by Kip Sullivan, JD
October 2, 2009
Douglas W. Elmendorf
Congressional Budget Office
US Congress
Washington, DC 20515-6925
Dear Mr. Elmendorf:
I write to ask for information about the methodology the CBO used to analyze the impact of the public plan (“public option”) in the Affordable Health Choices Act (drafted by the Senate health committee) and HR 3200 (drafted by three committee chairs in the House), and the health insurance cooperatives in America’s Healthy Future Act (drafted by Sen. Max Baucus). The CBO’s discussion of the public plan called for by the Senate health committee bill and HR 3200 assumes the public plan would be available throughout the country. In contrast, CBO’s discussion of the health insurance co-operatives called for by the Baucus bill assumes the co-ops would be unlikely to thrive, or even survive, in many parts of the country.
I can find no information that indicates what evidence, if any, CBO used to reach these conclusions. My statement is based on five letters from you:
• July 2 letter to the late Sen. Ted Kennedy, chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee;
• July 14 letter to Rep. Charles Rangel, chairman of the Ways and Means Committee;
• July 26 letter to Rep. Dave Camp, ranking member of the Ways and Means Committee;
• September 10 letter to Sen. Michael Enzi, ranking member of the Senate HELP Committee;
• September 16 letter to Sen. Max Baucus, chairman of the Senate Finance Committee.
Although you have written other letters about these three bills, I believe the five letters I listed above are the ones in which you presented conclusions about the “public option” and the health insurance cooperatives that required that you determine, or at least make an assumption about, whether they could survive and participate in all, some or no US health insurance markets.
In Part I of the addendum to this letter, I quote examples of such conclusions. Here I offer a summary of the conclusions that require, in my view, an explanation of your assumptions about the viability of the “option” programs and the co-ops:
• The “public option” in the HELP Committee bill will have premiums roughly equal to those of the insurers it competes with, will enroll few people, will allow its enrollees greater freedom to choose providers, and will utilize few or none of the managed care tactics widely used by the insurance industry.
• The “public option” in HR 3200 will be able to induce a substantial number of providers throughout the country to participate in the public plan, will be able to set its premiums 10 percent below those of the plans it competes with, and will be able to enroll roughly 10 million people.
• The health insurance co-ops under the Baucus proposal will probably not survive in many markets, and where they do they will enroll relatively few people.
Obviously the first two conclusions rest on the premise that “option” insurance programs will start up and succeed in all or most American health insurance markets. The third conclusion (the one about the co-ops) rests on the premise that there is something different about co-ops from the “option” programs that warrants more pessimism. These conclusions raise these questions:
Did the CBO make an explicit determination that the “public option” program in the Senate health bill and HR 3200 will be able to establish itself in all or even some insurance markets in the United States, and if so, what evidence led you to that conclusion?
Did the CBO determine that the health insurance co-ops in the Baucus bill will not be able to survive in some or most US markets, and if so, what evidence led you to that conclusion?
Upon what basis did you determine that the public plan in the Senate HELP Committee bill will not limit enrollees’ choice of provider and will not use managed care tactics or will use them less frequently than the insurance industry does? (Enrollees will, of course, prefer these features, but these features will make it more difficult for the Secretary of the Department of Health and Human Services (HHS), who will be in charge of setting up the “public option,” to break into any given health insurance market.)
The barriers to market entry for a new insurer are very high in the vast majority of American health insurance markets. These barriers would not melt away simply because the potential entrant calls itself a “public option” (or anything else). These barriers apply to insurance companies, co-ops, “public options,” employer coalitions, and all other entities. The most important barriers are the high degree of consolidation that exists in nearly all health insurance markets and the necessity, in the age of managed care, of creating networks of providers (as opposed to simply letting enrollees see any licensed provider).
Here in Minnesota the market has been virtually impenetrable to new entrants for two decades. Numerous observers and industry insiders have said the reason for that is the high level of concentration within the health insurance industry and the need for insurers to create or rent provider networks (see Part II of the addendum to this letter for examples of such statements).
Members of Congress and the CBO cannot assume that entry into all or most of today’s health insurance markets is automatic or even feasible. Proponents of any proposal that relies on that assumption have an obligation to explain and document their assumption. To my knowledge, that has not been done. I realize the failure of the proponents of the “option” and co-ops to document that assumption makes CBO’s job very difficult. Nevertheless, I believe CBO has an obligation to call attention to the barriers the Secretary of HHS and the co-ops will face in trying to create new insurance plans and to attempt to determine whether those barriers can be overcome.
To remain silent about those barriers – to assume them away without notifying the recipients of your letters that that’s what you’ve done – strikes me as a substantial deviation from CBO’s standards.
