Public Option Health Plan Fails Modeling Test in Colorado

The Obama administration has proposed a government-run health insurance plan generally referred to as a "public option." Some believe that government can do a better job of running a health plan than private companies can. Others argue that a government-run health insurance plan will improve Americans' health insurance choices.

The problem for public option proponents is that private insurance plans work reasonably well, at least if one defines well as good financial protection and ready access to the technologically advanced health care of one's choice at the lowest possible cost.

Proponents of the public option planned to test marketed it in Colorado. The effort was put on hold two years ago.

The reason you haven't heard of this before is that the public option cost more than private insurance. How much? According to the Lewin Group, roughly $8,547 for each of the 6,400 previously uninsured people that were expected to sign up.

These cost estimates don't include the Medicaid and SCHIP expansions that were assumed to take place before the public option was instituted. They would theoretically have reduced the number of Coloradoans without some sort of third party payer coverage to 115,600 out of a population of roughly 4.6 million. At $8,547 for the 0.1 percent of the population likely to be interested in the public plan option, proponents could have purchased private health insurance for each participant and had enough money left over to buy each participant a new care every four years.

The public plan was to have been financed in one of two ways. The first financing option was charging a monthly premium of $225 per person per month, or $2,700 a year. That was the amount that the plan's designers considered affordable for health insurance. They tinkered extensively with the benefits to make the public plan come under that premium amount.

The second financing option was to fund the plan by levying an additional income tax of 8.1 percent on everyone who joined it. The tax would be collected in lieu of a premium. This option was preferred by the policy reformers who supported a public plan option. In general, they believed that all payments for health care should be means tested. Unacquainted with the concept of deadweight losses from tax systems, they thought that piggy-backing on the tax system to collect premiums would necessarily reduce costs.

Going into the modeling process, the public option proponents were certain that their idea would attract all kinds of people. They believed that there were huge numbers of people who wanted to purchase health insurance, and thought that coverage of routine items made their plan better than private plans. They also assumed that members would be able to find a physician or dentist willing to accept the public plan's payment rates.

What public plan proponents didn't consider carefully enough was that in Colorado (where mean household income is $55,517) the average person could already buy health insurance in the individual market for about $212 a month, $13 less than the $225 that the public plan's proponents considered an "affordable" premium. Since those who are uninsured are likely to be more sensitive to premium costs than those who have insurance, the higher premium on the public plan was not especially attractive.

When the public plan was financed by charging everyone in it an additional 8.1 percent income tax, the modeling showed that the public plan was a good deal only for those with individual incomes below $31,320. The problem with income tax finance is that Colorado households with incomes below that level typically are either young and healthy singles or are retirees already covered by Medicare. Median household incomes for those aged 15 to 24 (5.6 percent of all households) was $27,375. For those aged 25 to 44 (40 percent of all households) it was $57,646.

When Lewin ran the numbers, the public option proponents found that a the public option in Colorado was a solution to a problem that relatively few people had. It was an extremely expensive way to cover a few people. Provided costs, premiums, and coverages are fairly estimated, and government doesn't bend the rules in its favor, one would expect to see the same modeling results at the national level.

The Colorado public option had several other problems, problems that also apply at the national level. A thorough airing of them might serve to dampen enthusiasm for a national public option even for those who feel that no possible harm could come from having the federal government add health insurance to its failing ventures in banking and automobile manufacturing.

The problems include:

