By Kip Sullivan, JD

Advocates of a “public option” claim that the “option” will look like Medicare. They say this about the “option” in both bills that have been introduced to date – the House “reform” bill, HR 3200, and the bill written by the Senate Health, Education, Labor and Pensions (HELP) committee. But this statement is not true.

Medicare is larger than any private insurance company; the “option” in both bills will be small. The traditional Medicare program is a single program with uniform benefits; the “option” in both bills will be a balkanized program that may not be available in all parts of the country. Medicare is administered by public employees; the “options” in both bills will be administered by private-sector corporations, some or all of which will be insurance companies. The “option” in neither bill resembles Medicare.

Review of two previous papers

The “option” provisions of the Senate HELP Committee bill appear in Section 3106. HR 3200’s “option” provisions appear in Title II, Subtitle B, entitled “Public health insurance option.” I have already discussed in some detail Section 3106 in a paper posted on August 14. Readers who want more details on Section 3106 should read that paper.

In another paper I have discussed the claim by “option” advocates that the “option” in HR 3200 is superior to the “option” in the Senate HELP bill. Those who make this claim rest their argument on a mere two sentences in HR 3200. One sentence says doctors and hospitals that participate in Medicare will be deemed to be participants in the “option” unless they “opt out” of the “option.” The other says the “option” is authorized to pay providers at rates linked to Medicare’s rates. Neither argument makes sense. Both sentences are useless and do nothing to augment the power of HR 3200’s moribund “option.”

The purpose of this paper is to examine the rest of the “option” provisions in Title II, Subtitle B of HR 3200 to see if there is any reason to describe HR 3200’s “option” as “like Medicare.” I begin with a summary of the ways in which the “options” in HR 3200 and the Senate HELP bill resemble each other.

Comparison of the “options” in HR 3200 and the HELP bill

The “option” sections of HR 3200 and the HELP bill have these features in common:

~ Both bills authorize the Secretary of DHHS to sell health insurance to the non-elderly. HR 3200 calls the program that will do this the “public health insurance option” while the HELP bill calls it “community health insurance options.” In both bills, “option” insurance can be purchased only within an “exchange” (a one-stop shopping center for health insurance). The exchange will clearly be multiple exchanges at the state level under the HELP bill. The exchange will probably be a single national program under HR 3200.

~ Both bills authorize a start-up fund for the Secretary to use in some unspecified manner to get the “option” program up and running, and require the Secretary to “provide for the repayment” (HR 3200’s phrasing) of the start-up fund within ten years.

~ Both bills authorize subsidies for the relatively small number of Americans who will be eligible to shop within the exchange. These subsidies will be given to eligible individuals regardless of whether they use the subsidy to buy insurance from the “option” or from an insurance company.

~ Both bills authorize the Secretary to contract with corporations to conduct unspecified activities that will somehow lead to the creation of an “option” program throughout the country.

I want to dwell at some length on this last shared feature for two reasons. First, the language in both bills setting forth the role of corporations in creating the “option” is rather convoluted. Second, it’s an extremely important feature.

The bills do not describe the criteria that corporations have to meet to get contracts from the Secretary; instead they refer the reader to criteria laid out in Section 1874A of the Social Security Act. That section spells out criteria corporations have to meet to win contracts to administer the current Medicare program. Under Section 1874A, corporations that win contracts to administer the Medicare program are called “Medicare Administrative Contractors” (MACs). (The task MACs carry out for Medicare is limited in its scope: It is to process claims filed by providers who treat Medicare patients.) Even though the authors of the HELP bill and HR 3200 want the Secretary to use MAC-like criteria in deciding which corporations to contract with to create the “option” program, they chose not to use the “MAC” label for the corporations that will create the “option.” The HELP bill calls them “contracting administrators.” HR 3200 gives these entities no name at all. For lack of a more convenient term, I will refer to the MAC-like corporations in the HR 3200 as “contracting administrators.”

As the preceding rather convoluted description of MACs and contracting administrators suggests, neither the HELP bill nor HR 3200 makes it easy for readers to grasp that corporations, not public employees, will create, and probably run, the “option” program. Neither bill comes right out and says, “The Secretary shall hire private-sector corporations to create and run as many health insurance companies as is necessary to make health insurance available for sale to the non-elderly in each health insurance market in America.” Nor is that fact being ballyhooed by the bills’ authors and proponents. But it’s an important feature for “option” supporters to understand because it undermines the claim “option” advocates make over and over that the “option” will look like Medicare.

