Institute for America’s Future and Berkeley Center on Health, Economic & Family Security
Policy Brief
April 2009

Healthy Competition: How to Structure Public Health Insurance Plan Choice to Ensure Risk-Sharing, Cost Control, and Quality Improvement

By Jacob S. Hacker, Ph.D.

Executive Summary

The debate over health care reform has increasingly centered on the issue of “public plan choice”–whether Americans younger than 65 who lack employment-based coverage should have the choice of enrolling in a new public health insurance plan modeled after Medicare. The central argument for public plan choice is that such a plan, offered as a choice within a new national insurance “exchange,” provides an essential set of security guarantees, ensuring that Americans without insurance from their place of work can find a plan that offers them quality, affordable health care through a broad choice of providers in all parts of the country.

For public plan choice to provide such guarantees, however, the public plan must be properly structured, compete on a truly “level playing field” with private plans, and have the authority to use its bargaining power as one of many tools to encourage greater value in health care delivery. The most effective and easily implemented model for the new public plan is a “Medicare-like” plan that builds on Medicare’s administrative infrastructure and basic framework of coverage but is separate from Medicare’s risk pool and departs from Medicare in a number of key respects regarding payment and benefits.

To create a level playing field requires attention to the “three R’s” of workable public-private competition: rules that are the same for both the public plan and private plans, risk adjustment that protects plans from being competitively disadvantaged if they enroll a less healthy group of people, and regional pricing that allows private plans and the public plan to compete within regions on the same terms, rather than having the public plan compete on a national basis with regionally based private plans (whose premiums may be lower or higher in any given region).

Finally, giving the public plan the authority to bargain for reasonable rates is an essential item on the menu of cost control — and one that the Congressional Budget Office (CBO) and other budget watchdogs are likely to “score” as producing savings (in contrast with many other currently favored cost-control strategies). Nonetheless, there are reasonable concerns about how the new public plan will use its bargaining power — concerns reflected in current proposals for a price-taking (rather than price-making) public plan that would have limited ability to secure fair rates. However, a watered-down public plan would be a grave mistake. Instead, the public plan should include safeguards designed to ensure that providers are fairly represented and that bargaining for lower prices does not negatively affect patients’ access to care or shift costs onto private insurers. Indeed, a better alternative to a public plan without price-setting authority would be allowing private fee-for-service-style plans to piggyback on the public plan in setting their own prices.

Public plan choice is rooted in existing precedents that have shown themselves to work, rather than speculative convictions about how a delicately balanced new system will operate. It must be part of any successful reform package. Without public plan choice, Americans without workplace insurance will be put in jeopardy, private insurers will lack an effective check on their actions, and the opportunity to place our crumbling framework of health financing on a secure foundation will be lost.

http://www.ourfuture.org/files/Hacker_Healthy_Competition_FINAL.pdf

Comment:

By Don McCanne, MD

This is a very important paper because addresses one of the most controversial issues in the current health care reform debate: Should a Medicare-like plan be offered in competition with a market of private health plans? UC Berkeley Professor Jacob Hacker adds to his previous contributions on the private plan/public option model of reform by describing in detail what a properly-designed Medicare -like option would look like.

To understand this fairly complex model, you really need to read this 31 page report. But looking at just a few of the problems that he addresses can give you an idea of where this approach is headed.

How would the public option control costs?

From the report: “The great virtue of public plan choice as a means of cost control is that it proposes relatively minimal disruption to existing arrangements compared with other comprehensive reform proposals. It only says that a public health insurance plan will be offered alongside private plans as a coverage option for those without insurance through their employer. It is the competition between private plans and public health insurance, with its distinctive cost-control advantages, that presses both public and private plans to provide more for less and ensures that the goal of affordable quality coverage can be maintained over time at a price the nation can bear.”

DM: In the Medicare Advantage program we have already tested this concept, and the private plans required more money, not less, than the “competing” traditional Medicare program. With a single, universal public program, cost efficiencies would apply to our entire health care system.

How would this proposal spur improved quality?

