The public insurance option

On July 11, the Journal of the American Medical Association published an article written by Barack Obama, JD. While the president devoted only a small portion of his article to the “public option” for insurance, this is part of what he wrote:

“Some parts of the country have struggled with limited insurance market competition for many years. … Public programs like Medicare often deliver care more cost-effectively by curtailing administrative overhead and securing better prices from providers.”

Hillary Clinton, the Democratic Party’s presidential nominee, agrees, so let’s look at the public option a little closer. If the public option becomes law and is implemented, we already have a pretty good idea of what it will be like. Medicare.

What do we know about Medicare? Of course, it is a safety net for those over 65, many of whom would otherwise find it impossible to afford health care or insurance. Here to stay as long as we can afford it.

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Know that the only way Medicare controls its costs is by dictating very, very low fees to hospitals, physicians, and other providers of health care services. Private insurers (Blue Cross, United Healthcare, Aetna, Cigna, etc.) regularly pay hospitals and physicians 20-30 percent more than Medicare. Why? Is it because the private insurers are insufficiently aggressive in negotiations?

The private insurers for years have been the difference between survival and bankruptcy for many hospitals and other providers, including those in Rhode Island. Even so, a 2009 survey reported that more than 60 percent of physicians would support a public option. Yet, if implemented, an even greater portion of their revenue would be paid by the federal government at those at least 20-30 percent lower rates.

The other way that Medicare “saves” money is by virtue of a lower per-insured operating expense. Hardly surprising given that its scale is enormous, and it does almost nothing other than process claims and collect money. Medicare does not manage care or do the myriad other things that private insurers do.

To put it in context, Blue Cross & Blue Shield of R.I. covers about 500,000 lives. An expenditure by our local Blue (say for a significant technology upgrade) of $50 million would add $100 to rates. The Medicare program has over 50 million insureds, so a similar spend by Medicare would add one dollar to rates.

Operating expense accounts for a relatively small portion of private insurer premiums. Last year the Congressional Budget Office reported that in 2012, on average, 88 percent of insurers’ revenue covered health care costs (actual claims paid for services to their insureds) while the rest went to operating expense and net margin. Compare that with virtually any other industry.

Private insurers (particularly the smaller ones), with or without competition, can do only so much to reduce their operating expenses. They do much more than Medicare does, such as customer service, managing care, nurse case management, wellness, employer group servicing, community service, and the list goes on. And a reduction of operating expense means fewer employees, local men and women who do things such as customer service and care management.

If the federal government is suggesting that private insurers “be kept honest” and reduce their costs, the only way they can do that with a significant impact on rates is by reducing the fees paid to providers or reducing the per-member use of services. There are no other ways. In regions where there is just one private insurer, usually the lack of alternatives for providers gives such insurers leverage to negotiate low fees. This makes for bad press and public outcry, as I can confirm from my own personal experience.

And IF the government agreed (for now) to pay provider fees no lower than private insurers, what would happen? It would immediately be price uncompetitive because the rate of use of services would be higher given that it doesn’t manage care.

There may be claims that the public option will stand on its own and be self-supporting. That was said of the Medicare program in 1967. Today at least 50 percent of the cost of Medicare is funded by the general treasury and not by employer/employee contributions (FICA) and beneficiaries’ premiums. Medicare plainly is here to stay and I’m not suggesting otherwise. But expansions of that program must be done with our eyes open.

A public option would position the federal government to “compete” with private insurers, while at the same time being an enormous user of such services and the regulator. It is fair to say that if the public option is run like Medicare, with similar fees and scope, it will mean the demise and eventual end of private health insurance. When you add Ms. Clinton’s call for Medicare for over 55’s, we would be a stone’s throw away from Mr. Sanders’ single payer, governmentally run, health insurance dream. •

James E. Purcell is the former CEO of Blue Cross & Blue Shield of Rhode Island. He is also an attorney and operates a national consulting practice on workplace wellness.

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