Thank you, John Holahan and Linda Blumberg, for showing us that a public insurance plan cannot compete within, much less change the character of, the private health insurance market.
by Andy Coates and Kip Sullivan
A short paper by John Holahan and Linda Blumberg asks “Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?” The call for a government-run insurance entity established to compete alongside private health insurance companies can be found in a proposal by Professor Jacob Hacker and recent mainstream Democratic Party proposals, including one put forward this month by Senator Max Baucus of Montana. We expect it will be part of upcoming White House proposals too.
We would like to discuss several fatal flaws in this proposal in light of the paper by Holahan and Blumberg. Their work helps reveal the folly of these unfounded assumptions:
~ A Medicare-like public insurer will maintain its advantage in cost savings through low-overhead when competing with private plans.
~ Market competition automatically yields efficiencies and savings.
~ A public insurance company will start out big or get big, and if it gets big, will be able to use its size to reduce costs.
~ Adverse selection can be prevented.
While they address the first two assumptions adequately, partially examine the third, and simply mention the last, John Holahan, Director of the Urban Institute Health Policy Center, and Linda Blumberg, Principal Researcher a the Urban Institute Health Policy Center, nevertheless endorse the proposal:
In this brief we argue that using a public plan is a good idea and will likely contribute to cost containment, but is probably not a panacea.
John Holahan and Linda J. Blumberg, “Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?”
Not a panacea?
If their conclusion were consistent with the content of the paper, Holahan and Blumberg would have said of the public plan option: “not even a placebo!”
They begin by citing sound research for the conclusion that public insurance programs have lower administrative costs, including the 2003 New England Journal of Medicine article, “Costs of Health Care Administration in the United States and Canada” by Steffie Woolhandler, Terry Campbell and David Himmelstein. That study demonstrated that the United States would save hundreds of billions of dollars if it created a single-payer health program like the one in Canada, often called “Medicare for All.”
It is true that Medicare is more efficient than any private-sector health insurance company. But Medicare overhead costs are very low because it is the single payer for the elderly, not one of many competing insurers. (Medicare spends little or nothing on marketing, underwriting, telling doctors how to practice medicine, lobbyists, executive salaries, and profit.) Medicare’s status as the largest insurer in the country also means Medicare can induce clinics and hospitals to accept lower fees than smaller insurers can.
Holahan and Blumberg point out that when a public health insurance plan competes on a private market, it must adopt most, if not all, of the survival tactics of private insurers. They identify “premium collection costs” and “marketing costs” as well as “claim processing, claims and utilization review, and care management” among the many costs that must be borne by a competing public insurer that are either not incurred by Medicare now or cost Medicare far less than they cost private insurers.
Holahan and Blumberg add that “commissions and profits for private plans” would remain a burden upon the entire system. In short, they echo, rather than refute, Woolhandler, Campbell and Himmelstein, who wrote:
A system with multiple insurers is also intrinsically costlier than a single-payer system. For insurers it means multiple duplicative claims-processing facilities and smaller insured groups, both of which increase overhead. Fragmentation also raises costs for providers who must deal with multiple insurance products…
N Engl J Med 2003;349:768-75
Race to the bottom
Having undermined the premise that a Medicare-like program will retain its overhead advantage in a multiple-payer setting, Holahan and Blumberg address another assumption underlying the Edwards-Clinton-Obama-Baucus-Hacker plan, namely the myth of market competition.
Although Holohan and Blumberg ignore the question of how the public plan will acquire critical mass, they do present several reasons to believe that even if the public plan is large it might not be able to use its negotiating clout to much effect.
Holahan and Blumberg take as a starting point the reality of the modern health care marketplace. They note that “insurer and hospital markets are increasingly dominated by large insurers and provider systems.” When the market has “become dominated by a small number of large insurers,” they explain, insurance companies have increased both premiums and profits, ratcheting total costs skyward.
The authors point out at least four further reasons why a public insurance company injected into a multi-payer system will fail to reign in costs:
First… large and expensive teaching hospitals, have little incentive to negotiate with insurers and lower prices. Second, small insurers do not aggressively compete over price… but rather seem to follow the pricing of the dominant insurer. Competition in insurance markets is often about getting the lowest risk enrollees as opposed to competing on price and the efficient delivery of care. Third… the lack of clear information necessary to allow individuals to effectively shop for plans based on benefits, price, and quality. Finally, the consolidation of hospital systems that has occurred in recent years has also severely limited insurers’ ability to negotiate with hospitals for lower rates.
John Holahan and Linda J. Blumberg, “Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?”
The evidence at hand supports all of these criticisms. The health insurance industry is heavily consolidated, the hospital industry is heavily consolidated, and consumers have very little information with which to force insurers and providers to compete on price and quality.
Competition in insurance markets is often about getting the lowest risk enrollees as opposed to competing on price and the efficient delivery of care.
This line by Holahan and Blumberg bears repetition. They recognize that a leopard cannot change its spots. Competition in insurance markets is not about the delivery of the best care for the sick. It is about which insurer can avoid enrolling the sick and when the people they do enroll get sick, how to deny them the services they need and thereby encourage them to enroll with another insurer.
