for a certain package of insurance a voucher which they could use to buy insurance, public or private. That way, it wouldn’t simply be a matter of the public plan getting federal funding – people would get that funding, and have a choice on whether or not to apply it to the public plan.

    Not sure how you’d avoid having the public plan turning into a dumping ground, though. Maybe if you combined it with a mandate forbidding rescission and pre-condition screening.

    Note, too, that there’s a serious constitutional issue with the public plan. As things stand private insurance companies are regulated by the insurance boards of each state in which they operate. Would the same be true of the public option? If not, it doesn’t compete under the same rules as private insurance companies. If so, how would that work, exactly? State officials would issue orders to federal officials? Really?

    The most effective way to make it work would be to simply abolish the state-level regulation and replace it with a set of national-level regulations. That would probably make the major insurance providers happy (and it would cut down on bureaucracy and enable economies of scale to a greater degree), but you’d have an immense degree of politicking in the process.

    Other than that, I’m not sure. You’d have to either federalize the public plan, effectively creating “state plans” that would compete in the state markets, or work out some other arrangement.

    Personally, if we’re not doing the former (replacing the state regulations with national regulations), I almost wonder if we should bother. Single-payer can work in a federalized system by simply having the states operate the plans (with federal subsidies if they accept federal regulations), but a public plan that would be essentially a quasi-private entity a la the Post Office? Not so much.

    Right now, this very minute, the only thing preventing California (not to pick on poor California—it’s just as true for Illinois or Missouri) from having its very own single-payer system is California. Its legislature could enact such a plan any time it cared to. That it has not, presumably unwilling to take the political heat and recognizing that it’s beyond the state’s ability to pay, should give us pause.

    Keep in mind that there are some potential legal issues to be resolved. Since Medicare is a wholly federal program, it and its subsidiaries would have to work in an entirely different system (although this would probably be good for the state program, since the elderly are quite costly to cover). Medicaid is more tricky – could California basically combine all of its Medicaid users into a single-payer plan and keep all the Medicaid funding?

    That said, it’s a good point – and an interesting issue of divergence from the Canadian history on health care (which otherwise uses mechanisms that should be familiar to the US, such as federal funding to provincial programs provided they accept the rules of the Canada Health Act). In Canada, you had Saskatchewan and Alberta trying to institute near-universal programs on the provincial level in the late 1940s (and to some degree succeeding – Douglas’s plan in Saskatchewan was comprehensive, but not universal due to budget constraints).

    Some states have tried universal programs over the decades, although most of them tended towards efforts like Massachusetts (using insurance regulations on the private insurance market to try and reach broader coverage). Perhaps Single-Payer advocates are fairly “diffuse”, mainly concentrating in certain liberal areas and lacking dominance of entire states. In any case, there are groups trying to get single-payer on the state level – MassCare, for example, is a group in Massachusetts advocating for single-payer there.

    It’s the European Union and the European Union doesn’t have a single, consolidated healthcare system, either. Our states resemble sovereign countries more than they do departments of the federal government.

    I think the Canada comparison is good as well in terms of the relation between the state/provincial level governments and the federal one (although American states have more powers and authorities than Canadian provinces). As I mentioned above, the Canadian system uses mechanisms that should be familiar to any American student of government to get to universal care – basically in exchange for some federal funding for their provincial plans, the provinces have to agree to the rules of the Canada Health Act. Theoretically, they could reject the money and dismantle their universal health care system, but that would be highly unpopular.

    Under our political system the proper place to fight out reforms to the healthcare system is state by state, legislature by legislature. That would require spade work that I suspect advocates of sweeping reform aren’t willing to do.

    That’s arguably what health care reformers should be doing in addition to national-level reforms, so that if the national level reforms fail, then you could still aim for universal coverage state-by-state.

    I think it could also be the root of a back-up plan in case the national level reform bill fails. You could pass a bill basically saying that the state has to agree to set up laws and work towards universal coverage, and then offer the states federal funding if they accept the rules. States could try single-payer systems, or employer-mandates, or whatever – and hopefully, the superior models would prevail over time.

  • Not sure how you’d avoid having the public plan turning into a dumping ground, though. Maybe if you combined it with a mandate forbidding rescission and pre-condition screening.

    That’s certainly been the case in Maine. Indeed, although Maine, Tennessee, and Massachusetts have all had similar experiences, the advocates for universal coverage via mandate always believe that the next time things will be different.

