Health Care Reform (7)

The Obama Health Insurance Reform in Perspective & the Relevance of the Public Option

(Let me apologize for and warn you about the length of this post. My explanation - I've been thinking long and hard about this.)


The Obama Health Insurance Reform in Perspective

I’m glad to see that the first step of the Obama Health Plan (OHP) will rest on creation of a health insurance “exchange,” where consumers are presented each year with a menu of alternative plans at predetermined standardized levels of benefits, offered by various companies. Since there will be government subsidies to make at least the basic plan affordable to everyone, insurance will probably become nearly universal, and job mobility should improve. It seems that, after all this time, the problem of the availability of health insurance to individuals will be largely solved. This will mark a good and important first step, tactically very smart to take, in fixing health care and making insurance available.

But it is only a first step. As everyone knows, the whole system needs revision, to make it relatively efficient, fair, less costly, higher quality, and progressively gaining ground in all these aspects instead of losing ground. The basic problems lie in the nature of the insurance system, the cost and organization of hospitals, pharmaceuticals and medical devices, and reliance on specialists instead of primary care. So, while the OHP’s first step is a great one, it needs to lead to bigger changes in the way the system functions as a whole. Which I think it will.

The key to understanding the current insurance system is this: how do the companies make their money? Competition in and of itself is not a good thing if the way they compete doesn’t redound to the benefit of the public. To simply celebrate the existence of competition qua competition is to celebrate ideology rather than what competition is supposed to deliver.

I wish I knew more about insurance companies so I could write with a deeper factual background, but here is the way it seems to me. First of all, they compete by underwriting. In the individual market they assess health and age status; in the group market they assess utilization history and probabilities; in both cases they then price their products accordingly, and deny applications, raise premiums, or restrict coverage. (This is called experience-rating; if a company would give the same price to all comers, this would be called community-rating). The companies that underwrite most artfully make the most money. In addition, since benefits are not standardized, the companies that can write their plans most cleverly also win. Unfortunately, the underwriting enterprise winds up making coverage either unobtainable or exorbitant to many people who thus become uninsured.

Insurance companies also strive for profits in other ways. In the large company sphere they provide administrative services; if they can do this most efficiently, they win. They negotiate with care providers, especially physicians and hospitals, to variable effect, bending to the pressure of hospitals with a lot of market power, making others bend to them when the insurance company is more powerful. Market power is more influential than straight cost-accounting. What a company loses in one market they gain in another. If they lose to hospitals, they make it up by short-changing the atomized physicians.

Insurance companies can also profit by the way they pay providers, or don’t. If they declare some services “included” with other services, they can avoid paying for both, although both might have perfectly valid CPT (service descriptor) codes. They can deny claims on obscure bases. Some insurance companies have been convicted of setting “payment denial” objectives for their staff. They can delay payments and make money on the float.

Unfortunately, what they have not been able to do to a significant extent is to assert control over utilization, nor to improve quality, because they are too far away from the functioning of the system, and too far away from their own expertise, to do so. Overall, the culture of the health insurance companies has been such that none have been described as particularly good citizens, looking out for the health of the nation, coming up with schemes that would advance the health care industry and do better for people. In fact, quite the reverse.

It is clear, then, that when it comes to health insurance, the OHP has more to reform than accessibility to a policy. The first step will be to establish the “exchange.” The second will be to eliminate the ability of the companies to reject applicants, and establish community-rating premiums with governmental subsidies to avert adverse selection. (Hal Luft of the Palo Alto Medical Foundation Research Institute has suggested that establishing a Major Risk Pool is a way of achieving this.) While these changes will save insurance companies the overhead costs of underwriting, they will also mean that a major modus operandi of the health insurance industry will be altered. They can still make money by establishing contracts with providers that rest on their market power; they can still make money by denying claims; they can still make money by being efficient in administrative operations. But they will have to stop making money by experience-rating individuals and groups, and by cleverly designing plans to their own advantage.

The OHP will of necessity solve the insurance accessibility problem. What it then needs to do is to influence the insurance companies to focus their profit motive to add to the public good by making their own internal operations more efficient, and inventing ways that make the system as a whole better. The issue is, would inclusion of the public option make that objective more possible?