  1. Having premiums that are the same for everyone means that the plan would not charge people based on their medical risk. If premiums are set to pay for the medical risk of the sick, premiums would be so high that no healthy people would enroll. If premiums are set to attract the healthy, then sick people would enroll in droves and the public plan would end up with a high, and expensive, proportion of bad risks. Proponents were against risk passed premiums and proposed using a waiting list "ensure a normal distribution of risk." As in all other government run systems, the preference for equality above all created a waiting list. In this case the list would be just to get into a government funded coverage plan. The waiting lists for care would, no doubt, follow over time.
  2. Because public plan proponents they did not believe in using price as a rationing mechanism, they worried that people would transfer into the public plan when they needed extensive surgical or dental work and then out again once they were fixed up. They concluded that people who opted for the public plan should be locked in for long periods. This presented a knotty enforcement problem, especially if people wish to move out of the state, or the country, for various periods of time. Would people who joined a public plan have to agree to be locked into it for years? Would they still have to make payments to it if they moved out of the country for some period?
  3. Portability was limited. In Colorado, the health coverage under the public option was portable only in the sense that if one changed jobs but stayed in the state coverage was continuous. People who might want treatment out-of-state, or want continuous coverage if they moved, or spent months out-of-state, were out of luck. This is one of the problems in Massachusetts. People who buy Commonwealth Connector plans are buying health insurance that will not pay for out-of-state care. In Colorado, some Colorado residents routinely go out-of-state for care in remote border areas. With prior approval, many US private plans pay for health care obtained out of the US. Would a government run plan pay for health care outside of its jurisdiction or would it put unacceptable limits on the ability of its enrollees to obtain the kind of care they want from the people they want regardless of their location?
  4. There was an evident animus towards private insurance arrangements on the part of those who favor government run health coverage. Proponents of the public option test in Colorado favored regulations, taxes, and fees that made private health insurance and private health care more expensive relative to public insurance, and to health care provided by government. Proponents were proud of the fact that the public option plan would "not involve insurance companies" unless one "might be hired to handle claims."

Comments (21)

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  1. Bart says:

    in Colorado…the average person could already buy health insurance in the individual market for about $212 a month

    Does “average person” include everyone in the state? In other words, with pure community rating, and knocking off 10 percent or so in forgone underwriting costs, everyone in the state could be covered for $190 per person? That’s less than I would have thought.

  2. Bart says:

    I should have asked, “Does ‘average person’ mean one whose premium is equal to the average cost for everyone in the state.”

  3. Greg says:

    More people should be aware of this.

  4. Linda Gorman says:

    The “average” person in any state is reasonably healthy and is probably insurable on the individual market.

    The premium quoted is from the AHIP survey of individual health insurance 2006-7. It is the average premium cost for all of the individual policies that insurers participating in the survey said they sold in Colorado. Colorado has a medically underwritten individual market so its premiums tend to be lower than in states that have community rating or guaranteed issue.

    Of course, coverage for someone who is already seriously ill is not really health insurance. Colorado has a subsidized high risk pool open to people who are uninsurable, are residents, and have been continuously insured (or satisfy a waiting period). It is guaranteed issue if you meet its requirements. A policy from it would cost a 40 year old Denver man $265.02 for a $2,000 deductible, $311 for a $1000 deductible as of this writing.

  5. Bart says:

    So “average” in this case was more-or-less a figure of speech, akin to “typical”. Got it. That answers my question, but leaves open the question of what the real state-wide average cost would be. In any case, it sounds as though the public option IS a subsidized high-risk pool, and that low-cost private plans need not fear competition from it.

    I strongly disagree with the implication that anyone who is declined coverage is “seriously ill.” All it takes are a couple of oddball events on your medical record, or a relatively minor chronic condition. These may be correlated to a risk of higher future expenditures, but there doesn’t need to be a known causal connection in order to affect one’s rating. Nor does there need to be a certainty of expenditure that would justify calling coverage “not really insurance.”

  6. Ron Greiner says:

    Bart you said, “Does “average person” include everyone in the state? In other words, with pure community rating, and knocking off 10 percent or so in forgone underwriting costs, everyone in the state could be covered for $190 per person? That’s less than I would have thought.”

    Bart you should be an insurance company CEO. Just fire the underwriting departments and pass 10% savings on to the consumers.

    Is that 10% savings for the first year or for the life of the policy?

    What kind of “odd ball” events make people uninsurable?

    What kind of “minor chronic condition” makes people uninsurable?

    HSA News: 8 million Americans have gone tax free. North Carolina’s new high risk pool has HSA qualifying coverage. They call it Plan C.

    We need an HSA category here.

  7. Linda Gorman says:

    I disagree with the assertion that a couple of oddball events results in coverage denied. Not that things would be better under the public plan–recall that in order to control risk, the proposal included a waiting list for entry.

    As proposed, the Colorado public plan was a benefit plan ginned up by a committee based on the coverage that they thought people “ought” to buy. With one exception, the people doing it had little experience with what people really want to buy when their own cash and health are on the line. A couple of modeling iterations allowed the benefits to be tweaked to meet the artificial $225 a month limit.