In the next two sections, I discuss in more detail the evidence that supports the conclusion that HR 3200’s “option” will be created by corporate America and, in all other important respects, will look like the HELP “option.” I begin with curious statements by Sen. Harry Reid and a spokesman for Health Care for America Now supporting this thesis, and then turn again to the text of HR 3200.

Reid and Kirsch agree the “option” could be run by a private corporation

The fact that the “option” programs in both bills will be run by privately owned corporations was hinted at by Sen. Majority Leader Harry Reid and Richard Kirsch, the campaign director of Health Care for America Now, on September 1. As the following excerpt from a post on Talking Points Memo suggests, the Democratic leadership and HCAN have known since these bills were first drafted that the “option” programs will not be Medicare-like, but rather will be administered by one or more private-sector corporations:

During a Friday tele-town hall event, Sen. Majority Leader Harry Reid told constituents that he doesn’t think the public option ought to be a government run program like Medicare, but instead favors a “private entity that has direction from the federal government so people that don’t fall within the parameters of being able to get insurance from their employers, they would have a place to go.”
Today, a Reid spokesperson tells me, “[t]he idea is that [Department of Health and Human Services] could contract with a third-party administrator to do the administrative stuff. It would still be policies set by HHS.”
Though this isn’t the reform community’s first preference, it is something they could get behind.
According to Richard Kirsch … such an arrangement might work out OK.
The public option “doesn’t have to be a government agency, though we’d prefer it,” Kirsch said. “The entity would have to be accountable to the public, its risks borne by the public, and its policies set by a public entity.”

Note that both Reid and Kirsch used the singular form of “entity.” They did not use the plural form. That suggests that they were thinking of turning the “option” over to a single corporation, say, United Healthcare, rather than to multiple corporations. In view of the actual language of HR 3200 (which I will discuss further below), and given the rabid resistance such a proposal would provoke – not just from “option” supporters and the public but probably from the insurance industry as well (the industry would no doubt prefer to see multiple contracts scattered among its members) – it is extremely difficult to believe that Reid and Kirsch really meant to imply that the entire “option” program will be turned over to a single corporation.

But regardless of whether Reid and Kirsch really meant to refer to one corporate administrator or dozens of them, why would they wait until September to drop the hint that the “option” will be run by one or more corporations? They have known, or should have known, since at least June (when draft versions of both bills were published) that corporations will play a dominant role in the creation and administration of the “option.” My guess is that Reid and Kirsch avoided revealing the role of corporations till now in order to maintain the illusion among “option” supporters that the “option” will be run by public employees. It’s pretty difficult to convince people the “option” will “look just like Medicare” when you admit it will be run by corporations, many of which will probably be insurance companies. I think Reid and Kirsch decided they might gain more than they lost if they revealed the fact that the “option” will not only create millions of new customers for the insurance industry, but will let corporations actually create the “option” program. They were hoping, in other words, to win over a few Blue Dogs and maybe a Republican or two without losing the votes of any member of Congress who already supports the “option.”

Reading the entrails of HR 3200

Several provisions of Title II, Subtitle B in HR 3200 indicate the authors of HR 3200 understand that the “option” will be run by multiple corporations. These provisions, coupled with an understanding of the obstacles that these corporations will have to overcome to create “option” insurance in every region of the country, support the conclusion that HR 3200’s “option” program will not look like Medicare, but rather will look very much like the hodge-podge of privately-run programs proposed by the Senate HELP Committee.

Three provisions in HR 3200 support the conclusion that the “option” will be run by corporations. One, which I have already discussed briefly, authorizes the Secretary to contract with what the HELP bill calls “contracting administrators.” A second requires the Secretary to make these contracting administrators repay their loans within ten years. A third authorizes the Secretary to engage in “direct contracting with providers” and direct negotiations with drug companies.

HR 3200 authorizes contracts with multiple corporations

Like the HELP bill, HR 3200 indicates public employees will not be setting up the “option” or “options.” This fact stands in sharp contrast to expectations created among the public by “option” advocates. HR 3200 communicates this fact by not authorizing the hiring of public employees and, instead, authorizing the Secretary to “enter into contracts” with corporations described in subsection (a)(4) of section 1874A of the Social Security Act. When you track this statute down and read it, you discover that HR 3200 is talking about corporations called “Medicare Administrative Contractors.”