The Question of the Public Option

Given that there will be a health insurance exchange, and given that there will be community-rating, the biggest controversy right now is: should there be a so-called public plan on the menu? A public plan would be one sponsored by government – proponents want it to be the Federal government, others would like it to be states, or even other entities such as “cooperatives.” I have called this option the BGP – the Big Government Plan. (Which it wouldn’t be it were to be the ill-advised cooperatives.) All agree that there would need to be a level playing field so that competition between public and private plans would be fair, and there are many suggestions on how to do this. This is the question I pose and answer today. I think we can only answer the question by reflecting on the nature of the health insurance industry, which is why I started this post as I did.

Let’s first look at what is being said. The May 28, 2009 issue of the New England Journal of Medicine contains three invited articles on the subject. One is by Jacob Hacker, a liberal strongly for the BGP; one by Mark Pauly, a free-marketeer from the Wharton School who accepts a BGP to make reform politically viable; and the third by the canny veteran health economist Victor Fuchs, who thinks the BGP would be irrelevant. Two weeks later in the June 11 issue of the Wall Street Journal, Karl Rove stated the hard Right’s objections to the BGP as the pathway to socialism, and the next day in the WSJ Stephen Burd, CEO of Safeway, didn’t address the BGP at all, but gave the preventive medicine approach to fixing America’s health care problem. These are our texts for today.

Hacker strongly supports a BGP, while acknowledging that public entities are generally rigid, and private ones are “more flexible and more capable of building integrated provider networks….” He looks to the BGP “to provide: stability, wide pooling of risks, transparency, affordable premiums, broad provider access, and the capacity to collect and use patient information on a large scale to improve care.” He also thinks the BGP would have lower administrative costs (the government more efficient than private business?); will be able to receive better volume discounts (this would violate the level playing field provision, and just who would these discounts come from, and for what?); and would be non-profit (OK, but what would the incentive be, then? Virtue?)

Pauly, the free-marketeer, thinks that a very wide array of choices on the menu would bring public support, and many provisions to allay the advantages of size and the possible political domination of the BGP, would make the OHP politically viable. Interestingly, he puts forward the idea of having two distinct government plans in each area! I think this is a great idea – it gives a sense of where the incentive to the public plans would come from. We have experience with this format in California Medicaid, where in our counties, for instance, patients can choose either the local initiative (county health department) plan or the private Medicaid plan, and so can providers.

Pauly also brings up the old issue of Any Willing Provider – could the BGP(s) choose not to let a duly licensed physician, say, join the plan? How could a governmental entity do this? Yet, if the BGP had to admit providers and the private plans didn’t, wouldn’t that give an advantage to the private plans? Likewise, if care were to be delivered in networks that contracted with the BGP, how could the BGP choose to contract with one group but not another? I think the answer here would have to be that each provider would have to have access to at least one plan, with the BGP as the contractor of last resort. More could be proposed here, but let’s go on.

Fuchs says that the three biggest challenges of health care are the uninsured, cost, and quality, and he doesn’t see how a BGP would impact any of them. Insuring everyone will require a subsidy and compulsion, and a BGP is not needed for either. Neither cost nor quality have been positively affected by either Medicare or Medicaid, so why should another BGP have any effect?

Moreover, says Fuchs, who would join at BGP? Medicare and Medicaid are already set for the elderly and the poor. 30% of the populace are covered by large companies who self-insure, the administration of their plans contracted out to the health insurance companies for provider network supply and payments. The BGP would have nothing to offer these companies. 25% of the populace are covered by smaller employers that contract with private health insurance companies. Again he argues, what would a BGP have to offer them? Since these contracts for care are generally experience rated rather than community rated (that is, one price or all despite historical medical care utilization), only the high utilizers would want to go to the BGP, thus giving the BGP adverse selection, and taking the bloom off their rose. (I think community-rating is in the works, given the nature of an exchange.) 5.9% are currently individually insured, and these would go to the BGP. 15% of the populace are uninsured, of which three-quarters, or 12%, are too sick or too poor to buy policies, and the remaining 3% choose not to. Fuchs doesn’t see the value of a BGP for these people either.

I don’t agree with Fuchs here. First of all, I think we have to get to community rating for everyone, with risk adjustments made as Hacker suggests. Secondly, even by Fuchs’ analysis tens of millions of people would sign up with the BGP.