    I return to the point I’ve made before. With cost reductions everything becomes possible; without it no reform in coverage can be sustained.

  • Matt

    This whole debate is centered on cost reduction, yet I don’t hear people mention the MLR, or Medical Loss Ratio. Are you aware that approx 83 cents of every medical premium are paid for claims? After administrative cost the profit margin is only around 4%.

    People have a misconception of how much insurance companies are making. This past year, UnitedHealthcare had a RIF, called off any salary increases, and the employees are offered the lowest benefits out there. In the past 8 months, with our CDHP (consumer driven health plan) my family has paid out over $8,000 in medical and dental bills.

    So, my point is, after 7 years in the industry, health insurance companies are running efficiently… If we can lower the cost of claim utilization through reform and living healthier lives, then premiums can come down. The last thing we need is a Public Option.

  • steve

    “Medicare and Medicaid are in fact the public option subset in our current health care system, and you know their financial performance”

    Yes, but I have also looked at the performance of the private insurance companies in the U.S. and it is even worse, not much but some. If I want to find a working model that has lower costs and quality care you have to look at single payer or a hybrid like France.

    Now, do they do this with rationing or just not subsidizing not needed care? (Ok, they actually do other things but allow me the binary for a bit) When you look at their outcomes, about the same as ours, they are either really smart about their rationing, or they are avoiding not needed care. So, I can see how a public option could have the clout to crack dow on not needed care. We could simply follow evidence based medicine and look at cost effectiveness of treatments and reduce costs a bunch.

    However, I will concede this is unlikely to happen. This would take major political will. There will be horror stories of rationing and denial of care. “I was denied the experimental cancer drug that could have saved me” kind of stuff. Never mind the drug does not work. I get to have my picture in the paper for denying a patient antibiotics kind of stuff. Never mind that the patient had a viral infection and I would have just been breeding more resistant bugs.

    Costs are the most important factor. I can see opposing this bill because it does not address this adequately. The public option has some potential, but only if we had the political savvy, which we probably do not. As I said above, my interest in its passing is partially just academic. I would be interested in seeing if private corporations could really outperform a government run business. The other reasons to support the bill would be to do away with rescission and pre-existing issues, which could presumably be bundled into other reforms.

    Steve

  • Matt:
    You won’t cover me because I’m self-employed and over 50. Not at any price.

    So tell me again how everything is just fine.

  • Matt

    A couple notes… Doing away with pre-ex has pros and cons.

    Pro: If you are uninsured, are diagnosed with cancer, and need to pick up a plan… This would ensure immediate, full coverage.

    Con: Cost. Pre-ex looks to seek if someone has had continuous medical coverage, for at least 12 months, with no greater than a 63 day lapse in coverage. So, essentially, if you are covered, and switch policies, pre-ex would not apply. However, removing this allows individuals to not seek coverage unless they are sick. This drives up the cost of health care for all participants…

  • Matt

    Michael – First let me say, I am for reform… Something needs to change. I’m just giving my perspective as I see it on the inside. That said, you raise a good point.

    Not sure what state you’re in, but, it would appear you are being ‘age banded’ or ‘census’ rated on your premium. States determine the rating methodology. Some states, like NY, are what are known as ‘community based’. This means whether you are 17 year old female, or a 50 year old male, your rate is the same.

    What your facing is something more like what I see in PA or NJ. There should be discussions about what is fair and what other states are doing. You should contact your state and voice your opinion.

    Also, another thought, if you are an individual, you will not get the bang for your buck that a group rate would provide. Others have stated there are times you can pay $10 to join a local Chamber of Commerce around here and then be able to join their group health plan. Worth a shot.

  • I’m in CA. What I’ve had to do is form a corporation with my wife. We’re both self-employed writers, in business for decades, so it is legit. We’re not 100% sure this work-around will work, but it should — thanks to state regulations requiring that group policies be accepted.

    Needless to say this adds a great deal to the cost of my health insurance — lawyers, accounting, so on.

    Once we have a policy in place — assuming we get one — we will of course still face arbitrary cancellation at the whim of an insurance company. No matter what I pay I — like most Americans — will always live with the possibility of medical bankruptcy.

    The health insurance companies are criminal enterprises. They exclude the sick. They cancel policies on a pretense. They deny needed treatment. They harass people who are already under terrible stress and carry out this harassment with the aim of intimidating policy holders. They write deliberately opaque policies for the purpose of defrauding policy holders. Their core business is fraud: they fail to deliver the service for which they charge.

