The Agenda

Patiently Explaining the Case Against A Strong Public Option

In his latest column, Paul Krugman makes the case against Reaganism. He also seems baffled by opposition to the public option.

The debate over the public option has, as I said, been depressing in its inanity. Opponents of the option — not just Republicans, but Democrats like Senator Kent Conrad and Senator Ben Nelson — have offered no coherent arguments against it. Mr. Nelson has warned ominously that if the option were available, Americans would choose it over private insurance — which he treats as a self-evidently bad thing, rather than as what should happen if the government plan was, in fact, better than what private insurers offer.

Let me walk through — very slowly — an argument that I consider coherent and convincing. In June, the Commonwealth Fund published “Fork in the Road: Alternative Paths to a High performance U.S. Health System.” I should stress that the authors strongly endorse a public option. The paths include:

  • Public Plan with Medicare Payment Rates. This path includes a public health insurance plan that pays providers at Medicare rates and is offered alongside private plans within a national health insurance exchange.
  • Public Plan with Intermediate Payment Rates. This path includes a public insurance plan that pays providers at rates set midway between current Medicare and private plan rates and is offered alongside private plans in a national health insurance exchange—and subject to the same market rules as they are.
  • Private Plans. This path does not include a public plan option; it includes only private plans offered to employers and individuals through a national health insurance exchange.
  • The researchers argue that the closer a Public Plan sticks to Medicare rates, the more likely it is to generate system-wide savings.

    Health system savings. All three paths would produce substantial health system savings over the 11-year period from 2010 through 2020, with cumulative savings of $3.0 trillion under the Public Plan with Medicare Payment Rates scenario, $2.0 trillion under the Public Plan with Intermediate Payment Rates scenario, and $1.2 trillion under the Private Plans scenario.

    And if the Public Plan does indeed pay providers at Medicare rates or intermediate payment rates, we will inevitably see “cost-shifting,” i.e., squeezed providers will presumably demand that private insurers reimburse them at higher rates. Over time, this will make private insurance plans less attractive relative to the Public Plan. Indeed, this would be true from the start of a robust Public Plan.

    Impact on premiums. Estimates indicate that premiums for the public plan choice in the Public Plan with Medicare Payment Rates path would initially be 25 percent below those currently available for a comparable benefit package in the private individual/small firm market and 16 percent lower under the Public Plan with Intermediate Payment Rates scenario (Exhibit ES-4). Private plan premiums would initially be 3 percent lower within the exchange as it facilitates the process of choosing plans and reduces administrative costs, especially for individuals and small businesses.

    The report’s authors suggest that this will spur innovation among private insurers, and they float a legislative change that really would transform the medical marketplace. I’ve marked it in bold below.  

    Effective private-sector cost containment. Offering a public health insurance plan as an alternative choice should be a catalyst for private plans to innovate in the way they operate and pay for care. It would help them reduce their administrative costs and implement payment and system reforms that lead to more appropriate utilization, better care, and slower cost growth—and, in the process, contribute to reduced premiums. Community health plans partnering with integrated health care delivery systems in particular have considerable potential to achieve economies through redesign of care, control of chronic conditions, and prevention of avoidable hospitalizations. Private plans could also be given the authority to adopt public plan payment methods and rates. If private plans adopt effective cost-containment measures sufficient to slow a rise in their premiums relative to trends in public plan premiums, over a three-to-five-year period public plan premiums and private plan premiums within the exchange would be roughly comparable.

    If private plans were given the authority to adopt public plan payment methods and rates, rest assured, private insurers would be fighting tooth and nail for a public option. Medical providers, in contrast, would be extremely upset.

    Many progressives argue that there is no reason why a Public Plan should operate on a level playing field with private plans. Why not use its monopsony power to deliver better outcomes? This view makes sense when you consider the origins of the Public Plan concept as a more politically palatable alternative to single-payer — the idea is to achieve a single-payer option in stages.  

    So it’s not terribly interesting to say that the Public Plan would be “better” than private insurance plans when it can force providers to accept lower rates of reimbursement.

    I would get better prices at my local sandwich shop if its owners were legally obligated to sell me sandwiches for twelve cents. It’s by no means obvious that other customers would be better off. To be sure, I could then resell my sandwiches to other customers by setting up a stand outside of the original sandwich shop. Said customers would be delighted to patronize my new “business.” For a while, we might even generate “system-wide savings.” But surely the providers would object, particularly as customers who pay the standard rates start drying up. Believe it or not, a few sandwich shops might even go out of business

    This is, of course, a gross oversimplification. As Shannon Brownless has argued, American medicine suffers from oversupply in some areas and undersupply in others. In my view, fee-for-service medicine is the problem, a case David Ignatius made in an excellent column published last week. Perhaps medical providers should be encouraged to work for less. I certainly think we can organize providers into more efficient networks. There are many good reasons to oppose single-payer. For example, systems with a bias towards catastrophic coverage tend to yield far greater savings, which is one reason why Michael Graetz and Jerry Mashaw favor such an approach in their book True Security. This is, admittedly, a somewhat subtle argument. But surely it’s coherent.  

    Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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