Health Reform - Public Option, Private Option

I think I now understand how the new health plan could work. I have dealt with the heart of the plan, the Health Insurance Exchange (HIE), previously. It's a good heart of a plan. But the role of the Public Option has been obscure. Here's what I think.

The Great Health Reform Bill (GHRB) of 2009 needs to set the path for reform of the health care system. It can’t solve a whole lot of things at once, but it can solve some of them – access to health insurance being the most prominent. But making the health system more effective, efficient, and cost-saving will take time. The role of the GHRB should be to get us on the path.

We are set to have a Health Insurance Exchange. That’s very good. The HIE will make health insurance accessible to people, will set standards that people can understand and be sure of, and stop insurance companies from making money by shucking and jiving – not covering things, denying insurance after the fact (rescissions), low-balling vulnerable primary care providers, etc. As currently constructed the basic insurance policy under the plan is pretty bad – high deductible insurance was a bad idea from the start. But we won’t deal with that in this post – I think I’ve dealt with it before. This can be solved. The current bills also restrict access to the HIE to individuals and very small groups, which is also bad. Why not make it accessible to larger groups? The answer seems to be that the authors of the GHRB are afraid of adverse selection – that is, the only reason a larger group would opt for the HIE would be that they couldn’t get a good policy from a conventional private plan, because of poor health care utilization history. This reasoning means, we’ll give private people a good deal, but screw the larger groups that can’t get coverage. Thanks a lot. But again, that can be solved.

But those problems aside – I couldn’t help but comment – the biggest problem lawmakers and lobbyists are dealing with is the Public Option. Clearly, if there were a Medicare-like plan that competed with the full force of the public coffers behind it, this sort of PO would be able to blow the private plans out of the water. The so-called “volume discounts” available to a Medicare-like PO would mean that they could pay providers much less, charge the public less for policies, and drive the private plans out of business. A temporary fix for costs, yes, but in effect creating a single-payer plan. The country currently rejects this option, as do I unless it were completely thought through, which it hasn’t been. So it’s a non-starter. The next option for a PO is a good possibility – a government sponsored plan on a level playing field. This would mean that the PO would obey all the rules that apply to the private plans – be funded only with premiums, keep similar reserves, etc. Although denied “volume discounts,” this type of PO would still be able to “keep the private plans honest.”

OK – how would that solve anything? To answer that question, we need to look at the as to now unexamined side of the equation – that of providers. (For those who have been skimming, here is the meat of this post!)

Currently, the private health insurance companies not only contract with customers who buy their policies, but they contract with providers as well. The contractors can be individual physicians, integrated groups of physicians, individual hospitals, larger hospitals and hospital chains, pharmaceutical companies, and others. Depending on market power, the insurance companies are winners or losers on each contract, although with their overall book of business they need to be solvent. But the insurance company has freedom to contract or not contract with each entity. They make business decisions.

Medicare, however, does not have such latitude. Medicare has a set price and a method of paying, take it or leave it. If the provider meets the Medicare standard of professional requirements, they have to be accepted as Medicare providers. This is called Any Willing Provider (AWP).

I would propose the same AWP rule for the PO – any willing provider would be admitted as a contactor to the program. The terms of engagement would not be differentiated by the judgement of the governmental agency – that would constitute a great difference between the PO and private options. But it would mean that no provider would be completely shut out of business.

I would further propose that the PO set their prices in accord with public policy objectives. For instance, the pay of various specialties under our current system is very skewed. There is a curve with primaries at the bottom, some specialties (general surgery, for instance) in the middle, and some specialties (orthopedics, interventional cardiology, radiology) at the top. As a direct result of this allocation, not surprisingly, the top paid specialties have many recruits and the lower paid specialties, especially primary care, are wanting. I would propose that the PO adjust the pay of these specialties to rectify the current imbalance. A possibility might be 125% of Medicare rates for primary care, 115% for the middle specialties, and 90% for the high-flyers. It may be that the PO would have difficulty recruiting the top-paid specialties for these contracts. This might mean that there would have to be high-level negotiations in Washington. There may be no other way.

Likewise with hospitals. Currently, the payment scheme has many hospitals making tons of money, because there is often no real competition for many of these capital intensive institutions. Their contracts with private insurance companies are very lucrative; many hospitals are making tens of millions of dollars profit per year. The PO would be charged, in concert with Medicare, to introducing the rigors of competition to the hospitals.

If this were done, let’s look at what would happen on the private side. The private plans would not have the requirement of AWP; they could accept or reject whomever they wanted. Seeking profits, it would be in the interest of the insurance companies to organize superior networks of providers. What would “superior networks” be? They would be providers who pleased the public and thus obtained subscribers, and saved money while doing it. These insurance/provider plans might cost more money for each subscriber – but if the improved service were worth it, that’s competition. Or, they might be less expensive, since the plan could reject less cost-effective providers. These plans might let go of fee-for-service and opt for capitation. They might be able to assemble actual “accountable organizations” that accepted capitated payments for defined episodes of care. They might be primary care groups that assembled themselves, and then referred their patients to preferred centers of excellence for specialty services, as suggested in “Redefining Health Care” by Porter and Teisberg.

In other words, the PO would be traditional and stable as an entity, not changing the method of payment of providers (although it might go back to DRG’s for hospitals). If the experimentation of the insurance companies/provider networks went awry, it would be a port in the storm for patients to switch to. At the same time, it would be able to enact some of the more obvious needs of public policy.

The private plans have not been good at positive innovation up until now. They have not been able to team with providers in the public interest. They have not been able to adjust the pay of primaries and specialists to conform to public needs. In fact, they have come up with plans – high deductibles – that have negatively impacted the problems. Now, under new conditions, they would need to innovate positively to survive and prosper. At the same time, they would be constrained by the PO to keep costs down to be able to compete, but on a level playing field.

Politically, this should be a saleable. The Left wants a PO – here it would have one. The Right wants a level playing field and competition – here it would have it. Primary care needs to have support – here it would have it. Costs need to be contained and the path set for further cost reductions by efficiency rather than rationing – this would happen. Monopolistic and oligopsonistic hospitals need to be constrained – this proposal would work toward that goal. High-flying specialties need to be restrained – this proposal would do that.

So, that’s my plan.

Budd Shenkin