• The politics of public option asymmetry

    Let’s think this through. I’ll start. You chime in in the comments.

    Medicare:

    1. Private plans participate in Medicare under Medicare Advantage and, for drugs, through Part D.
    2. With the exception of drug coverage, Medicare has a public option: traditional Medicare.
    3. Medicare Advantage plans and traditional Medicare do not compete under a competitive bidding regime, but it is one idea for program reform.
    4. I’ve not heard it argued that the role of traditional Medicare under competitive bidding would be to impose discipline on private plans, increasing their quality and decreasing their costs. Why not? Did I miss this argument? It certainly is not prominent.
    5. If traditional Medicare and Medicare Advantage plans were to compete on a level playing field (competitive bidding), one concern I’ve seen articulated many times is that traditional Medicare would experience adverse selection (left with the higher cost beneficiaries) beyond that which could be addressed through risk adjustment. This would increase its costs, potentially threatening its viability and, if not that, clearly tilting the playing field. This is one of the main, if not the main, arguments against competitive bidding. It is very prominent.

    ACA:

    1. The ACA exchanges will not have a public option.
    2. Advocates of a strong one wanted included in the exchanges a version of a public option that set provider payments based on traditional Medicare prices.
    3. Plans in exchanges will be subject to a competitive bidding regime.
    4. It was suggested by many that a public option would discipline the market, forcing private plans to increase quality and lower costs. This was a very prominent argument.
    5. I’ve have heard it argued that the public option would experience adverse selection beyond that which could be addressed through risk adjustment. I don’t think this was prominently discussed, but it was discussed. The concern doesn’t seem to strongly deter interest in a public option from some quarters. Nor is it used as a strong argument against one, not that I’ve seen anyway.

    Questions and Hypotheses:

    1. Take another look at points 4 and 5 under each of the sections above. See the asymmetry? Why does it exist?
    2. Do the arguments for an ACA exchange-based public option apply to traditional Medicare and vice versa? Why or why not?
    3. My attempt to answer: A lot rests on the starting point and one’s political orientation or policy preferences. Medicare starts with a public option. None exists for the majority of consumers in the commercial market. With this, and once you know whether one is predisposed to prefer public or private solutions, you can make sense of the different perspectives taken on public options. My hypothesis is that to the extent they are differentially promoted for exchanges or in Medicare, the arguments of adverse selection and market discipline arise largely for political purposes. Otherwise, it seems to me we should view the exchanges and Medicare as technically equivalent with respect to these two issues.
    4. In the following two points, I will be blunt for the sake of clarity and to promote discussion. Please pardon the gross generalities, and feel free to offer opposing views in the comments. These are hypotheses, not assertions of truth.
    5. From the left: In its aim to preserve traditional Medicare, the left highlights adverse selection as a threat to it and downplays the discipline it might bring to private plans in competition. In its aim to achieve a public option in the exchanges, it does not view adverse selection as a reason to abandon pursuit of the goal or of the ACA’s competitive model. To the contrary, they find strength in competition by asserting that the public option, through it, will discipline the market.
    6. From the right: In its aim to promote private solutions, the right downplays the adverse selection issues that may arise if Medicare and private plans were to compete on a level playing field. Rather than Medicare disciplining private plans, the reverse is asserted. I’m not aware of a lot of specific attack of an exchange public option from the right on adverse selection or market discipline grounds other than, perhaps, the view that it would have an unfair advantage if it used Medicare rates. But Medicare uses Medicare rates and the right thinks private plans can do better in competition. So, ???.
    UPDATE: After writing this post, I noticed Ezra Klein expressed ideas similar to some of the above in Wonkbook today.
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    • The right and left positions perhaps, are not so contradictory. In fact, could they be rational, if one assumes ideology stems from the behavior observed in different marketts and/or populations.

      If you are on the left, and observe McAllen, TX seniors, your fear might be adverse selection going one way, MA to FFS. If you are in McAllen receiving ESI, and on the right, might you see the corruptive influence in a publicly administred plan in reverse:
      http://content.healthaffairs.org/content/29/12/2302.abstract?sid=b5c04c4f-e905-4d8b-a5c5-507763cbde99

      Brad

    • You say:

      “Medicare starts with a public option. None exists for the majority of consumers in the commercial market. With this, and once you know whether one is predisposed to prefer public or private solutions, you can make sense of the different perspectives taken on public options. My hypothesis is that to the extent they are differentially promoted for exchanges or in Medicare, the arguments of adverse selection and market discipline arise largely for political purposes.”

