Did the Congressional Budget Office just kill the public option?

How to fix health policy.
Oct. 30 2009 2:30 PM

Public Option, RIP?

The Congressional Budget Office explains the perils of compromise and the limits of its own interest in health costs.

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I've had a bad feeling since Tuesday that Connecticut Sen. Joe Lieberman's pledge to filibuster any variety of public option eliminated its chances of becoming law. Continuing recalcitrance from moderate Democrats didn't help, either. But I never figured that the final death blow would come from the Congressional Budget Office.

Here's the killer sentence, spotted byPolitico's Carrie Budoff Brown on Page 6 of the CBO's analysis  of House Speaker Nancy Pelosi's "blended" House bill: "[A] public plan paying negotiated rates ... would typically have premiums that are somewhat higher [italics mine] than the average premiums for the private plans in the exchanges."

Whaa? Most analyses of the public plan, including mine, have assumed that even the watered-down "level playing field" version (i.e., the version in Pelosi's bill and also—with an "opt out" provision slapped on—in Senate Majority Leader Harry Reid's yet-to-be-scored Senate bill) would set premiums lower than private insurers. But the CBO says that's wrong.

More specifically, here's what the CBO says: "The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and attract a less healthy pool of enrollees. (The effects of that 'adverse selection' on the public plan's premiums would be only partially offset by the 'risk adjustment' procedures that would apply to all plans operating in the exchanges.)"

Before I explain what that means, let's review why a public option is such an important part of health reform in the first place.

Sanctuary. Private insurers have shown themselves to be untrustworthy when it comes to paying out health benefits. Other parts of the health reform bill outlaw insurers' most familiar tactics for screwing sick people (rescission, rejection based on "pre-existing conditions," a large disparity in premium prices based on demographic factors). But it's sheer fantasy to assume private insurers won't come up with new, similarly cruel tricks to avoid acquiring or maintaining customers in poor health. A public option would be accountable not to stockholders but to voters, whose interests would align much better with public-option policyholders. It would therefore provide a haven where customers could be reasonably sure of getting and keeping decent health insurance no matter what their health needs.

Price. Government health insurance plans, such as Medicare, have a track record of maintaining costs below those of private health insurers because they enjoy certain advantages of scale, are cheaper to administer, and don't have to deliver profits to shareholders.

The CBO is saying that a public option that was required to be self-sustaining financially and that was barred from aligning its doctor and hospital fees with Medicare's—as Pelosi's level-playing-field version would be—would see its role as sanctuary doom its role as price competitor. Private insurers would engage in aggressive "management of utilization by its enrollees," i.e., dumping or avoiding the people most likely to need the services of doctors and hospitals, leaving them no place to go except the public option. This would drive down private insurers' costs and drive up the public option's. The CBO acknowledges that Pelosi's public option would have lower administrative expenses than private plans. But because its ability to drive down doctor and hospital fees would be somewhat inhibited by its level-playing-field structure, its cost advantages would be outweighed by its cost disadvantage in serving a disproportionately unwell population.

In short: Private insurers have been fretting that a public option would doom them, but the CBO is saying the opposite: Private insurers would doom (or at least put at a significant disadvantage) the public option.

This is a nightmare scenario that Paul Starr, the sociologist and Hillarycare veteran, has been warning about for some time. "Over-constrained," Starr wrote this past June in the American Prospect ("Perils of the Public Plan"), "the public plan could go into a death spiral ... as it becomes a dumping ground for high-risk enrollees, its rates rise, and it loses its appeal to the public at large." I've long thought that Starr was being too pessimistic because Congress would never design a public option this vulnerable. According to the CBO, however, that's just what Pelosi did. Although the CBO has not yet scored Reid's Senate proposal, it's similar enough that CBO will likely conclude Reid's public option, like Pelosi's, would charge higher premiums than private insurers.

The logical solution is to revert to a "robust" public option that would align doctor and hospital payments with Medicare, thereby re-establishing the public option's price advantage. But Pelosi doesn't have the votes for that, and neither does Reid.

Depressing, no? There is, however, a silver lining to be found in a separate CBO analysis released Oct. 30.

What does it mean, the CBO asks, to "bend the cost curve"? The answer is more complicated than most acknowledge because there isn't one cost curve—there are four. One curve shows growth in the overall federal budget deficit. A second curve shows growth in federal spending on health care. A third curve shows growth in health care spending by both government and the private sector. And a fourth curve shows growth in health insurance premiums. (A cynic might add a fifth curve showing growth in political contributions from health insurers.)

The CBO can do a decent job predicting growth in the first two curves, it says, because government spending is its primary area of expertise. But the third and fourth curves require calculations regarding private industry and the larger economy that take CBO outside its comfort zone.

Here's how the CBO puts it:

Major proposals to reform health care would affect not only the federal budget but also spending for health care by individuals, firms, and other levels of government. A broad measure encompassing those effects would be the impact on total national health expenditures. However, CBO does not analyze [national health expenditures] as closely as it does the federal budget, and at this point CBO has not assessed the net effect of health care reform proposals on those expenditures, either within the 10-year budget window or for the subsequent decade. That is, CBO has not evaluated whether reform proposals would lower or raise—or bend down or up—the 'curve' of national health expenditures.

I take this to mean not only that the CBO declines to project health reform's overall effect on health expenditures, but also that its individual calculations projecting, say, the price of private health insurance premiums relative to public-option premiums should be taken with a grain of salt. At the CBO, economists get paid to measure government spending. They don't get paid to measure spending in the larger economy. So don't get too worked up over their findings when they do.

AP Video: Nancy Pelosi on Health Care

Timothy Noah is a former Slate staffer. His  book about income inequality is The Great Divergence.