    And they do these things so that they can keep their stock prices high and ensure that large bonuses go to their executives.

    That’s the system we have. Honesty, transparency, reliability, the dignity of sick and dying people, health itself, all sacrificed for the goal of a higher stock price and bigger bonuses. That’s the system that insurance lobbyists are paying to defend, the system that Republicans are lying to protect.

  • Tom

    You say health insurance companies are criminal enterprises. I disagree. They are competitors. If one company is allowed to deny coverage, then they can lower their rates. Other companies are forced to do the same. If they do not, they will lose customers. The only way to preclude this kind of predatory competition is to regulate it. The insurance companies have already said they would like to avoid some of these practices. But they can’t do so if another company is allowed to do it.

    It’s not the fault of the insurance companies, it is the fault of the voting public. We have the medical system that we have voted for. And our ignorance will ensure that we continue to vote for a lousy system. The power of democracy – you get what you vote for, no matter how bad it is.

  • A lot of companies compete. They don’t all kill people in the process.

  • Tom

    Sure they do. Look at product safety. Competition and regulation control how much safety is built into a product. Just because the insurance industry does it more directly, doesn’t mean it’s really any different. Benevolent companies go out of business if they cannot match costs. The market does not distinguish between benevolence and incompetence when they both lead to higher costs.

    Look, I’m not really trying to defend the insurance companies here. It doesn’t really matter what you think of them. We can make them stop doing what we don’t like. Expecting the market to manage this is just unrealistic. We have decades of evidence to prove that.

    We just need to start with a few simple rules. Like not letting anyone deny insurance to someone who is just changing insurance. That alone would be a nice improvement.

  • I agree that the market won’t manage this, not as the market is currently defined. I’m talking about this through a different prism, an unusual one for me: morality.

    The fact that doing something wrong is profitable does not justify doing something wrong. If that were the case then every pimp and dealer and child pornographer could hold himself out as nothing but a businessman. People still have a responsibility for their actions and that moral responsibility does not simply evaporate when money is added to the mix.

    That’s what I’m talking about: their moral choices as individuals running a business.

    If the primary motivator was cost-cutting and successful competition then executives would not be paying themselves 50 million dollars. If they were acting in the rational interests of their company they’d cut their own pay. They don’t do this. Given a choice between looting a company and making that company more efficient they very often choose looting.

    Just as when they are given a choice between cutting off a child’s cancer meds and cutting their own bonus they choose the bonus.

    Which brings us back to their moral vacuity. Their essential criminality.

    Has an insurance company ever decided on a strategy of more decent care for policy holders, controlled executive salaries to reasonable levels and advertised these facts to the public? Has any of them tried the more moral route?

    As a consumer given a choice between a rapacious company that would cut you off at the slightest excuse, and a company that charged, say, 5% more but guaranteed they would not play those games, would you not at least consider signing with that second company? I would. In a heartbeat.

    There is not necessarily a conflict between good business and a decent regard for the lives of your policyholders. But this literally never occurs to insurance executives. Perhaps because we make excuses for their rapacious and immoral behavior.

  • Matt

    Policies are termed for 2 reasons, voluntarily, or due to non-payment of premiums.

    I can’t speak for the top executives, I have met a couple, and know that a few years back our CEO was involved in a stock back dating scandal. He no longer works for the company and had to pay millions back. This happened at the same time that other companies were found to be guilty of this as well.

    What I can speak for is me, my employees, and the times I have worked hard to get someone covered immediately that is standing at the pharmacy. Cutting through the red tape to ensure that I can get someone the surgery they need, no matter what it takes. I have countless kudos for my team and the work they do to make the customer know that when they need something, we are here for them.

    Let’s stop pointing fingers and blaming others. What about us? What can we do to make it better? I’m doing my part and trying to be part of the solution. Not just for my customers, but my family.

  • Tom

    Hey, all good points. All I’m trying to say is that we can’t depend on insurance companies to do the ‘right’ thing. We simply have to define what is ‘right’, and regulate that behavior. We have a real opportunity to level the playing field and eliminate this kind of hideous competition. We tried this 15 years ago with no luck. If we miss it again, no one will try again for 30 years. Now THAT would be immoral.

  • Matt

    Agreed. Fair, level playing field that puts the customer first and provides the coverage they need. You’re right, the insurance companies in general are not known for putting the customer first, even if they say they do… I know that’s what I aim for, however I am not the one steering the ship.