From the report: “… a new public health insurance plan for the nonelderly (and Medicare, through its association with the new plan) can and should be centrally involved in obtaining better information to improve physician and patient decisions, as well as insurer decisions about coverage, pricing, and benefit structure. Because of its broad and national reach, the stability of its enrollment, and the unparalleled opportunity for data collection and use, the new public health insurance plan is the player in the system that will have the largest incentives to make these investments.”

DM: So the public program would bear the costs on research and data collection. Would those costs be allocated exclusively to the patients in the public program? Would the private insurers have a free ride? Since the mission and income needs of the private insurers are different from the public plan, would they even use the results of the research, especially if greater spending would ensue? Would the government even have access to the proprietary information of these plans competing in the private marketplace? Obviously a single, universal public program would have a more complete and accurate information database that could be applied to improve the quality of our entire health care delivery system, rather than allowing private plans to pick and choose based on bottom line issues rather than optimal quality.

What should the public plan look like?

From the report: “More specifically, the new public plan should be national (with the same basic terms nationwide for patients and providers), governmental (a true public health insurance plan, not, say, a nonprofit insurer operating under federal charter), comprehensive (providing defined benefits on the same basic administrative platform), and built on Medicare’s infrastructure.”

DM: So a bona fide public program is proposed, but…

How could the public and private plans compete “on a level playing field”?

From the report: “… a level playing field requires a set of safeguards that are easily remembered as the “three R’s”: rules, risk adjustment, and regional pricing.”

Rules: “Both the public and private plans should also have to abide by the same fundamental rules, the main purpose of which is to prevent plans from profiting by selecting healthy people rather than delivering value. These rules include: community rating, guaranteed issue, limits on marketing, standardized and defined benefits, reserve requirements, transparency…”

Risk adjustment: “…there is also a need for risk adjustment. That is, plans should be paid different amounts by the exchange based on the expected and realized risk of their enrollees. Enrollees and plans should not be penalized when a plan attracts less healthy enrollees. While prospective risk adjustment technologies have come a long way, they are still imperfect. Thus any risk-adjustment system should mix prospective risk adjustment with a retrospective risk-adjustment process at the end of the year that redistributes funds among the plans to ensure that those with very unfavorable mixes of risk are protected. Of course, the public health insurance plan must be part of this arrangement.”

Regional pricing: “… the bids made by both the public plan and private plans should be made on a regional basis. In other words, although the exchange should be nationally administered, the bids should be regionally specific. Many private plans will only wish to provide benefits in certain regions where they operate. The public health insurance plan will of course be truly national. Without regional bidding, the public plan will be disadvantaged in areas where private premiums are low and advantaged where they are high. Neither is conducive to a truly level playing field.”

DM: Merely to counter the attack that the government doesn’t play on a level field, we would have to establish a set of administratively complex rules of competition with which the government must comply, include the difficult task of determining and adjusting for the relative risks in the public and private pools in spite of the private insurers proclivity to game these risks, and then require our national public program to bid in each region to provide fairness for the government program? This adds considerable administrative inefficiency to a government program that should be offering greater efficiency. A single, universal national health program would not require these extra rules, risk adjustments and health plan competitive bidding processes.

How would the premium for the public plan be established?

From the report: “A strong argument can be made for the federal government setting subsidies on the basis of the average weighted premium of plans, as opposed to the cost of the least expensive plan. First, this would reduce the chance that lower-income enrollees would feel pressured by costs to enroll in the least expensive plan. Second, it would at least crudely adjust subsidies to reflect the variance of plan premiums as well as the level. In areas where the range of plan premiums is larger, subsidies based on the average will much better protect enrollees against premium costs than subsidies based on the lowest-cost plan. For these two reasons, the weighted-average-premium approach is preferable to the lowest-cost-plan approach for setting subsidies, and the graphics that follow focus on showing how this approach would work. However, either approach would create the necessary incentive for enrollees to prefer less expensive plans.”

DM: Instead of a complex process to determine a premium for a public program based on the actuarial value of the benefits provided, a single payer program would do away with premiums. The system would be financed with a simpler and much more equitable tax. Also, everyone who believes in health care justice should be deeply troubled by the statement that this approach “would create the necessary incentive for enrollees to prefer less expensive plans.”

Since premiums would be unaffordable for the majority, how would subsidies be administered?