      Not sure the parralels are framed correctly. Don’t know enough about the PPACA exchange proposal except for the drumbeat that it is like the Massachusetts’ exchange (about which I am painfully aware).

      But when it comes to Medicare, the terms private and public get you off on the wrong foot. All Medicare (A, B, C and D) is private to the extent that it is administered by private insurance companies and public to the extent that it is highly regulated (minimum creditable coverage rules, guranteed issue, approval of premiums, co-pays, deductibles, etc.). The government and subscriber are payers for both, in theory equally. The providers are pretty much the same. I know you want to frame it from the provider perspective but the subscriber perspective would be more revealing.

      That means you also can’t look at the market for A, B, C and D without also considering all the truly private (in your sense of the word) supplements available. Only 10% of Medicare subscribers have only A/B. Presumably they are split between wealthy people that self-insure and people so poor or so far off the grid that they don’t know how to/don’t apply for dual eligible status. So unless you factor in the competition for supplements (even factoring in why/how people stay with an employer under less than optimum circumstances on the face of it in order to get the retiree insurance), your comparison is unfair.

      You probably need to factor in some geographic and age bands as well

      • I had hoped that it was pretty clear what I meant by public and private. Let me stipulate (because it is true) that there is no insurance in America apart from today’s individual market (which is relatively tiny) that is not supported in some way by public funds (including the tax subsidization of employer plans). Due to exchange subsidies, this will apply to a large part of the individual market in 2014. Thus, private means there is a private insurance or self-insured firm between the subscriber/subsidy (if any) and the payment of claims. Public means there is a public entity (ignoring fiscal intermediaries, if I may). With the exception of what I say below, I do think going beyond that is splitting hairs as far as the political debate is concerned. Maybe you disagree. If so, why?

        However, it’s a good point about supplements. What I understand you as saying (correct if wrong) is that the public Medicare plan does not exist on its own. Use of private supplements is just way too common. I agree.

        But here’s the question you need to address: how does incorporating that change my hypotheses? Same goes for geographic bands. You didn’t rephrase the hypotheses. Since it is your contribution to the discussion, I’d appreciate it if you did that. Otherwise, it is not clear to me how to make use of your excellent reminder and insight.

        • You define public/private as follows::
          “Thus, private means there is a private insurance or self-insured firm between the subscriber/subsidy (if any) and the payment of claims. Public means there is a public entity (ignoring fiscal intermediaries, if I may).”

          My point is that all Medicare (A, B, C, D and Medigap, which is not officially Medicare but so highly regulated that it may as well be) is private by your definition above. There is a private insurance firm involved in all cases between the subsciber and the provider. (The government is the self insurer the way I look at Medicare.)

          You say:
          “With the exception of what I say below, I do think going beyond that is splitting hairs as far as the political debate is concerned. Maybe you disagree. If so, why?”

          I would not only not go beyond that. I would not even go there. I would not even frame the debate/hypothesis using the terms public and private because they are not market factors and have become loaded terms politically, often interchanged with profit vs. non-profit and good vs. evil.

          You say:
          “However, it’s a good point about supplements. What I understand you as saying (correct if wrong) is that the public Medicare plan does not exist on its own. Use of private supplements is just way too common. I agree. ”

          Correct. The use of supplements is not just common; it is the case for 90% of Medicare subscribers (including the 10% also on Medicaid). That includes Medigap or retiree plans supplementing vanilla A/B with or without D and C (with D built in) supplementing vanilla A/B. I’m not sure why you characterize it as “just way too common.” Perhaps you are pointing out how bad vanilla A/B is as insurance with its high deductibles and co-pays, lifetime limits, geographic restrictions and lack of vision/dental? And of course I would not use the term “public Medicare” to describe vanilla A/B, which I think is what you mean by public Medicare.

          And backing up to the beginning, this is all about framing the debate you asked for in the original post. I am suggesting your questions/comments be thought of from the subscriber point of view rather than the provider, payer or administrator point of view. It would be key to look at the PPACA exchange proposals similarly.

          But here’s the question you need to address: how does incorporating that change my hypotheses? Same goes for geographic bands. You didn’t rephrase the hypotheses. Since it is your contribution to the discussion, I’d appreciate it if you did that. Otherwise, it is not clear to me how to make use of your excellent reminder and insight.

