How Private Insurers Could Compete With a Public Plan

The Commonwealth Fund, one of the principal sources of health policy ideas for the Obama Administration, has estimated the potential savings of three different insurance reform scenarios from 2010 to 2020. Assuming that unspecified Medicare reforms and delivery system changes were implemented within a framework of universal coverage, the report predicts that an approach that includes a "public option" paying Medicare rates to providers would save $3 trillion over that decade. If the public plan paid providers somewhere between Medicare and private insurance rates, the savings would be $2 trillion. If the reform legislation relied only on the current private health plans, about $1.2 trillion would be saved.

While the public option scenarios would reduce administrative costs much more than the current insurance setup, those savings are relatively small compared with savings that "come from greater efficiencies in care delivery and slower growth in health care spending." The Commonwealth Fund estimates those savings would range from $2.7 trillion to $1.2 trillion under the three scenarios.

The bulk of these savings appear to come from a slower rate of growth of provider reimbursement. The report calculates that, under the Medicare rate scenario, premiums for the public plan would be 25 percent lower than those for comparable benefit packages now available in the individual/small business market; with providers receiving intermediate rates, they would be 16 percent lower. Private plan premiums, however, are predicted to be 3 percent lower than they are now, mainly because of lower administrative costs within the proposed insurance exchanges.

So how would the private health plans compete with the government-backed plan? "Offering a public health insurance plan as an alternative choice should be a catalyst for private plans to innovate in the way they operate and pay for care," the report states. "It would help them reduce their administrative costs and implement payment and system reforms that lead to more appropriate utilization, better care, and slower cost growth--and, in the process, contribute to reduced premiums."

The authors suggest that "community health plans" that partner with integrated delivery systems would be in a good position to reduce costs through joint preventive and chronic care programs. But even if truly integrated hospital-and-doctor systems were more widespread than they are, health systems and health plans have not had a good track record of working together when they're not fighting over rates.

The Commonwealth Fund has another bright idea: "Private plans could also be given the authority to adopt public plan payment methods and rates." Whoa! If that means what I think it does, the government and private plans would jointly decide what they wanted to pay providers. I don't think that idea would go down very well among hospitals and physicians -- although in the long run, we may have no other choice.

Finally, the report predicts that if private plans adopted effective cost-control measures "sufficient to slow a rise in their premiums relative to trends in public plan premiums," the private and public plans would be charging about the same within five years.

Talk about piling assumptions upon assumptions! First, this conclusion presupposes that large numbers of people wouldn't immediately migrate to plans that charged 25 percent less than their current insurer. Second, it assumes that private carriers could do a much better job of controlling costs than they have to up now, despite their diminished bargaining ability in the marketplace. And third, it assumes that providers would not revolt against their incomes being cut significantly overnight.

Back to the drawing board--.