Myths of the Public Plan

Jul 30, 2009

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It's a critical week in Congress on the health care reform front, and members are ramping up the rhetoric for one of the sticking points -- a government-run health insurance plan that would "compete" with private insurers.

"I believe [a public health plan is] the only way we'll drive down costs," Sen. Kirsten Gillibrand, D-N.Y., recently told the Buffalo News. Like other Democratic members and the Obama administration, Gillibrand insists a new public health plan modeled after Medicare, which is facing insolvency and piling up trillions in long-term debt, would bring in savings that private insurers can't achieve. The House Tri-Committee and Senate Health, Education, Labor and Pensions Committee bills both create a new public plan modeled on Medicare.

Public plan proponents claim the addition of a new government plan will drive lower costs and improve quality and innovation, using the Medicare program as an example. According to public plan proponents:

  • Compared with private insurers, Medicare has slower cost growth;
  • Medicare's administrative costs are lower than those for private insurance;
  • Medicare has superior bargaining power to reduce health costs without harming patient access to care;
  • A public plan would be more innovative because private plans always follow the government's lead.

 

But Dr. Robert Book, a health care economist at the Heritage Foundation, recently combed through the Medicare data and found that the facts tell a different story:

Total health care costs per patient are growing faster for those on Medicare compared with those who have private coverage. We don't see it immediately because Medicare is paying a rapidly shrinking share of its beneficiaries' total costs, with an increasing share coming from beneficiaries' out-of-pocket payments and supplementary and other private insurance. An apples-to-apples comparison of total health care costs between Medicare and privately insured patients shows that per-patient care is increasing at a faster rate for those on Medicare.

Medicare's per patient administrative costs are substantially higher than those for private insurers. The illusion of the lower Medicare administrative costs comes from expressing those costs as a percentage of total costs, including patient care. But most of the program's administrative costs are accounted for in activities that aren't directly related to the level of patient care. And it's not a straight comparison in any event, because Medicare doesn’t offer the same services that private insurers do, such as disease management and on-call nurse consultation -- services that are included in the private insurers' administrative costs.

Medicare has no "bargaining power." While Medicare can pay doctors and hospitals less than private plans, it's only because the federal government dictates or "fixes" the prices. There is no bargaining involved, if that word has any meaning at all, and it hasn't really reduced the actual cost of providing care. In fact, lobbyists for doctors' groups have convinced Congress for the past seven years to block scheduled reductions that Medicare pays for physician services. In six of those years, Congress actually replaced the reduction with a payment rate increase. The Medicare program itself doesn't have much power in lowering prices: its prices are politically driven and Washington's Beltway politics could raise prices instead of lowering them.

Historically, public health plans have followed the health care delivery innovations that come out of the private sector. As private health organizations and insurers introduce improved quality measures and customer service perks (not to mention smarter ways to do disease management and preventive care), Medicare follows suit.

Even if you disregard Book's arguments, there are other drawbacks to Congress' creating and micromanaging another Medicare-like program. One is the unfunded future promises Medicare (read: taxpayers) is obligated to pay out -- more than $36 trillion right now.

Plus, a public health plan creates the conditions for a "Freddie Doc" entity that would take the same bad steps we've seen from the "public plan" mortgage companies Fannie Mae and Freddie Mac. These quasi-government companies were created to "keep private lenders honest." Instead they were driven by congressional meddling, special-interest lobbying and bureaucratic processes that threw the entire financial system into chaos.

We don't need that to happen even more in the nation's health industry, which makes up one-sixth of our economy. That's not what voters thought they were getting last November. Congress needs to scrap the public option and focus on the health reform proposals that enjoy broad bipartisan support -- like changing the unfair tax treatment of employer-sponsored health insurance so that families and consumers can buy affordable insurance and have real options in the marketplace.


Nina Owcharenko is the Deputy Director of the Center for Health Policy Studies at The Heritage Foundation .