If the Medicare-like plan does not treat patients as heartlessly as the private plans do, it will attract a disproportionate share of the sick and in turn, premiums would then have to rise. If the public plan insists on lower reimbursements to providers and hospitals, the best it might achieve would be a two-tier health care system region by region, with success tantamount to ruthlessness on the part of the public plan toward the sick as well as the hospitals and providers.
Giant or pipsqueak?
But Holahan and Blumberg might have looked more closely at the assumption that such a public program would start out with a size advantage.
Why should we expect that if a Medicare-like program opens an office in, say, Dallas and begins advertising heavily in the Dallas media that large portions of Dallas residents will sign up with the Medicare-like program? Health care, with a few exceptions for expensive, high-tech procedures, is almost exclusively a local business. How will the existence of a public plan option lower costs, let alone improve the nation’s health, if it is large in terms of its total national enrollment but small in any particular urban area or region of the country? Advocates of the Hacker proposal have offered us no reason to believe that opening-day enrollment in the public program will be large anywhere, including at the national level.
One problem is dominance of a few private insurers. A second is that the Medicare-like plan will be faced with the awful choice of adopting the antisocial tactics of the private plans or accepting responsibility for continued cost escalation.
Social responsibility
Holahan and Blumberg weigh the daunting implications of the scenario they’ve conjured:
The problem is that the government, as a strong buyer, becomes responsible for the health and stability of the system. If it limits hospital and physician payments too strictly, it faces the risk of perhaps causing hospital closures, slowing down the introduction of new technologies by more than is socially desirable, limiting access to physician services, and affecting the quality of individuals seeking medical education.
Here the authors recognize that public intervention into the health system brings expectations and responsibility: the health of the nation. They suggest that reliance on overhead cost advantage, market competition and an enrollment size advantage, even in the best-case scenario, would not be enough. The logical question should follow: would the public insurance option be set up for failure?
This makes for a sharp comparison with a single-payer program that would cover everyone. A single-payer would offer a way to hold down costs, through massive ongoing overhead savings. It would eliminate the perverse incentives of insurance market competition while creating the bargaining power for price controls (for example bulk purchasing of drugs). A single-payer program would further offer a mechanism to allocate health resources where they are needed.
Likely scenario?
Holahan and Blumberg don’t address the single payer proposal except to say that a public plan competing with private insurance would never morph into a single-payer program. (We agree.) They offer “The Likely Scenario”:
We think that a public plan would not drive out private competitors and result in a government takeover of the system, nor would it be fully successful in controlling cost growth…
The presence of private plan competition will place a constraint on how penurious a public plan can be. Public plans would have to keep physicians and hospitals reasonably happy, otherwise enrollees would exit to private plans…
We believe Holohan and Blumberg’s ‘likely scenario’ is too rosy in light of the very arguments they develop. We agree with Holohan and Blumberg that a public option insurance plan will never drive the private insurers off the market, that the public plan will not enjoy an unusually low overhead, and it will have a hard time using whatever size it acquires to lower provider fees and other medical costs, thanks to the cruel facts of the insurance and health care marketplace. We think they have made an additional, probably incorrect, assumption that Medicare will start out with a large enrollee base.
To their credit, Holahan and Blumberg raise the issue of adverse selection (the tendency in private health insurance enrollments for the healthy to go in and the sick to go out). But their light treatment of the issue seems a serious error. They call for “assessments” on the private plans that enroll healthier enrollees, as if these assessments can be precisely determined at little cost.
Adverse selection, rewarded and encouraged by the health insurance market, would likely present another force capable of destroying and discrediting the public program. One shudders at such a scenario, for such a debacle could delay the day in which every inhabitant of the United States will have access to comprehensive care.
Holahan and Blumberg ultimately conclude:
Public plans are attractive because they can offer better access to necessary care for diverse populations, they have lower administrative costs, and they can be large-scale purchasers with a strong negotiating position with providers.
As we have discussed, the body of the paper contradicts this conclusion.
Finally Holahan and Blumberg end the paper with a coda, awkwardly tacking on several stray ideas, each one unproven. Yet ironically each one has also often been held up as a panacea — electronic medical records, new technology, chronic disease management, “cost-sharing structures,” “payment reforms,” and preventive medicine measures. These further weaken the contradictory conclusions the offer.
Still we would like to credit Holahan and Blumberg for breaking ranks with current liberal orthodoxy. They offer reality-based criticism of the central premise underlying mainstream Democratic Party proposals — that inserting a public insurer like Medicare into the current multiple-payer system can force the entire system to be more efficient and somehow improve the health of the nation. While they say it is not a panacea, they convincingly demonstrate that the proposal is not even a placebo — it could be a poison pill.
HR 676. Now.
A single-payer program for financing health care in the United States, embodied in the Congressional bill with 94 co-sponsors, House of Representatives 676 (HR 676), has been shown to lower costs through massive reduction in administrative waste and to provide comprehensive care to every inhabitant regardless of employment or health status. It will do this without adopting the antisocial techniques of the private insurance industry. It will be organized around the health needs of the nation, not the incentives of the market. It will restore to patients their freedom to choose their own doctor, and it will restore to patients and doctors their freedom to decide what medical services are appropriate. The evidence is in. We should stick a plan that will work: HR 676.