    Michael had mentioned that insurance is confusing. The more we seem to be moving away from the old PPO with a $10 copay, to now having HSA’s, FSA,s, HRA’s etc. with a lot of money out of pocket, it can be very confusing. Were I not in the business I would have a tough time understanding the plans. I think we need to be better about educating how these work as the average person on the street could become overwhelmed.

  • Policies are termed for 2 reasons, voluntarily, or due to non-payment of premiums.

    That’s not true. That’s the gentlest way I can put it. Not true.

    I think we need to be better about educating how these work as the average person on the street could become overwhelmed.

    Such gentle condescension. And such baloney. It’s not incidentally indecipherable, it’s deliberately so. For the purpose of terminating policies. It’s deliberate trickery: like a three card monte game. Insurance companies hire lawyers to create language that will give the insurance company all the options and the policy holder none.

    So that policies can be terminated and for no other reason. For reasons of profit. For the CEO’s bonus. For that you will create contract language that allows you to cancel a sick child’s policy.

    I’ll repeat: a criminal enterprise.

  • Matt

    “For that you will create contract language that allows you to cancel a sick child’s policy.”

    Again, I will speak first hand. I have a little girl, under the age of 2, and she has a chromosomal trans-location that no one else in the world has. Many things are being diagnosed, such as Jacobsen’s Syndrome and Myelodysplastic syndrome.

    Some of the best doctor’s in the world have said, “This is no one like your daughter and if she progresses to the next stage, acute myeloid leukemia, we don’t know how to treat her. With her chromosome translocation, we can only guess what to do. There is no history of anyone treated who had this disability.

    So, what you have to ask yourself is, do you want to take a huge risk and try and treat her, if we do there is no going back. Or, do you take your daughter to the beach and enjoy the time you have?”

    My baby girl is getting the best care in the world, even if they don’t have all the answers. I would not want any other health care system, because when my girl gets sick, and I fear the worst, we can get her anywhere that same day. We can get the coverage she needs.

    I’ll be away for a couple days, at the beach, with my little girl.

  • Matt:

    First of all, if this is true, my deepest sympathies. I have kids. And I have a very good imagination. Like most parents I suppose, I would burn down the world to save my kids.

    What I want in this kind of case for the insurance company to understand that the decisions must be mine, not theirs, so long as my choices conform within reasonable parameters to medical science.

  • Matt

    No sympathy needed. I love her just the way she is. She loved the beach as she is just learning to walk and it is so flat. The waves were high from hurricane Bill, but she was ready to walk right in!

    I guess we can agree to disagree. I don’t see the public option as addressing the real cost issues. For me I worry about my job, my insurance, my family, my house, etc… So, I guess it is selfish in a way.

    I agree that we need to find a way to cover everyone, but the public option increases tax payer monies, and doesn’t look at the true medical cost of running this.

    I’m just worried. But now you may better understand my perspective. I’m in it, and worry about the possibility of what would happen without a job. My wife is a home care provider for her sister with disabilities, so she is not offered insurance, it’s me, I have to provide.

    I don’t want to be without. Nor do I want you to continue to be without. There must be a better compromise. Something in the middle. I see this creating different problems and putting a band-aid on a bullet wound.

  • Weston

    For example, what would the public plan do if it had exhausted its budget? If it can appeal to the Congress for more money, it doesn’t operate on a level playing field with private companies. If it can’t appeal to the Congress, there’s the possibility that it might not be able to pay its claims.

    This doesn’t seem like a tight criticism to me: there are other possibilities depending on the terms on which it’d have to approach congress. What does a private insurer do when they need more money? Presumably, they borrow or seek investment while talking about what they need to change in order to be successful again. A public scheme in which congress replaces investors is not necessarily different. Competition for funding and demands of funders may be different in the public world, but it does exist.

    I think it’s pretty likely that even a real, live government-run system could improve on them. Would it? As Brother Verdon might point out, they don’t have incentives to do so.

    Even assuming they don’t have financial incentives to do so, the political incentives to do so are going to be huge. If they can’t demonstrate accounting that indicates a greater efficiency, they’re going to be a poster child for criticism of government programs for as long as the program sticks.

    None of this is to say that the public option couldn’t end up having the problems described here (and worse), so I think a good deal of this kind of discussion is somewhat productive. But I think it would be more productive if rather than saying “Any public option is going to be a problem because it will _____,” we said “any well-crafted public option is going to have avoid problem ____ and address problem _____.”

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