The Wonk Room

Report: New Public Plan Will Control Health Care Costs

As the insurance industry and its conservative allies rally against competition between public and private insurance plans, a new report by Jacob Hacker argues that offering a new public insurance option to Americans who lack coverage would control health care costs and improve quality:

The core argument is that public insurance has distinct strengths and thus, offered as a choice on a level playing field with private plans, can serve as an important benchmark for private insurance within a reformed health care framework.

The Wonk Room has previously argued that ‘leveling the playing field‘ is key. But offering Americans a choice would trigger a sort of “checks on each other’s downsides” and allow public insurance to serve as an important benchmark for private insurance, while private insurance can remedy some of the problems of the public insurance.

In short, injecting a public plan — that is managed by the federal government and would pay private providers to deliver care — into a new health care exchange that prohibits cherry picking has two big benefits:

- Contain Costs: Between 1997 and 2006, health spending per enrollee grew at 4.6 percent a year under Medicare, compared with 7.3 percent a year under private health insurance. This is partly because public plans have lower administrative costs and greater bargaining leverage to negotiate for lower service and drug prices. Still, “the greatest potential cost-control advantage of a public plan is its ability to restrain the rate of increase of costs over time.” A recent study found that “since Medicare payment controls were put in place in the early 1980s, Medicare spending has grown much more slowly than in the past.”

- Improve Quality: The Veterans Health Administration has implemented a sophisticated electronic medical record systems and a quality measurement approach that focuses on preventive care and chronic disease management. Traditional medicare “has been the source of important payment innovations” that private plans have generally adopted. Conversely, “private insurance has few incentives to conduct comparative effectiveness research, and limited scope to influence the practices of provides and other insurers even when they do.”

Opponents of this kind of a public model typically argue that bargaining is unfair and would only lead to increased premiums. “A new public program similar to Medicare would exacerbate cost-shifting, which already adds $1,500, or 10 percent, to the average premium for a family of four,” Karen Ignagni, the CEO of America’s Health Insurance Plans (AHIP), told the New York Times.

AHIP recently released a study showing that lower reimbursement rates from Medicare and Medicaid cause private providers to shift the uncompensated costs to private payers. But they simply assume that “all payers should pay the same rates and the the total level of payments to providers is appropriate.” And while there is some limited cost shifting and Medicare could do a better job in setting its payment levels, “the whole point of bargaining, however is to gain volume discounts and restrain total spending.” Private insurers don’t do this, they simply pass on “rising costs to individuals while increasing their profitability.”

A public plan, however, because of its lower administrative costs and ability to bargain for better rates, lowers prices and saves Americans money. “The clearest evidence of the savings produced by the public plan is its premiums, which are estimated to be about 23 percent lower than comparable private insurance for the same set of benefits for the same population,” the analysis found.