In an earlier column ("Obama: Soft on Health Insurance?"), I expressed some worry that President Obama was backing away from his campaign promise to create a government health insurance program for the self-employed, employees of small businesses, and people whose employers don't provide them with health insurance. My worry arose from an exchange at a White House health care forum between Obama and Sen. Charles Grassley, who with four other Republican senators had signed a letter stating that creation of such a program would be a deal-breaker for health care reform. Here it is:
Sen. Grassley: The only thing that I would throw out for your consideration—and please don't respond to this now, because I'm asking you just to think about it—there's a lot of us that feel that the public option that the government is an unfair competitor and that we're going to get an awful lot of crowd out, and we have to keep what we have now strong, and make it stronger.
President Obama: OK. Well, let me just—I'm not going to respond definitively. The thinking on the public option has been that it gives consumers more choices, and it helps give—keep the private sector honest, because there's some competition out there. That's been the thinking. I recognize, though, the fear that if a public option is run through Washington, and there are incentives to try to tamp down costs and—or at least what shows up on the books, and you've got the ability in Washington, apparently, to print money—that private insurance plans might end up feeling overwhelmed. So I recognize that there's that concern. I think it's a serious one and a real one. And we'll make sure that it gets addressed, partly because I assume it will be very—be very hard to come out of committee unless we're thinking about it a little bit. And so we want to make sure that that's something that we pay attention to.
As I noted earlier, the Republicans aren't wrong to fear that creation of a new public plan might put the private plans out of business. Employer-based private health insurance has been costing steadily more and delivering steadily less for some time. Existing government health insurance programs like Medicare and the State Children's Health Insurance Program have consistently been shown to be more cost-effective than private insurance. A recent report by the Commonwealth Fund, a nonprofit dedicated to improving the health care system, estimated that a public plan along the lines Obama proposed during the campaign could set its premiums 20 percent to 30 percent lower than private health insurance plans. That strikes me as an argument for "public plan choice" rather than against it. But in his comments, Obama seemed to agree with Grassley that it would be wrong to "overwhelm" the private insurance market by making this new government health insurance program too cost-effective, or too generous, or too wonderful in some other, unspecified way. Maybe we shouldn't have a public program at all!
Mainly, though, I didn't understand what Obama was saying.
Seeking enlightenment, I consulted a recent paper ("The Case for Public Plan Choice in National Health Reform") by Jacob Hacker, the University of California-Berkeley political scientist who first conceived this particular scheme. In my earlier column, I'd linked to Hacker's paper and cited its observation that Medicare spending had during the previous decade grown less rapidly, per capita, than spending for private health insurance. This time I lingered over Hacker's discussion of why Medicare was more cost-effective. Two reasons seem especially relevant to this discussion:
- Because of its sheer size, Medicare enjoys greater leverage than private insurers in negotiating what it will pay doctors and hospitals. On average Medicare pays 81 percent of what private insurers pay to doctors and about 75 percent of what private insurers pay to hospitals. When Congress enacted Medicare's prescription drug benefit in 2003, it prohibited the government from negotiating volume discounts with drug manufacturers—that would be socialism!—but other federal health insurance programs not subject to this absurd restriction typically pay for drugs about half what private insurers do. Although physicians like to complain that Medicare's penny-pinching is driving doctors out of the program, Hacker found that the number of doctors participating in Medicare is actually growing faster than the number of Medicare patients. Those old folks are hard to get away from. Medicare represents about 20 percent of the U.S. health care market. (Government health care programs in general represent about 45 percent.) Private insurers worry that a new public program would exploit similar economies of scale, putting them at a competitive disadvantage.
- Doctors and hospitals recoup some of their losses from Medicare by shifting a greater portion of their operating costs onto private insurers. According to one California study, every $1 that Medicare eliminated in payments to hospitals added 17 cents to the hospital bills of private patients. The same study observed similar, though less pronounced, cost-shifting with Medicaid. Taken together, Medicare and Medicaid cost-shifting accounted for 12 percent of the cost increase in private health insurance during the previous decade. Private insurers fret that a new public program would lead to more cost-shifting.