• The Role for a Public Plan

    This post originally appeared on The Finance Buff.

    As I wrote previously, I’ve yet to find a compelling economic argument for a public plan option as part of a remade health system for the non-elderly. If there is an argument, it hinges on market failures, which no doubt exist in health care. Moreover, I see no other way to achieve universal coverage (if that is the goal) or to make coverage affordable to all (if that is a goal) without use of public resources. But I don’t see how any goal, short of single payer, leads necessarily to the required participation of a public plan. Economics may indicate that government participation is necessary, but I’ve yet to see how it unambiguously suggests the precise form that participation takes.

    What I would find more plausible is an argument that calls for a public fallback option. That is, if the private market does not provide solutions to the problems we wish to solve in some market then a public plan that does so by government fiat would enter in that local market only. In principal the private market could be regulated in any number of ways and benchmarks for various goals could be set. If an insufficient number of plans participated in an area and/or goals were not met in some market, that would define market failure and justify a public plan in that particular market (not everywhere necessarily and possibly not anywhere if the private market proves to function well).

    A public plan as fallback is not a new idea. I’ve seen it discussed elsewhere (here is one example). And, it is precisely what is provided in the legislation that authorized Medicare Part D (Medicare Modernization Act of 2003, MMA). If an insufficient number of private plans participate in a region under Part D, a government plan enters to fill the void.

    So far, there has been ample private plan participation in Part D. The value the program provides to beneficiaries is substantial (source). There is genuine competition among plans. In many ways Part D is well designed, far better from an economics perspective than FFS Medicare (with government-set prices that contributed to a primary care doctor shortage) and Medicare Advantage (with administrative pricing that invites insurer rent seeking).

    Part D is not perfect. I can think of a few things I’d change. For instance, I would remove the formulary inclusion requirements and would not allow plans to adjust formularies during the year (while most beneficiaries are locked into a plan), just to name two. But these are relatively minor tweaks to an otherwise successful program: one that does not currently include a public plan but provides that option if a true market failure arises.

    A fallback public plan concept forces the debate to focus on what would justify government entry. That is, it calls to the surface a dialogue around what we mean by market failure. What are our goals for health reform? What regulations might make fulfilling those goals with maximum benefit to the taxpayers and populace most likely? While it is clear that the “first best”—unfettered private markets—is unpopular, it is not at all obvious to me that government provided insurance is second best. Government subsidization and regulation, with public insurance as a backup, would allow benefits of market competition (if any) to emerge with protection from market failure if they do not.

    • “I’ve yet to find a compelling economic argument for a public plan option as part of a remade health system for the non-elderly.”

      I think I have a couple.

      “…Medicare beneficiaries are generally more satisfied with their health care than are persons under age sixty-five who are covered by private insurance. Medicare beneficiaries report fewer problems getting access to care, greater confidence about their access, and fewer instances of financial hardship as a result of medical bills.”
      Medicare Versus Private Insurance: Rhetoric And Reality

      The recent Lewin Group report estimated the difference in cost between a public and private plans:

      “On average, the monthly premium in the public plan for a typical benefits package would be $761 per family compared with an average of $970 per family in the private market for the same coverage.”
      The Cost and Coverage Impacts of a Public Plan: Alternative Design Options
      April 6, 2009

      By omitting a public option you’d only be requiring families to pay an average of $2500 more annually for coverage that, judging by consumer satisfaction with Medicare, they would be unhappy with. That just doesn’t seem right.

    • SteveH,

      While your comment has numbers in it, it is not an economic argument of the type I was alluding to.

      There is a new version of the Health Affairs paper you cited. In it, the authors acknowledge that there are differences between Medicare and insurance for the working age population other than the public provision of the former and the private provision of the latter. It is possible that much of the difference in satisfaction between Medicare beneficiaries and the non-elderly is due to things other than the public or private nature of the two systems. In fact, as the authors state, many Medicare beneficiaries have private supplemental plans.

      Lewin’s analysis used Medicare’s payment levels, which are 70-80% of private payment levels. As acknowledged in the Lewin report, this is a substantial pay cut to providers. Judging from the current rent seeking behavior of provider groups and Congress’ willingness to cave to their demands, I am not optimistic about the long term stability of Lewin’s estimates. That is, there may be savings to families initially, but they would soon be followed by rapid price increases and reductions in provider availability.

      There are methods of keeping the politics at arm’s length from the payment system. One (so far) successful one is in Medicare Part D, which has private plans that competitively bid. I have more confidence in such a system for long-term stability of prices.

    • The argument that I find most compelling in favor of a public plan is that it may be able to address the biggest market failure issue I see in health care, that of altering state-sanctioned barriers to entry in the industry.

      Over the past four decades, fueled in part by Medicare and Medicaid extending coverage to millions of people and by the more liberal provider reimbursement terms put into place, US health care providers have seen their incomes explode relative to what health care providers in the rest of the world make. This is not just a criticism of physicians, but extends to facilities, pharmaceutical companies and medical equipment manufacturers. A combination of state licensing requirements, caps on medical training slots, and strict intellectual property protections are responsible here for limiting the market’s ability to allow the supply of care to meet demand in an efficient manner.

      The result in the US has been that our health care system now lags most industrialized countries in quality and access metrics, while costing us a higher share of GDP than any other country. This is an “income” effect from many perspectives.

      What a public plan can do is apply government price leverage (exercising market power and legal authority) to drive reimbursement levels down closer to what the rest of the world pays for health care. Private plans to date have not been successful in doing so, but evidence from other countries suggests that this is a role the government can execute quite effectively when it chooses to.

      Will this have second-order effects on the quality of care? It will reduce the attraction of going to medical school to become a physician, and shift more of the business case of investing in incremental new technology to markets outside of the US. No more free rides on the US R&D engine in health care.

      I don’t believe that this is necessarily a bad thing, as it will force the health care delivery system to change. The resultant imbalance of demand far in excess of shrinking supply will force greater efficiency on the system. The market will force barriers to entry to provide medical care to be lowered, and greater use of physician extender resources will emerge. My hope is that this will elimnate artificial barriers and make health care delivery more like other occupations where one progresses from entry level to more senior roles by a combination of experience and training, not just through training alone.

    • Bill Springer,

      I’ve read your comment several times and I just don’t see how your argument hangs together. If the source of the problem is regulatory barriers (which you delineate at the end of your second paragraph), then why isn’t the solution to reduce those barriers?

      If price is high due to insufficient supply, forcing price down by fiat will reduce supply further, as you acknowledge. While it could of course reduce overall costs, it is a funny way to go about it if the problem is constrained supply.

      You sum up by suggesting the dynamic of price controls will push the demand-supply imbalance to the point where entry barriers will be lowered (I presume by popular demand or necessity for public health). The lowering of those barriers can be (must be) done by statute. Why not just pass those statutes now? Why set price controls hoping that they’ll, someday, make things so horrible that we demand more supply?

    • I’m confused by Bill Springer’s comment. “A combination of state licensing requirements, caps on medical training slots, and strict intellectual property protections are responsible here for limiting the market’s ability to allow the supply of care to meet demand in an efficient manner… greater use of physician extender resources will emerge.”

      The supply of physicians per capita increased greatly over the last 40 years even as health care costs exploded. The sheer number of PAs grew over 10 times between 1975 and 2000. The number of NPs was about 5 times greater in 2005 than it was in 1990. There just isn’t any evidence that this moderated health care cost increases. In fact the evidence is that increasing numbers of physicians would increase, not decrease, health care costs. If you believe that increasing physician supply or increasing the extender supply will control costs you’ll have to support this assertion with some evidence that it will work.