Monday, November 16, 2009

The Public Plan

There has been a lot of buzz about the public plan, but what exactly is it, and what would it do to the US healthcare system? You’ll probably hate this answer, but it all depends. Here’s the general tension: one side believes that the government can run the healthcare system more efficiently and cheaply than the private sector. The other side is a belief that the private sector generally can do things better than the government and that the healthcare sector is no exception. I’ll start with the most liberal/powerful version, and move towards the right.

Strong public plan option
To me this is defined by 2 key elements: (1) required provider participation and (2) Medicare-based rates. Since no bill has actually required providers to participate, I won’t get into that. I did make a reference to low Medicare rates in an earlier post, but suffice it to say that there are studies, including one from the Lewin Group, which is admittedly a subsidiary of United Health Group, that show that Medicare rates are as low as 71% of standard commercial rates. If you don’t believe me or doubt the validity of the study, go ask your doctor (or ANY doctor) if the rates that Medicare pays come remotely close to the rates for commercial payors. One key question though is, why should providers care – isn’t Medicare+Plus better than an uninsured patient, who’s paying pennies on the dollar? Well the fear for hospitals and physicians alike is not about converting uninsured patients into some type of insured patient (government or commercial). The key fear is what if the commercial patients turn into a lower paying government-insured patient? If half of the patients are commercial paying patients, then the average rate that hospitals receive is slashed by 30% for half its patients. This would devastate the hospital industry. Remember, 30% off of reimbursement goes straight to the bottom line, so after accounting for mix and taxes, it’s roughly 10% of net income gone. For an industry that makes an average of ~3% profit margins (~85% of hospitals are non-profit), taking out 10% is infeasible. Even though every proposal has limited the eligibility of a public plan to a small group of people, industry experts, conservatives, and moderates alike have recognized that establishing a public option could be the “camel’s nose under the tent.” In other words, if the plan is eligible for groups under 50 today, then who’s to say that eligibility won’t be expanded down the road to groups of 100, 500, 1000…until eventually the government controls the entire healthcare industry? It’s for these reasons that the earliest versions of the House bill with a strong public plan at Medicare + 5% rates were defeated in committee.

House version Public plan option
To compromise a little with the moderates, the early House version switched from a Medicare+Plus system to a “negotiated rates” system. Loosely defined, the Director of Health and Human Services (the department in charge of Medicare, Medicaid, FDA, CDC, etc.) would be in charge of negotiating rates with providers. Ignoring the difficulties of negotiating with >5,000 hospitals and the hundreds of thousands of doctors, it is unclear if these rates would be closer to Medicare or commercial rates. Again, the same argument (Camel’s nose) is being used to argue against putting in the public plan infrastructure in this form.

Other proposed verions
There are a few other versions in the Senate being thrown around as ideas. 1) Senate Majority leader Harry Reid’s state-based public plans with an opt-out clause, 2) Senator Olympia Snowe’s public plan with trigger provisions if the health insurance industry does not meet certain coverage or cost goals, and 3) Senator Kent Conrad’s non-governmental, state-based cooperatives akin to the agricultural industry cooperatives (think FL orange growers). The state-based plans are nearly as powerful as their national-based cousins, but it would allow states to opt-out. Considering that a few moderate Senators do not like this plan, it has no chance of passing. Chalk this one up to politicking by Senator Reid. The cooperative has been blasted by liberals as being too impotent to cause any change in the current environment. In other words, it would be the same as not having a public plan at all, and those critics would be right. Private insurers have already been competing against non-profit, non-governmental entities for decades. The intriguing one to me is the trigger-based public plan. On the surface, it solves the general tension that debaters have: it gives the private sector the chance to prove that it can bend the cost curve and cover the uninsured under new regulation, but it also creates a public plan if the private sector fails as the public plan backers would believe. It seems like the perfect compromise, but then the question becomes what is the “trigger” itself? Can insurers really be responsible for cost controls when they control only 15-20% of the premium via SG&A and profits? Will the trigger be strong enough to motivate the journey towards efficiency? This and many other questions remain to be seen.

If you asked me my opinion (and I emphasize this is an opinion because I can respect the belief that government can do things better than the private sector – defense and utilities for example), I’d tell you that I look at Medicare as the model for the government’s ability to run a health insurance program. If you’ve read my earlier post about Medicare, then you’d know that I think it is a pretty miserable program full of inefficiency and fraud. Regardless, the public plan is truly a big distraction from all the things that need to be fixed. As an American, I really do sincerely hope that legislation gets passed in some form. It is impossible to argue that the current system works. We’re next going to explore some of the ideas and writings of Atul Gawande and identify some of the positive changes that are being proposed to the system.


  1. Interesting summary and views!

  2. I now see there is another Sam floating around the blog. I can only assume he is trying to steal my identity. To be clear, this is Sam L.

  3. Doing some looking into on the trigger option, the left seems more happy with an opt-out plan rather than a trigger plan because though the trigger plan sounds like a great compromise, the true issue is the condition(s) for the trigger to happen. The conditions for the public option to take into effect can be so vague and strict that it can be written in a way so that it would be nearly impossible to "pull the trigger". In essence, a trigger option may mean no public option at all.

