Medicare And Competition: The Keys To A Real Public Plan

Ah, the priming effect. The public supports a health care plan if they're given information about its intention: by injecting competition, it would force private insurance companies to lower their prices and could possibly drive some out of business. When the public is asked to evaluate the public plan in bleaker terms, like when they're threatened with the loss of their choice of doctor, support drops, unsurprisingly. Unfortunately, policy makers are adding layers of complexity to what is a simpler debate: the public plan is basically Medicare with a different, less baggage-laden name. 

Jonathan Alter makes this point in his latest Newsweek column: Why would policymakers want more Medicare? ".... 

 The fabulously popular free health-insurance program for the elderly is running out of money, thanks to exploding costs. But the administration of Medicare is a miracle of low overhead and a model, despite all the fraud and abuse, of what government can do right. Three percent of Medicare's premiums go for administrative costs. By contrast, 10 to 20 percent of private-insurance premiums go for administrative costs. Roll that figure around on your tongue. When you swallow and digest it, you'll understand that any hope of significantly reducing health-care costs depends on a public option. 

 This is the strongest argument -- the strongest real argument -- for a public plan. The difference between 3% and 20% is the profit motive for the health care industry: that's the money that doctors and providers and insurance companies get above and beyond the cost of the procedure or treatment or administration. Doctors don't want to be forced to accept Medicare-pricing; patients worry about Medicare rules determining what type of coverage they can get, although they seem just as uncomfortable with the bureaucratic decisions made by centralized entities at their private health care plans. Writing in the Wall Street Journal, Abraham Verghese of Stanford points out an axiom that explains why the private sector is congenitally opposed to cost-cutting: "a dollar spent on medical care is a dollar of income for someone." 

That means, he says, that the only way to cut costs to reduce the size of the trough. How do you reduce the size of the trough? You use the power and size of the government to negotiate better prices on prescription drugs, tests, and doctor visits. You do that in a competitive marketplace where the value of goods and services can be somewhat reliably obtained. Right now, only Medicare is big enough to negotiate. 

The more popular solutions, as Alter and Verghese point out, is what we might today want to call the Gawande Model, after the physician/journalist's New Yorker article about the disparity in health care costs in McAllen, Texas and El Paso, Texas. Rightly, Gawande teases out a common symptom: the culture of money and history and tradition that doctors operate in determines or heavily influences how they practice medicine. "Comparative Effectiveness" is seen as the answer. As Alter notes, under this concept, "doctors would be advised that this treatment for a urinary-tract infection or that surgery for back pain was ineffective and should not be used." That might help. But doctors wouldn't be -- couldn't be -- forced to give up their preferred methods of treatment. And the public wouldn't stand for it; they want their doctors to do everything in their power to make them well. There's some evidence that if patients are given information about, say, why expensive, invasive tests like angioplasty aren't terribly useful in certain situations, they'll elect to challenge their doctor about the necessity of the test. Problem is, it's much easier to say no to an invasive test than it is to a CAT scan. Comparative effectiveness works is human beings are rational. When human beings get sick, they're often quite quirky. 

 The point is that if cost-cutting is really a goal of health care reform, then it'll have to come from either patients paying less or doctors, hospitals, drug companies and insurance companies getting less. There's no magic bullet that would keep people employed and healthy and well-compensated at all once. The least intrusive option is the gradual introduction of a Medicare-like public plan. Medicare is efficient, but it is also  expensive because it has adopted the assumptions behind the fee for service model that underlays private insurance. (Medicare, now limited to old people, competes with private insurance and adopts their business model; private insurance has no incentive to compete with Medicare; doctors who take Medicare devise ingenious ways to bill for as many procedures as possible in order to male up the gap between what private insurance pays and what the government reimburses them.)  

Reordering Medicare payment priorities to account for procedures and outcomes is the first step. But positive incentives alone cannot force doctors, health insurers, drug companies and hospitals to pay themselves less money. On the other hand, it is quite possible to reform health care without cutting costs. If getting quality coverage for everyone is the main goal, then insurance companies alone, with some premium help and regulatory changes by the government, can probably handle the job. 

In the long-run, a public plan won't cut costs if it doesn't either force the hand of the private insurance business. It is difficult to see how it does, unless it really is popular enough to drive people to abandon their private insurance. If that happens, though, you don't reduce costs -- you merely increase the share of the costs born by the taxpayer. That's why a public plan has to be well-designed, has to be big enough to generate competition, can't be too big so as to throw the insurance companies out of business (the competition sustains the innovation), and has to compensate providers well enough without breaking the Treasury. 

Bottom line: if you want to cut costs, you need an agent that can bargain them down. Medicare can be that agent if you change the way it operates. If you don't really want to cut costs, you can drop the public option altogether.
Presented by

Marc Ambinder is an Atlantic contributing editor. He is also a senior contributor at Defense One, a contributing editor at GQ, and a regular contributor at The Week.

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