Non-Public Option Options

With the public option off the table, House Democrats are looking for ways to achieve by other means the reduction in premiums such an option was expected to deliver. The ideas mentioned in media reports include increasing competition among insurers by revoking their antitrust exemption.

That’s good politics but questionable economics. On this blog Ian and I have been over the issues of antitrust exemption and insurer market concentration several times. The upshot is that it is by no means clear that revoking insurers’ antitrust exemption will achieve the Democrats’ goals of reducing costs. Weaker insurers will be less able to negotiate low prices with providers. And lower health care prices paid by insurers are a necessary, though not sufficient, condition for lower premiums.

On theoretical grounds I’ve argued that a public option could play an important role in forcing insurers to pass lower prices on to consumers. A public option that serves as a competitive threat (the notion of contestability) could do just that. In the absence of a public option, what can be done to lower prices for consumers? What will help insurers (large and small) extract lower health care prices yet prevent them from keeping the savings as additional profit?

Two ideas. The first is to increase minimum required loss ratios, the fraction of premium revenue paid out in medical costs. Such increases are already in the House and Senate bills (to 85% for the large group market in both bills, 80% for the small/individual markets in the Senate bill). If they are perceived as too low then House Democrats should negotiate for increases. The higher the required loss ratio, the less is left for insurers’ non-medical expenses (profit, management, marketing, administration).

The second idea is to begin to establish incentives for provision of care that is itself lower in cost. Again, there are already a variety of ideas in health reform legislation to do just that. There was a recent blogosphere kerfuffle over whether legislative cost control ideas ever actually lead to genuine cost reductions (Tyler Cowen is skeptical, The Center on Budget and Policy Priorities is far more sanguine). My view is that we can’t tell from the current debate whether or not cost controls are likely to work because stakeholders haven’t fully engaged on this issue yet.

When the cost control debate begins in earnest (and it is coming, but not this year) will budget-concerned policymakers be able to stand up against the considerable pressure the hospital industry will bring to bear? I don’t know. A lot depends on the political and economic context.

What I do know is that if Democrats really want public option like results from non-public option reforms this is a fight they’ll need to have. That they’re hanging their hat on antitrust reveals that they don’t welcome such a fight today. That’s politically savvy but it isn’t going to get the job done on costs.

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