From the report: “… the subsidy could vary with the income of the enrollee. Low-income enrollees would certainly receive even greater assistance, as well as help with cost-sharing. Because most enrollees through the exchange will be workers whose employers have contributed on their behalf, and because coverage should be kept affordable, the subsidies should cover a good portion of the premium for all enrollees. Since the average employer/employee split of health premiums is roughly 80/20 in the private market today, 80 percent seems a reasonable baseline contribution.”

DM: The purpose of government subsidies is to transfer payment for health care from the wealthy to those who cannot afford to pay for their full, evenly-divided allocation of our national health care bill. That now includes middle-income Americans. A subsidy system requires a separate administrative task for everyone included within the system of health care coverage, with further adjustments depending on out-of-pocket expenses, and periodic reevaluation of eligibility requirements. These administrative excesses are made necessary only because we couple the payment of health care to the specific benefit package – the insurance plan. A single payer system eliminates this administrative nonsense by replacing premiums and cost-sharing with tax financing – again, a much simpler and more equitable approach.

What about the all-payer alternative?

From the report: “…allow private plans that pay providers on a more or less fee-for-service basis to piggyback on the public plan in setting their own prices… In practice, all-payer rate setting of this sort would mean that private fee-for-service plans within the exchange would use the same fee schedule that the public plan did. Allowing private plans that use fee-for-service payment to piggyback on the public plan’s rate thus would have broader benefits than simply reducing the opposition of private insurers to the idea of a public plan. It would make cost control more effective, encourage administrative simplification and care improvement, and increase the degree of coordination in American health financing.”

DM: Okay. So we combine the public and private payers into an all-payer program. Then why would any individual in his/her right mind, other than an insurance executive or shareholder, want to keep this worthless, wasteful, expensive industry in play?

PNHP has been under attack by our friends in the progressive community for being opposed to the public Medicare-like option. That is a misstatement of our position. We are opposed to a fragmented, dysfunctional health care financing system that is causing financial hardship, physical suffering, and, all too often, death. Adding a public option will have only a negligible impact on the fundamental flaws that are causing so much personal grief.

Our friends and our enemies know what would fix our system: a single payer national health program. We think we understand the position of our enemies – largely based on greed. Why else would they support such a cruel system?

But our friends? Why do they attack us as they retreat to a secure position within the ranks of the private insurance industry? Besides, just wait and see what the insurers and their purchased representatives in Congress will do with Jacob Hacker’s “Healthy Competition” proposal. You’ll have to look quick because the window of opportunity for reform will have slammed shut.

The Cost and Coverage Impacts of a Public Plan: Alternative Design Options

Prepared by John Sheils Randy Haught
The Lewin Group
April 6, 2009
President Obama has proposed to create a “public plan” that would compete for enrollment with the private insurance industry.
The public plan is difficult to evaluate because no one has specified in legislation how it would work.
Consequently, in this paper, we present impact estimates under several variations on the public plan model.
If Medicare payment levels are used in the public plan, premiums would be up to 30 percent less than premiums for comparable private coverage. 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.
If the public plan is opened to all employers as proposed by Senators Clinton and Edwards, at Medicare payment levels we estimate that about 131.2 million people would enroll in the public plan. The number of people with private health insurance would decline by 119.1 million people.
Medicare premiums would be lower than private premiums because of the exceptional leverage Medicare has with providers. Medicare pays hospitals about 30 percent less than private insurers pay for the same service. Physician payments are about 20 percent less than under private coverage. Also, because Medicare has no allowance for insurer profits or broker/agent commissions, administrative costs for this population are about one-third of administrative costs in private health plans.
Assuming Medicare reimbursement rates and eligibility for all individuals and employers, provider net income would decline under this public plan proposal, even after accounting for reduced uncompensated care and increased utilization for the newly insured. Net hospital revenues would fall by $36 billion (4.6 percent), and physician net income would fall by $33 billion (6.8 percent).
http://www.lewin.com/content/publications/LewinCostandCoverageImpactsofPublicPlan-Alternative%20DesignOptions.pdf

