• The Economic Necessity of a Public Option

    The fundamental problem in health care in the U.S. is that we spend so much to get so little. The current health reform effort is unlikely to address this problem in the short term. But it will establish the institutional structure of health care financing within which it must one day be faced. At the moment it is not entirely clear what form this institutional structure will take. But any way you slice it, it is hard to see how to achieve cost, volume, and quality control without some form of public option.

    At the moment, the market power of health care providers (e.g. hospitals) is largely being viewed as inviolable. In fact, and ironically, for reasons of payment reform described elsewhere on this blog providers may be encouraged toward greater integration and coordination. It is a reasonable expectation that provider market power will not diminish under health reform.

    At the same time, there is a renewed interest among Democrats to repeal the existing exemption from federal antitrust law currently enjoyed by insurers under the 1945 McCarran-Ferguson Act. While the direct effects of repeal, if any, are uncertain (as discussed in today’s companion piece by Ian), this move strongly suggests an intent to break up large insurers and dilute insurance markets.

    With insurers weakened, what would serve as a counter-weight to the power of provider groups that is expected to maintain or increase? Who or what would have the power to bargain on behalf of consumers? It would have to be an entity capable of negotiating (or dictating) low prices, reasonable volume, and high quality. An insurer without substantial market power cannot do it, but a public option could.

    On the other hand, if we permit insurers to maintain sufficient market power to extract low prices from providers, what would compel them to pass the savings on to consumers? With little competition they wouldn’t have to. But a fallback version of the public option–one that entered if insurers didn’t offer affordable premiums–would serve as a stick.

    Whatever market structure health reform encourages it had better be one that includes mechanisms for cost, volume, and quality control and, moreover, does so on behalf of consumers, not just to the benefit of insurers. At a high level, I don’t see how we get from here to there without at least the threat, if not the reality, of some form of public option. The only other approach I can fathom is to dilute the power of providers. But, for perhaps sound political reasons if not to facilitate payment reform, that does not seem to be in the works.

    • Here is a simpler answer:

      Force healthcare providers to have a single price. E.g. if you accept $60 for an office visit, that is your price for *everyone* no matter whether they are insured or not.

      a) Suddenly, not being insured is not nearly as expensive.
      b) The poor can suddenly afford 3-4x more healthcare than they can today
      c) Healthcare providers need to be more selective about their insurance carriers- if an insurer wants to pay $50 for a visit, the doctor will be forced to lower his price to $50 for everyone (or not accept that insurance). This creates compeition between insurers to have the best payment plans.
      d) This creates competition between doctors to have better prices to match the most competitive insurers.

      To make this work, we’d also want to allow intrastate insurance providers, and repeal state & local insurance regulations.

      There is no reason to have a public plan, and the public plan has the risk of creating a new Social Security. That is a risk we cannot afford.

      • @Mike – Who decides what that single price is? Or, if it is formulaic, who decides on the formula? Just thinking out loud: if it is the price of the lowest possible non-public payer then the largest insurer wins. If it is some average price (maybe insurers all bid and an average is taken) then some will be priced out but some will remain (no problem with that).

        Having barely thought through the mechanics of this, let’s turn to politics. Ain’t gonna happen. Providers won’t go for it. And they’re politically powerful, in case you haven’t noticed (which I’m sure you have).

        So, again, while there are many ingenious ideas out there, only a small number are politically viable. I could point out that many other countries have perfectly reasonable approaches to health care yet we’re not doing any of those either. I’m interested in the best politically possible ideas. I’m afraid this isn’t one of them.

        @Aurthur_500 – I don’t think a public option has to kill the insurance industry. If it is available only to a small subset of the population it could actually help the industry by sucking up some bad risks. The insurance industry is powerful. I think they’ll find a way to survive. To politicians, their money is as good as anyone else’s. Don’t count them out.

    • @Austin. I don’t understand your response here. I worked in private industry and we had to be very careful in our pricing. We had to have an economic or competitive market justification for offering discounts to our customers. Furthermore, our list prices and discounting structures would have to be within the realm of reason or we would get laughed out of the marketplace.

      It seems to me that higher education and health care are suffering from the same problem. With such few people paying the full tuition because of financial aid, set your tuition rates at astronomical levels. However, many more people are being truly hurt by high retail pricing in health care than in higher education. Why are there no studies on how un- and under insured being hurt by this if this is the population we are most concerned about?

      • @Roger – Sorry. What response to what are you referencing?

        Yes, that the patient doesn’t pay (much) to providers and the entity they do pay, the insurers, are not providing the service imposes a lot of distortion.

        On the relationship between cost and receipt of care or the effects thereof on the un- and under-insured: try Google Scholar. There are loads of studies.