Sincerely,
Kip Sullivan, JD
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Addendum
Part I. Excerpts from five letters from CBO to members of Congress
The new draft [of the Senate HELP Committee bill] also includes provisions regarding a “public plan,” but those provisions did not have a substantial effect on the cost or enrollment projections, largely because the public plan would pay providers of health care at rates comparable to privately negotiated rates – and thus was not projected to have premiums lower than those charged by private insurance plans in the exchanges. (Letter to Sen. Kennedy, July 2, 2009, page 3)
Another significant feature of the insurance exchanges [in HR 3200] is that they would include a public plan that largely pays Medicare-based rates for medical goods and services. CBO estimates that the premiums for …. the public plan would be about 10 percent cheaper than a typical private plan offered in the exchanges. (page 5) …. Enrollment in the public plan would also depend on the number of providers who chose to participate in it. Providers would not be required to participate in the public plan in order to participate in Medicare, and CBO assumed that some providers would elect not to participate in the public plan because its payment rates would be lower, on average, than private rates. Even so, CBO’s judgment is that a substantial number of providers would elect to participate in the public plan, in part because they would expect a plan run by HHS [the Department of Health and Human Services] to attract substantial enrollment. … CBO estimates that roughly one-third of the people obtaining subsidized coverage through the insurance exchanges would be enrolled in the public plan—so enrollment in that plan would be about 9 million or 10 million once the proposal was fully implemented. (page 6) (Letter to Rep. Rangel, July 14, 2009)
… CBO … assumed that [under HR 3200] only firms with 50 or fewer employees would be permitted to buy coverage through the exchanges, and we estimated that about 6 million workers and their dependents would obtain coverage in that way. We also estimated that about one third of those enrollees would choose the public plan…. (Letter to Rep. Camp, July 26, 2009, page 5)
Under [the Senate HELP Committee] proposal, the public plan would… pay negotiated rates to providers of health care…. CBO’s assessment is that premiums for the public plan would typically be roughly comparable to the average premiums of private plans offered in the insurance exchanges…[A] public plan as structured in the introduced bill would probably attract a substantial minority of enrollees (in part because it would include a relatively broad network of providers and would be likely to engage in only limited management of its health care benefits). (Letter to Sen. Enzi, September 10, 2009, pages 5 and 6)
(The proposed co-ops had very little effect on the estimates of total enrollment in the exchanges or federal costs because, as they are described in the specifications, they seem unlikely to establish a significant market presence in many areas of the country or to noticeably affect federal subsidy payments.) (Letter to Sen. Baucus, September 26, 2009, page 5)
Part II. Evidence supporting the conclusion that the Minnesota health insurance market is extremely difficult to enter
In 1988, the Minnesota Department of Health reported, “It is becoming increasingly difficult to ‘crack’ the Minnesota health plan market.” The reason, said the Department, was that new entrants found it very difficult to assemble the critical mass of enrollees and providers needed to compete with the largest insurance companies in Minnesota (Minnesota Health Plan Markets, 1987, February 1988, page 18).
Scholars at George Washington University visited the Twin Cities area in 1991 and reached the same conclusion. They reported, “There is now little chance of market entry by a small newcomer plan unless it is sponsored by one of [the] giants” (National Health Forum, Where Does Marketplace Competition in Health Care Take Us? Impressions, Issues, and Unanswered Questions from the NHPF Site Visit to Minneapolis-St. Paul, January 1991, June 1991, page 5). The “giants” referred to in the preceding quote were Blue Cross Blue Shield of Minnesota and four HMOs that dominated the Twin Cities by 1991. Since 1991, the four HMOs have consolidated into two – HealthPartners and Medica.
In 1994 Prudential fled Minnesota’s managed care market even though Prudential enjoyed excellent name recognition, insured 30,000 Minnesotans, and had contracts with 800 primary care physicians and 1,500 specialists. As the Minneapolis Star Tribune put it,
Prudential did not grow large enough or fast enough in the Twin Cities market to maintain a substantial lead, analysts said. The firm was easily overshadowed by heavyweights such as HealthPartners and Medica…. And these bruisers and others like them are merging or forming alliances that kept welterweights like Prudential Plus on the ropes. (Dee DePass, “Prudential to discontinue managed care health plan,” Star Tribune, July 9, 1994, 1D).
Prudential’s own management and other analysts agreed with this explanation.
Five months after Prudential left, American Family Insurance pulled out. (Glenn Howatt, “American Family medical business leaving state,” Minneapolis Star Tribune, December 9, 1994, 1D).
In a 1993 article for the National Journal about the Minnesota market, Julie Kosterlitz quoted Alan Baumgarten, a health policy expert then with the Citizens League:
“In this market, the barriers are very high,” … Baumgarten said. …. New plans … face a catch-22, he said: Unless they have lots of patients, it’s hard to attract doctors and hospitals at competitive prices. But without an extensive network of doctors and hospitals in place, it’s tough to attract patients. (“Monopoly medicine,” July 10, 1993, page 1748)
Other insurers have left Minnesota since 1994. The Minneapolis Star Tribune reported just last week (September 25) that Minnesota’s oldest HMO, FirstPlan of Minnesota, will close its doors at the end of this year for the same reasons Prudential left. Although FirstPlan had been in operation since 1944, and although it insured 18,000 people in a fairly small area (the Duluth-Two Harbors area), it was too small to survive competition with Minnesota’s larger plans. The article went on to report, “FirstPlan isn’t the only one to go under in recent years.” Mayo Health Plan (an HMO run by the Mayo Clinic) and Altru Health Plan in northwestern Minnesota both shut down in 2000. No insurance company, either new or existing, has challenged the dominance of the Big Three in Minnesota – Blue Cross, HealthPartners and Medica – since the mergers that created HealthPartners and Medica in the early 1990s.
Minnesota’s market is not the only highly concentrated health insurance market. High concentration levels characterize the health insurance industry in every state in the country. Eleven other states have more concentrated markets than Minnesota does.
Kip Sullivan, JD is a member of the Steering Committee of the Minnesota Chapter of Physicians for a National Health Program.