No details have been released by either Congress or the administration about the specifics of a potential public insurance option that could be offered in competition within a market of private health plans. Nevertheless, to provide an analysis of how such a plan might work, The Lewin Group used certain assumptions to prepare this simulation.
Under this analysis, hospitals would be paid 30 percent less than the reimbursement rates of private insurers, and physicians would be paid 20 percent less. Using these and other assumptions, premiums for the public plan would be 30 percent less than comparable coverage by private plans.
Supporters of the public option are likely to claim that it is an essential component of reform since it will lower the cost of insurance while expanding coverage to over 100 million more people.
Opponents of the public option are already claiming that the government would be an unfair competitor to the private plans because of its ability to dictate rates that are lower than what the private plans must charge.
This simulation may very well also increase the opposition by physicians and hospital administrators because of concern about the possibility of shifting large numbers of patients from the private plans to the government plan with its considerably lower reimbursement rates. In the heat of the debate, it may be forgotten that these fee reductions were an assumption made by the authors of this report for simulation purposes, and not a feature of any actual legislative proposal.
Unfortunately, this study only fuels a debate that has diverted us from the discussion that we should be having. Instead of arguing over a controversial, yet-to-be-defined measure that cannot possibly lead to the efficiencies, equity and effectiveness of the single payer model, we should be discussing what actually would work – true single payer reform.

Prepared by John Sheils Randy Haught
The Lewin Group
April 6, 2009

President Obama has proposed to create a “public plan” that would compete for enrollment with the private insurance industry.

The public plan is difficult to evaluate because no one has specified in legislation how it would work.

Consequently, in this paper, we present impact estimates under several variations on the public plan model.

If Medicare payment levels are used in the public plan, premiums would be up to 30 percent less than premiums for comparable private coverage. 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.

If the public plan is opened to all employers as proposed by Senators Clinton and Edwards, at Medicare payment levels we estimate that about 131.2 million people would enroll in the public plan. The number of people with private health insurance would decline by 119.1 million people.

Medicare premiums would be lower than private premiums because of the exceptional leverage Medicare has with providers. Medicare pays hospitals about 30 percent less than private insurers pay for the same service. Physician payments are about 20 percent less than under private coverage. Also, because Medicare has no allowance for insurer profits or broker/agent commissions, administrative costs for this population are about one-third of administrative costs in private health plans.

Assuming Medicare reimbursement rates and eligibility for all individuals and employers, provider net income would decline under this public plan proposal, even after accounting for reduced uncompensated care and increased utilization for the newly insured. Net hospital revenues would fall by $36 billion (4.6 percent), and physician net income would fall by $33 billion (6.8 percent).

http://www.lewin.com/content/publications/LewinCostandCoverageImpactsofPublicPlan-Alternative%20DesignOptions.pdf

Comment:

By Don McCanne, MD

No details have been released by either Congress or the administration about the specifics of a potential public insurance option that could be offered in competition within a market of private health plans. Nevertheless, to provide an analysis of how such a plan might work, The Lewin Group used certain assumptions to prepare this simulation.

Under this analysis, hospitals would be paid 30 percent less than the reimbursement rates of private insurers, and physicians would be paid 20 percent less. Using these and other assumptions, premiums for the public plan would be 30 percent less than comparable coverage by private plans.

Supporters of the public option are likely to claim that it is an essential component of reform since it will lower the cost of insurance while expanding coverage to over 100 million more people.

Opponents of the public option are already claiming that the government would be an unfair competitor to the private plans because of its ability to dictate rates that are lower than what the private plans must charge.

This simulation may very well also increase the opposition by physicians and hospital administrators because of concern about the possibility of shifting large numbers of patients from the private plans to the government plan with its considerably lower reimbursement rates. In the heat of the debate, it may be forgotten that these fee reductions were an assumption made by the authors of this report for simulation purposes, and not a feature of any actual legislative proposal.

Unfortunately, this study only fuels a debate that has diverted us from the discussion that we should be having. Instead of arguing over a controversial, yet-to-be-defined measure that cannot possibly lead to the efficiencies, equity and effectiveness of the single payer model, we should be discussing what actually would work – true single payer reform.