Notice that the clause from HR 3200 I quoted above – “enter into contracts” – refers to “contracts,” plural. HR 3200’s bill writers obviously anticipate the Secretary will be signing multiple contracts with multiple MAC-like corporations. As I noted in my August 14 article about the HELP bill, the corporations that now qualify for MAC contracts with Medicare are nearly all insurance companies. This shouldn’t be surprising; the skills a corporation is supposed to have to get a MAC contract are virtually identical to those possessed by the typical insurance company. (At the end of this article I present the list of the current MACs I presented in my August 14 paper.)

There are several minor differences between HR 3200 and the HELP bill on this issue of MAC-like contractors. One is that HR 3200 does not require that the MAC-like corporations that get contracts with the Secretary be non-profit, whereas the HELP bill makes the non-profit requirement very clear.

Loan repayment provision

In addition to the remarks by Reid and Kirsch quoted above and the provision in HR 3200 authorizing the Secretary to hire private corporations, two other provisions in HR 3200 strongly suggest that HR 3200’s authors expect the “option” to be run by private corporations. One of them is the provision creating a start-up fund for the “option.”

HR 3200 uses peculiar language to describe who can use this start-up money and who has to repay it. In a paragraph entitled “Start-up funding,” HR 3200 says, “there is hereby appropriated to the Secretary … $2,000,000,000” (emphasis added) plus additional funds “necessary to cover 90 days worth of claims reserves based on projected enrollment.” But in the section requiring these start-up funds to be repaid within ten years, HR 3200 doesn’t say the Secretary shall repay the loans. Rather, it says, “The Secretary shall provide for the repayment of the start-up funding” within ten years (emphasis added).

Is this not peculiar phrasing? If the Secretary is the borrower, why not simply say the Secretary “shall repay the loan”? The only plausible explanation is that the Secretary isn’t going to be the ultimate borrower. The only plausible explanation is that the Secretary will turn around and lend the money to another entity, or more likely, multiple other entities, namely, contracting administrators. For reasons known only to the authors of HR 3200, the bill does not contain language analogous to that in the HELP bill which clearly indicates entities outside of DHHS will be the recipients of the start-up funds. Despite this peculiar omission, it is reasonable to infer that multiple MAC-like entities will be receiving loans from the Secretary under HR 3200.

Why did HR 3200’s authors insist on using the unnecessarily opaque phrase, “shall provide for repayment”? My hypothesis here is identical to my hypothesis about why Sen. Reid and Richard Kirsch delayed revealing the role of corporations in the administration of the “option.” My hypothesis is that the authors of HR 3200 didn’t want to reveal to the public the dominant role private corporations will play in creating and administering the “option.” What the authors of HR 3200 really wanted to say was, “The Secretary shall include in all contracts with contracting administrators a clause requiring that they pay back all loans from the Secretary within ten years.” They didn’t do that because it would have revealed the secret – that the “option” won’t be run by public employees, at least not directly, and it will not look anything like Medicare.

Direct contracting

The third provision in HR 3200’s Title II, Subtitle B which suggests the “option” will be run by multiple corporations is one which authorizes the Secretary to engage in “innovative payment mechanisms,” including “direct contracting with providers.” For those who know what “direct contracting” means, this is a telling clause.

In health policy, “direct contracting” is used to describe the practice of self-insured corporations contracting directly with clinics and hospitals on behalf of their own employers. Direct contracting spread rapidly among large corporations in the early 1990s as employers struggled to find ways to cut their health insurance costs. The contracts between employers and providers are called “direct” in order to distinguish them from the more traditional contracts between employers and insurance companies in which an insurance company agrees to serve as the middleman between the employer and the provider.

The explicit authority in HR 3200 for the Secretary to resort to “direct contracting with providers” makes sense only if the authors of HR 3200 understood that the “option” that the Secretary will oversee will consist of dozens or hundreds of insurance companies. If the “option” really were going to look like the traditional Medicare program – a single program in which Medicare reimburses providers directly – there would be no need for HR 3200 to explicitly authorize the Secretary to deal directly with providers.

