More Insurance Competition Will Not Reduce Costs
Robert Reich, the former Secretary of Labor in the Clinton Administration, is a pretty reliable barometer of Democratic opinion. So his blog post “3 Things Obama Must Demand From Congress on Health Care” undoubtedly represents the thinking of many Democrats. The minimum qualifications for “meaningful” reform, in Reich’s view, include universal coverage, a tax on the wealthy to help pay for reform, and, of course, a public plan “option.”
Reich supports the public option because he believes that it is “critical for lowering health-care costs.” It would do this, he says, by creating more competition among insurance companies and by reducing payments to providers.
Unfortunately, Reich’s assumptions do not withstand scrutiny. Even if a robust public plan did increase competition in the insurance market, it would not reduce the cost of insurance significantly. The reason is that health plans are pitted against powerful providers, including hospitals and large physician specialty groups, that bargain for the highest rates they can get. As a result, in markets where there are many insurers, costs may be higher than in other markets where there are fewer plans.
One example is Milwaukee, where there is no dominant insurer. Because the health plans are relatively weak, local hospitals and specialists do quite well financially, says Bruce Kruger, executive vice president of the Milwaukee County Medical Society. Milwaukee specialists, he says, “won’t take anything under 200 percent of [the] Medicare [fee schedule] from a health plan. What they’re getting is even higher than that.” Plans in Chicago, where Kruger previously worked, are paying physicians at about 110 percent of Medicare, he says.
Reich points out that in 36 states, three or fewer insurers account for 65 percent of the insurance market. The AMA has protested this increasing concentration of health plans because, in many cases, it has led to lower reimbursement of physicians. This is a problem for doctors, but if they get paid less, costs go down for employers and consumers. The same is true of hospitals. Conversely, as the number of plans in a market increases, so do provider payments. So, while increased competition would force insurers to lower premiums to some extent, that reduction would be offset by the enhanced bargaining power of providers.
As for Reich’s contention that a public plan will be able to negotiate lower rates with drug companies and providers, he’s clearly imagining a public option patterned after Medicare. “Commercial insurers now pay about 30 [percent] higher rates to providers than the government pays through Medicare, because Medicare has the scale to get those lower rates. A nationwide public option could get similar savings.”
What Reich seems to be forgetting is that we’re talking about a public option, not a single-payer system like Medicare. Medicare does not bargain with providers, it sets their rates. And the reason why providers accept those rates is that Medicare covers everyone over 65 years old. In contrast, none of the current legislative proposals requires all individuals or small businesses to buy insurance through a public option. The CBO has estimated that the strongest public plan now being proposed in Congress would cover no more than 10 million people by 2019. At a local market level, how much bargaining power would this yield? Very little.
The Democrats should not let ideology get in the way of health care reform. If they cannot explain in detail why a public option is crucial to cost control, they should move on to other ideas that offer a better chance of success.
Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform. follow all BNET Healthcare posts on Twitter.
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