Rove asserts that we don’t need a BGP because we already have enough competition. This is a purely ideological argument (surprise!) that doesn’t look at the quality of the companies, nor at the results. Private insurance companies have a terrible history. Their innovations are generally pseudo-innovations, and the ways they choose to make money are not productive to the nation as a whole – underwriting, reusing care, reneging on coverage, gaming providers who submit bills, etc.

His second argument is that the public option will pay providers less than private companies will (not clear this is so), and thus cause others – providers and patients – to subsidize the BGP, the old transfer game that hospitals play.

His third argument is “crowd out,” that in contrast to Fuchs who thinks hardly anyone will choose the BGP, Rove avers that so many will choose it that private companies will be stifled. As both Hacker and Pauly assert, however, if the playing field is indeed made fair, this will probably not be the case. And if it turns out to be as Rove fears, would that not be a testament to the underlying vapidity of the current private companies and their practices? If they can’t beat the government – that’s a pretty low bar.

Rove’s fourth argument is also Fuchs’, that Medicare and Medicaid are too expensive and do not lead to efficiencies, so the BGP would do the same. It’s true that government is not good at innovation and cost control.

Fifth and finally, Rove asserts that a governmental monopoly will be unresponsive and a bad, socialistic option. This is the Trojan Horse or Slippery Slope argument -- BGP today, National Health Service tomorrow. Well, the point is then to make the playing field level, and as Pauly suggests, let there be competing governmental entities.

Burd, finally, makes a non-BGP point, an argument that reminds me of the “Legalize Marijuana” solution to the California state budget crisis in its indirect approach. Burd says that Safeway has kept medical costs stable for the last four years by giving their employees incentives to avoid tobacco, reduce obesity, and keep blood pressure and cholesterol in normal bounds. The better health of the group has led to lower costs. It strikes me that only smaller, private insurance groups could handle this kind of innovative approach, and thus beat the BGP in competition.


Conclusion

So, given that the OHP can make health insurance accessible by simply establishing the exchange, but that it needs to do more to “fix” health care, does there have to be a BGP option? The answer is clearly yes.. In fact, I Pauly’s suggestion of having two BGP’s available on the menu would make the most sense – perhaps one a Federal and one a state program.

If a BMP is on the menu, everyone agrees that the playing field needs to be made level. Community rating and risk adjustment could be accomplished by the Luft Major Risk Pool plan. The NEJM articles have cogent suggestions on other leveling procedures. More specifically for part of the means to this, the BGP needs not to undercut rates. I would suggest that the BGP start out with 130% of Medicare rates for primary care, 100% of Medicare for selected specialists (some, such as general surgery, would need to be higher; some, such as imaging could be lower).

The temptation for health insurance companies would be to continue their operations as they have practiced them in the past. The more the OHP can deny them profit from old, non-productive practices, the more they will have to find new means to make profit. Denied profit possibilities from underwriting and clever plan design, they would be tempted to continue to deny payments and care, and to assert market power where possible to glean profit. The presence of the BGP would blunt their ability to force poor contracts on relatively weaker providers. If properly designed, the BHP would force the private plans to compete for the allegiance of providers by ceasing those practices.

What would be left for the insurance plans to do? They would benefit if they were truly efficient in administration, practiced prevention as Burd suggests, aligned with groups that were themselves innovative in the way they delivered care, etc. We would look for innovation from the private sector as we always have. They would have the advantage over the BGP by not having to contract with all providers; if the insurance company and providers shared their profits, both would have incentives.

In addition, the presence of the BGP would act as a safety net. Everyone in every part of the country would have insurance available in a traditional way. If a private company tried to innovate and failed, the BGP would be there to pick up the pieces for the enrollees with that failed company. Also in addition, if small or large companies chose the BGP over private companies, so be it. And with several BGP entities available, they would themselves have a competitive incentive and measuring stick to work against.

Some say that a BGP is necessary to “keep the insurance companies honest.” Clearly, left to itself, the industry has not been trustworthy. I hope that I have shown to some extent how the BGP would function in keeping the private plans honest.

Finally, it is important to note that the point of the BGP would not be to be innovative – that’s not something the government is good at, at least not for a long time. (See the OEO experience from the 60’s, for instance, on how innovation can begin and then be stifled.) It should be solid even if stolid, the safety net for everyone; honest, straightforward, maybe unimaginative, but present. The BGP should also be a lowest common denominator, in the sense that if the BGP can do something, then there is no reason other plans can’t do it, too.

Budd Shenkin