It Takes Power to Bend the Curve

With growing health care costs the main fiscal threat, insurance options with no power to tame them should play no role in the future U.S. health care system. Oddly, some Democrats are arguing simultaneously for the inclusion of one such powerless option (a rather weak form of public plan) while pushing for the exclusion of another (a type of plan that currently exists under Medicare).

With respect to the public option Ezra Klein is right. The way in which a public option could bend the health care cost curve downward is principally through the pricing power a strong version could have with respect to providers, not through its effect on the insurance market. It is being sold as a way to discipline insurers because Americans by-and-large are comfortable vilifying insurance companies. But it is really providers–doctors and hospitals–and the prices they negotiate with insurers that play the greatest role in health care costs.

But in its current or likely ultimate form, the public option is so watered down it will be powerless with respect to providers. In that sense it won’t help with costs and therefore isn’t worth fighting for, which leads to Ezra Klein’s other idea for liberal Democrats to consider: the public option’s value in a political trade may be higher than its intrinsic worth. Perhaps it is time for the public option to go.

If I had mantras throughout this season (these seasons) of health reform one would be, “look to Medicare” and the other, “it’s about market power.” Of course Medicare has loads of power in its hugely popular traditional fee for service (FFS) option. With that power a lot can and likely will be done to bend the curve through FFS payment reforms. But what of the other arm of Medicare, known as Medicare Advantage (MA)? In what way does it or can it use market power to act as a counterbalance to providers? Can it be reformed to actually reduce wasteful health care spending?

If so, the first step is cutting the government payments to MA plans back to where they belong. Currently MA plans are paid about 112% of the cost FFS Medicare would incur to provide coverage. Once upon a time such plans were paid 95% of average FFS costs. At first glance it isn’t obvious why cutting MA payments will help. Here’s how: the greatest source of recent MA cost growth has been due to the surge in popularity of a certain sub-type of MA plan known as private fee for service (PFFS). PFFS may not be well known, but it is the poster child for how an insurance market with little power over providers wastes a lot of money. My published research shows that cuts in payments will decimate the PFFS plan type.

PFFS plans came into existence and were given favorable treatment at the urging of special interest groups, some of which had the ear of former speaker Dennis Hastert. Over the last five years they’ve grown from near non-existence to about 20% of total MA enrollment. They’re the highest paid MA plan type, sucking down payments nearly 117% of average FFS costs (five percentage points higher than MA plans are paid on average). PFFS plans offer the least generous benefits, and they do absolutely nothing to control costs. They do not manage care and, most importantly, they do not negotiate with providers. In contrast MA HMOs, while also overpaid, are paid less than PFFS plans, and they do manage care and negotiate with providers. PFFS plans are a hemorrhage and should play no role, indeed by their nature cannot play a role, in the future of health care cost control.

If the Democrats have their way, they will not. The Senate voted twice last week to retain provisions in its health reform bill to cut payments to MA plans that will nearly eliminate the PFFS plan type. If there is to be any chance of bending the cost curve, removing the Medicare option that is powerless to do so makes perfect sense. Meanwhile, continuing to fight for a powerless public option is hard to justify.

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