Democrats seek compromise on health care plan

By Ricardo Alonso-Zaldivar
The Washington Post
April 2, 2009
Democrats are seeking a compromise on a bigger government role in insurance coverage as part of President Barack Obama’s proposed health care overhaul.
At issue is whether middle-class workers and families should have the option of a government-sponsored plan that would compete with private insurers.
Sen. Charles Schumer, who is working on the issue for the Senate Finance Committee, said Thursday one potential compromise is based on insurance plans that most states already offer their employees. Obama’s health secretary nominee, Kansas Gov. Kathleen Sebelius, likes the idea.
Schumer, D-N.Y., said such a plan would avoid expanding a federal program like Medicare and that a private insurer possibly could run it. Sebelius already administers that type of plan in Kansas.
The insurance lobby fears that a federally backed plan could drive companies out of business.
“We are taking a look at the different state employee plans to get a better understanding of how they operate,” said Robert Zirkelbach, a spokesman for America’s Health Insurance Plans.
GOP lawmakers “are going to need to know what’s in the fine print,” said Craig Orfield, a spokesman for Sen. Mike Enzi, R-Wyo., a leading lawmaker in the debate.
“My goal is to find a plan that would be acceptable to large numbers of senators,” Schumer said in an interview. “Right now, the private insurers are totally opposed, but maybe there’s room.”
In California, the state sponsors three medical network plans for employees and retirees. These plans are offered alongside traditional insurance plans. The state-sponsored plans, administered by Anthem Blue Cross, account for about one-fourth of the 1.3 million people in the state employee health program, said Karen Perkins, a spokeswoman for the California Public Employees Retirement System, known as CalPERS.
The idea of using the state employee plans as a model came last month from two policy experts, Len Nichols and John Bertko.
“We were just trying to avoid nuclear war,” said Nichols, director of health policy for the nonpartisan New America Foundation. “We saw advocates of Medicare for all pushing to put the country into Medicare. And we saw the right using that to push the moderates out of engagement in the health reform debate.”
Schumer said he is looking at Nichols’ idea as a possible compromise and is beginning to sound out other Democrats and policy experts. He has room to maneuver because Obama and many Democrats did not spell out what they mean by a “public” insurance option.
But Schumer said other Democrats insist that option should look like Medicare, in which the government directly sets benefits and payment rates.
Mark McClellan, a health policy expert who ran Medicare under President George W. Bush, said Nichols’ proposal was “well meaning,” but that the government is much bigger than any state, so the effects of a federally backed plan on the insurance market would be far greater.
“At this point, I don’t know many Republicans who are confident a public option could work without making it look like another private sector choice,” said McClellan. “And then what would be the point?”
http://www.washingtonpost.com/wp-dyn/content/article/2009/04/02/AR2009040202804.html

The progressives in the House of Representatives have stated that they “will only support comprehensive health care reform legislation which includes a public plan option on a level playing field with private health insurance plans.” (http://cpc.grijalva.house.gov/index.cfm?ContentID=351&ParentID=0&SectionID=66&SectionTree=66&lnk=b&ItemID=349)
The Republicans will not support a government-run plan that competes “unfairly” with the private health plans. Specifically, they will not support a Medicare-like option.
But look at the wording of the statement from the Progressive Caucus. The public plan option must be “on a level playing field with the private plans.” The model that meets that definition is a PPO that is sponsored by the government but administered by private insurers, with a firewall separating the PPO from the government. Thus the government option will be simply another PPO, with all of its perverseness, competing in a market of private plans. The line in the sand drawn by the Progressive Caucus was washed away by their carefully worded release.
Mark McClellan has it right. The only hope for gaining the support of Republicans is to make the government option “look like another private sector choice, and then what would be the point?”
With the concession of the progressives, the strategy for a Medicare-like public option has already failed. Moving forward with what amounts to another private PPO with a government seal of approval means that the private insurance industry will maintain control of health care financing for the majority of Americans.
We have in the making yet one more example of where the Republicans will extract enough concessions from the Democrats to ruin the legislation, and then when it comes time to vote, the Republicans will vote against it anyway.
The Democrats have to give up the fantasy of a bipartisan solution since Congressional bipartisanship is a total fiction. The Democrats have to move forward with honest health care reform that works for everyone. They shouldn’t look for help from the party of NO.