Another provision in HR 3200 authorizing the Secretary to negotiate on behalf of all “option” enrollees with the drug industry raises a similar question. If direct negotiations with drug companies has to be specifically authorized by HR 3200, doesn’t that imply that the authors of HR 3200 understand that medical goods and services will be delivered by the “option” through a hodge-podge of insurance companies, just as prescription drugs are now delivered through hundreds of insurance companies under the privatized Medicare Part D program?

The logistics of creating the “option”

Even if HR 3200 stated clearly that the “option” will be run by public employees and not corporations, it would still be reasonable to conclude that the “option” program won’t be a single, uniform program like Medicare, but will instead consist of many programs that vary by state and region. The obstacles that will have to be overcome to create “option” insurance will be the same regardless of whether public or private employees are in charge. Those obstacles will vary from one insurance market to another. The primary obstacle will be the power of the insurance industry in any given market, and this power will be determined primarily by how concentrated the industry is. It will be more difficult to establish the “option” in those markets where one or two insurers insure a majority of the local population than in those markets where no single insurer dominates.

Depending on how successful the corporations in charge of creating “option” insurance are, some parts of the country may have no “option” coverage available at all, some might have “option” insurance that meets only the minimum criteria for coverage spelled out in HR 3200 and the HELP bill, and some might have “option” insurance that exceeds the minimum coverage. Other significant features of the “option” could vary as well, including the premiums and how tightly managed the coverage is (including how much freedom enrollees will have to choose their own doctor).

We need truth in advertising about the “option”

When Jacob Hacker began promoting what is now called the “public option” in 2001, he referred to it as “Medicare Plus.” Given the enormous size of this version of the “option” (Hacker predicted it would enroll at least half of the non-elderly population), Hacker’s comparison of his proposed program with Medicare was not misleading. But after the Democrats introduced draft versions of the Senate HELP bill and HR 3200 last June, “option” advocates should have immediately ceased comparing the “option” to Medicare.

They did not do that. They continued to barrage the public with statements linking the “option” with Medicare. For example, in an interview posted on AlterNet on July 8, Howard Dean responded to a question about what the “option” looks like by saying, “In a nutshell, it looks like Medicare.”

One would think “option” supporters would have an especially strong motive to stop misleading the public about what the “option” will look like. They risk serious embarrassment if the “option” they keep comparing to Medicare turns out to be a hodge-podge of small, ineffective insurance companies created by private corporations. But I am aware of only two instances in which “option” advocates have so much as hinted at the possibility of this outcome. In a paper posted on August 20, Jacob Hacker conceded in a parenthetical remark that “the HELP bill appears to leave open the possibility … that the public plan could be contracted out to private insurers or at least established on a state-by-state basis, two undesirable approaches that should be clearly ruled out in subsequent legislation.” (page 2) The other instance was the September 1 comment by HCAN’s Richard Kirsch, which I quoted above, in which Kirsch agreed with Sen. Reid that the “option” might be administered by a private-sector firm.

“Option” advocates need to do better. They need to tell congressional Democrats the “options” in the HELP bill and HR 3200 will be no match for the insurance industry and that unless the Democrats rewrite the “option” sections to create “options” like Hacker’s original Medicare Plus, they will urge members of Congress and the public to oppose the “reform” legislation.
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Appendix: List of corporations that currently serve as “Medicare Administrative Contractors” for Medicare
• Cahaba Government Benefit Administrators, a subsidiary of Blue Cross and Blue Shield of Alabama;_• First Coast Service Options, a subsidiary of Blue Cross and Blue Shield of Florida;_• Highmark Medical Services, a division of Highmark Blue Cross Blue Shield of Pennsylvania;_• National Government Services, a subsidiary of WellPoint, the nation’s largest health insurance company measured by enrollment (as opposed to revenues);_• National Heritage Insurance Corporation, which is a subsidiary of Electronic Data Systems (the firm Ross Perot founded) which is now a subsidiary of Hewlett Packard;_• Noridian Administrative Services;_• Palmetto GBA, a subsidiary of Blue Cross Blue Shield of South Carolina;_• Pinnacle Business Solutions, a subsidiary of Blue Cross Blue Shield of Arkansas;_• Trailblazer Health Enterprises, a subsidiary of Blue Cross Blue Shield of South Carolina;_• Wisconsin Physicians Services Health Insurance Corporation.
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Kip Sullivan is a member of the steering committee of the Minnesota chapter of Physicians for a National Health Program.