        • please note: in my reply of 4:30 ET 11/8, I reversed the answer and your question in the final two paragraphs. Sorry about that or send me an email and I will re-submit before you moderate it on

    • I think this argument needs to go back to fundamentals, because the issues and plans are so complex it is not possible to have a discussion without placing that discussion in the context of the basics of health care insurance, controlling costs and incidence of burden.

      Insurance: Insurance works when there is a large, statistically independent population where the probability of an event is small, but the cost of the event is large. This allows everyone in the population to pay a small fixed cost (the premium) in return for shifting the risk of the large unknown cost from an occurrence of the insured event onto the insurance company. If these characteristics are not present, insurance does not work. If the probability of the event is large for everyone, the premium defaults to the cost of the event plus expenses, so why take out insurance. If the cost of the event is small, why take out insurance.

      Risk Pool vs Individual Coverage: If the risk pool for both public and private policies is defined the same, ie for Medicare everyone over 65 and private insurers are required to accept everyone regardless of age, health history, gender etc, for the same premium, then there is very little difference between a public plan and private plans. Public plans may cost less, because they do not have the profit requirement that private plans have, and existence of a public option would work through competition to bring private plan costs below public plans and/or benefits above public plans.

      In this scenario the “public option” does work to keep private plan costs competitive. It doesn’t matter if it is the 65 and over age group or the under 65 age group. As long as the risk pool is sufficiently large and statistically independent, a public option competing with private plans works to “impose discipline on the market”.

      If private plans are allowed to segregate the risk pool into various groups by age, health history, gender etc, and the public group does not, then adverse selection will take place. Elderly and/or high risk individuals will be unable to obtain private insurance at an affordable cost. They will have to choose the public option. In the extreme case, the Ryan plan with individual underwriting, coverage will simply not exist for high risk individuals. John McCain, to use an example of someone whose health history and age is public knowledge, will never ever be able to obtain a private individual insurance policy that is underwritten specifically for him.

      Note that this discussion does not address the really critical issues. One is who bears the burden of costs and two is how are costs controlled. Remember how Medicare is paid for. It is paid for by the recipients through premiums, deductibles and co-pays, by employees/employers in the form of FICA and by general taxpayers. The purposes of the Ryan and Romney plans is to shift costs from the FICA and general taxpayers to the individuals. This will save government costs, but do nothing to help the system.

      Their argument is that private plans will control costs through competition. Well, the under 65 group is largely covered by private plans. Why haven’t costs been controlled? The answer is that the pay-for-procedure system itself is flawed. Fix that and many of these other questions become much easier to answer.

    • The argument that I am concerned with is that private individual health insurance, whether as a replacement for Medicare or as a replacement for Employer sponsored plans will lower the costs of health care due to competition in the private sector.

      However, I have never seen any discussion about the details, specifically about the risk pools that are created or if it is individual underwriting. Until you have details on the specific plans we can only theorize about the expected results.

      This blind belief in markets, unsupported by past experience is driving part of the health care debate to the point of ending Medicare and abandoning employer sponsored plans and their tax advantages. Isn’t that what the public option vs private plan, Medicatre vs Ryan/Romney debate is all about? Am I missing something?

    • i don’t quite understand the hypothetical medicare vs medicare advantage and competitive bidding

      medicare advantage is a subsidized variant of medicare (private insurers extract a flat fee for “carving-out” enrollees from traditional medicare in addition to any monies they accumulate by reducing demand for health care services)

      aetna et al are private insurance companies which rely on their marketing capability to gain subscribers

      medicare has no comparable marketing apparatus

      the “market” as such in health care has several independent islands

      traditional medicare enrollees participate in the closest thing to a “market” – they get to choose providers (but provider fees are set by the government) – medicare advantage enrollees enjoy the benefit of a restricted provider network and being subjected to their care services being managed by an insurance company

      employees of companies subsidizing health insurance have no feet – a corporate market – the employer is the customer who buys health insurance – but in this market employers and private insurance companies are able to negotiate to pass off some of the costs to the employees who are not at the negotiating table

      individual and small group insurance are sold in a market that pools people in such ways as to maximize profits to the insurer and minimize the benefit of pooled risk for the person(s) covered

      asymmetry?