Politics vs. Reality in Healthcare Reform

(MoneyWatch)  Because of their unwillingness to control costs by restructuring the health care delivery system, the Democratic reformers are focusing on insurance reform and, particularly, the public option. As I said in a recent post, I still favor their brand of reform over no reform, because it would expand coverage and improve insurance regulations. But the political Armageddon unfolding in Washington could easily lead to no reform, or to a Pyrrhic victory in which the Democrats pass a bill that contains little of substance.

The main reason is the public option. The Democrats, who are ready to ram this idea through the Senate, claim that the public option is essential to reform because it's the only way to control insurance costs. I say that's nonsense.

According to the Commonwealth Fund, a New York think tank, inclusion of both public and private plans in a health insurance exchange for individuals and small businesses could save up to $265 billion over 10 years. These savings would come from reductions in administrative costs, including "less marketing, elimination of underwriting activities, fewer resources spent negotiating provider-payment rates, and fewer or standardized commissions to insurance brokers."

The $265 billion figure assumes that providers are paid at Medicare rates in the public plan. The savings would be $223 billion if they were paid at a rate that fell between Medicare and private-insurance rates, and there would be an increase of $32 billion in administrative costs if all the plans in the exchange were private. Including the net cost of covering the uninsured, the Commonwealth Fund projects that the public plan paying Medicare rates would save $425 billion over 10 years, while the intermediate option would cost $547 billion, and the private-plans-only scenario would add $1.17 trillion to our national health tab.

Well, let's start with the assumption that a public plan can pay providers at Medicare rates. The Commonwealth Fund says that participation in the plan would be voluntary for providers--a feature that is also included in the Congressional bills. Now, most physicians and hospitals do participate in Medicare, which is also voluntary. But, to judge by the perennial complaints of physicians about Medicare payment policies, it's likely that many participate only because about a third of their business comes from Medicare, on average. Why would they participate in a public plan aimed at the much smaller and healthier group of people who would buy public insurance in the proposed exchanges, if they could earn substantially more by sticking with private insurance? Just ask all the doctors who don't accept Medicaid patients.

Second, let's not forget that any savings from health insurance exchanges will depend on their survival. And they will not survive, as Peter Lee and John Grgurina point out on the Health Affairs blog, unless the reform legislation regulates them in particular ways to prevent adverse selection. One of the missing pieces, they say, is a requirement for all individuals and small businesses to buy insurance through the exchanges.

Finally, $425 billion over 10 years--even if it were realistic--is pocket change compared with the projected growth in health costs. While the Commonwealth Fund has proposed a package of reforms that could save nearly $3 trillion during that period, there is no sign that Congress is going to adopt most of its proposals. The important thing to remember is that "bending the curve" on costs is going to take much more than a public plan. As Dr. Marcia Angell, the former New England Journal of Medicine editor, points out in today's Huffington Post, "We need a complete overhaul of our health system. Tinkering at the edges won't do it."