Some Myths About The Public Plan, Pro and Con

The debate over the inclusion of a public health plan in the forthcoming healthcare reform legislation is heating up. Not surprisingly, much of the debate revolves around the comparison between the track records of Medicare and private insurance. Jacob Hacker, an author and a fellow at the New America Foundation, recently wrote a policy brief extolling the merits of the public plan. He argued that not only does Medicare have a much lower administrative cost than private plans do, but that it also has been more successful than they have in holding down costs over the past three decades. Yet he does not see any contradiction when he proposes that the public plan could negotiate rather than dictate provider payments, as Medicare does.

It is obvious that part of Medicare’s success in controlling costs can be attributed to its ability to pay providers less than private insurers do. While Congress has restrained CMS from carrying out its intended pay cuts to physicians, hospitals have not been able to pry the kinds of payment increases out of Medicare that they routinely get from private insurers. As Hacker points out, Medicare pays hospitals about 75 percent of what private carriers get, and it pays hospitals 80 percent of their rates from private plans. These reimbursements are based on formulas embodied in the prospective payment system (for hospitals) and the relative-value-based system (for doctors). While providers can pump up their volume, they cannot bargain with the government on rates. So if a public plan negotiated with providers in the same way that private insurers do, it would pay more than Medicare does.

Let’s also not forget that Medicare is rapidly running out of money. It’s well and good to point out, as Hacker does, that Medicare has trimmed its excess growth rate (above the rate of general inflation) far more than private insurers have. But, while the current Medicare expansion rate of 4.3 percent per year is preferable to the 7.3 percent increase of private insurance, it’s still unsustainable.

Hacker’s great hope is that Medicare and the putative public plan will lead the way on quality improvement that will simultaneously restrain costs. Medicare has mounted a number of demonstration projects and continues to push on in areas like hospital readmissions; but none of these efforts has cut spending significantly so far. Moreover, an effective program to improve quality would not only require provider buy-in, but would also greatly increase Medicare’s administrative costs. To the extent that Hacker’s argument rests on the lower administrative spending in a public plan, the need for better care management undercuts his brief.

Hacker pegs Medicare’s administrative costs at 3 percent, compared with 5-10 percent of self-insured companies’ spending and 25-27 percent for the premiums charged to small firms. Even if the discussion is confined to seniors, he points out, the Congressional Budget Office has found that Medicare’s admin costs are only 2 percent, compared with 11 percent for privately run Medicare Advantage plans.

In a recent Wall Street Journal op-ed, former Acting CMS Administrator Kerry N. Weems and Benjamin E. Sasse, former U.S. Assistant Secretary of Health, blast the assumptions underlying the comparisons between public and private administrative costs. They point out that unlike Medicare, private insurers must build networks of providers, whereas Medicare accepts all providers with valid licenses; that private insurers must spend large sums to combat fraud; that they must pay for marketing; and that, unlike Medicare, they have to negotiate rates with providers.

Weems and Sasse are right on the latter point, as noted earlier. But their other arguments are questionable. Private insurers’ networks usually include the majority of providers in any given market, and they’re more likely to include “efficient” providers who are willing to accept their rates than to include only high-quality providers. As for fraud fighting, even if Medicare spends less on this than private plans do, the amount involved is a fairly small component of overall spending. Finally, the “marketing” that private insurers do—and that a public plan competing with them would have to emulate—is largely focused on attracting healthy enrollees. Presumably, if everyone were covered and plans were required to take all comers, much of that cost would go away.

From the viewpoint of private insurers’ ability to compete with a public plan, it makes a lot of difference whether the plan is patterned after Medicare and can dictate provider payments or not, and what portion of the public will be allowed to enroll in it. Faced with strong insurer resistance, the Administration has signalled its willingness to cut a deal on its public plan proposal. But, however it is designed, a public plan is not going to wave a magic wand and solve our healthcare problems. For that, much more heavy lifting will be needed to restructure the system of healthcare delivery and financing.