    Best example of the above is Medicare Part D. It was supposed to work on the same trigger principle, with the closure of the donut hole and reinstating some rules that would seem like no-brainers, like allowing gov't to negotiate with drug companies. The way it was written, the trigger never got pulled because the legislators gamed the wording so that it would be nearly impossible to reach the conditions. This is why Medicare Part D has been criticized so much; drug companies have basically been given taxpayer money by the billions due to this program, and when seniors truly need Medicare Part D, they almost always run into the donut hole.

  4. @ Albert
    I completely agree with you on the fundamental issue of the trigger. Ironically, I think every liberal's fear about the trigger is that it won't ever trigger (ie. like Part D) and every conservative's fear is that it will trigger too easily. Square 1 right? On the surface it sounds like a great compromise, but then arguing about what the trigger itself will be puts everyone back at square 1.

    (For readers that don't know, Part D is the drug benefit for Seniors passed in 2003 and implemented in 2006. The actual benefit is a little bit odd. There is a small deductible up front, 75% coverage for the next ~$2,500, 0% coverage for the next $3,600 [called the donut hole], and 95% coverage thereafter.) The trigger that was written into the 2003 legislation was that if there weren't more than 2 plans in each of the 34 regions of the US, then the government could implement a public Part D plan. There were legitimate concerns that plans would avoid rural areas, but this turned out to be quite the opposite. There is thriving competition in the program, and the program is one of very few that has cost the government LESS money than expected and it has covered more people than expected. I think it is less about 'gaming' the wording vs. just genuinely being unsure if competition would exist. I think rural Senators wanted a little reassurance that the program would be available in their areas vs. Congress wanting a public plan to run the program.

    On the topic of Part D though, I do not think it has been criticized that much - it really is one of the few successful programs I can point to: lower costs for the government, drug benefit for seniors (when it wasn't available before), and a popular program/high satisfaction rate for seniors. The criticism has been about the donut hole itself, which I find focuses too much on the minority. The donut hole is doing its job - it is forcing seniors to become price-aware consumers of their drug spending habits. That encourages more focus on using generics, purchasing cheaper branded alternatives, etc. Sidebar: I'm actually quite incensed that the Pharma industry's "contribution" to healthcare reform is cheaper branded drugs in the donut hole where they are losing volume to generics already. If we want to lower costs, we should be encouraging generics - not branded drugs. Even if they didn't get anything back through more volume, $80bn/10 years is a complete joke for the industry - any pharma analyst will tell you that. To be sure though, there are definitely seniors out there that hitting the donut hole causes them a significant burden. Hopefully these people are part of the low-income subsidy program or are dually eligible for the Medicaid program, but if not, then these are the ones that fall through the cracks. They are not, by any means, the majority though. I do think eliminating the donut hole altogether is throwing the baby out with the bathwater. I personally don't view it as a bad thing.

    By the way, if anyone knows any actuaries that look at Part D and/or Medicare Advantage, then please let me know! I would love to talk to them.

  5. The reason why the donut hole has been controversial is because of the assumption that the donut hole will force seniors to be smarter spenders. Seniors that don't fall into the donut hole have conditions that can be treated/managed with generics affordably. For instance, a senior that needs metformin or glyburide for his type 2 diabetes only needs to pay $4 a month for it. They can also take Januvia, a newer drug, that costs more money, as is just as effective for non-refractory patients. Doesn't matter what he picks, Medicare Part D will take care of the tab. Or, if a patient has depression, they can choose to take a generic SSRI for $4/month, or they can choose the new fancy but expensive SSRI/SNRI that will have the same efficacy but has a brand name going for it. Since medicare part D pays for it, the patient is going to be inclined to take the more expensive drug. On the flip side, a patient with crippling rheumatoid arthritis can enjoy a good quality of life if they take a biologic called infliximab. For $1650 every two-three months, you can live a life not hindered by painful arthritis. Or, a patient who has CML (a leukemia) can have a prolonged life expectancy if they go on Gleevec. All is great...if they can afford to pay $88 a day for it. Unfortunately, this means the patients will have to go into the donut hole; for many, this means they will have to stop taking the drugs after a few months.

    The crux of what I'm saying is that when a patient has a condition that requires medication, it's not the same choice as if I want to buy a new laptop or not. In the latter, if I can't afford the newest laptop, I will have to make do without one or with a lesser model, but it won't affect my life that much. I can always shop around for cheaper alternatives. For the former, it's either you take the meds, or you either die or live a very poor quality life. That medication may cost you thousands a year. I might be ok if I have a well-paying job, but if I'm retired, I'm in a bind. This is why the donut hole has received criticism; patients that need Medicare Part D the most are the ones that get shafted. Pharm companies have received billions because taxpayer money is used to pay for pricier brand name medications for easily manageable conditions though a generic can do just fine. When a patient truly needs a newer drug that becomes expensive, Medicare Part D fails because the whole point of it was to help patients with costlier bills make their ends meet. The only thing I like about Medicare Part D so far is that it does encourage generic drug usage. Otherwise, it needs to be redone.

    Last, on further research, I found out that the writer of the bill quit after it passed to become the head of the PhRMA, a pharma lobbying group. His salary is somewhere in the millions. In addition, 14 congressional aides quit their jobs to work in the pharm and medical lobbying industry afterwards.