    It is clear that the political pressure to increase benefits and lower costs, probably by cutting reimbursement and rationing care, was slated to begin right after the plan itself was begun.

    Recall that once in the plan, one’s ability to leave would have been limited. People lured into enrolling with the claim that this plan is just like private insurance would have had no recourse if the plan made medical care difficult to get.

    The real question is why this public plan was necessary given that Colorado, like every other state, already offers subsidized insurance to the uninsurable and that the public plan didn’t offer anything that the private sector wasn’t already providing.

    The answer is that there has been a steady push to get rid of private medicine, and one way to do that is to get rid of private insurance. There are several ways to do this. One can regulate it out of existence, tax it out of existence, or provide government run competition that has no cost constraint because it is tax funded.

    The Colorado legislature is currently seeking to copy Massachusetts by doing all three. Given the modeling results, it wouldn’t have been long before those running the Colorado public plan would be clamoring for tax money on the grounds that the plan would otherwise be bankrupt and strand thousands of people without health insurance.

    This year, there was a bill in the legislature to study a public plan further. There was no bill to study reforms based on deregulation, health care vouchers, or other market oriented reforms, and in fact the committee that recommended that a public plan be studied voted down a proposal to recommend that market oriented reforms be studied.

    The people appointed to the committee that recommended the public plan simply believed, without much evidence or expertise on policy matters, that government was the way to go.

    There is no reason to believe that motivations, actions, and presentation at the federal level are any more transparent than the Colorado deliberations were. Based on what I see, the same organizations are involved and the policy goal of the ultimate elimination of private health care for all but the rich and well-connected is exactly the same.

  8. Ron Greiner says:

    The National Association of State Comprehensive Health Insurance Plans (NASCHIP)

    http://www.naschip.org/

    Florida is not open for enrollment.

  9. Chris says:

    You wrote:
    The problem for public option proponents is that private insurance plans work reasonably well, at least if one defines well as good financial protection and ready access to the technologically advanced health care of one’s choice at the lowest possible cost.

    Compared to what? Certainly not comapred to the current public plan we have, Medicare, as private insurers offer uncertain financial protection according to the whims of their CEO’s, and work aggressively to limit access to the technologically advanced health care, they do it at a higher cost than Medicare, and they don’t work reasonably well, being more administratively inefficient.

    Hard to take the rest of your article seriously when you start off like that.

  10. Linda Gorman says:

    People on Medicare have unlimited financial liability for their care. Medicare has no stop loss limit. They also have problems finding physicians willing to treat them for the price that Medicare is willing to pay.

    The access problems with Medicaid are worse.

  11. Linda Gorman says:

    And, unlike private insurers, Medicare is insolvent.

  12. Bart says:

    Ron: I had considered leaving out the reference to cost of underwriting, since it made no difference whether average cost was $190 or $212. But there certainly would be some savings if underwriting were unnecessary. I can’t recall where I saw the statement that overhead for underwriting was in the double digits, but if you don’t like the 10 percent figure feel free to cite a more accurate one.

    For policies that guarantee renewal at class average rates, I would assume that underwriting costs continue until such time as the individual’s risk rises above class average.

    Note that I wasn’t really advocating for the public option, I was only trying to establish the actual cost of such a proposal for comparison purposes.

    But here’s a thought exercise: suppose everyone purchases individual coverage at birth, with guaranteed renewal at class-average rates, and maintains that coverage for life. Eventually some people will develop chronic conditions and their risks will become greater than class-average, but their premiums will only increase to class average. This will create a deficit in funding, so rates for low-risk individuals will have to rise as well. Wouldn’t the end result be the same as community rating (or modified community rating, depending on how “class average” is defined)?

    For “oddball events” just look at the questions asked on an insurance application. “Have you had a BP reading above 140/90 in the last 10 years?” “Have you been treated for a prostate problem in the last 5 years?” These could be spurious events that have nothing to do with a long-term condition. For “relatively minor chronic condition”, try past diagnosis for asthma, depression, hypertension, etc. I say “relatively minor” because I am not talking about heart failure or “a head full of tumors”. Any single event or chronic condition may only result in a premium increase of 25-50 percent, but stack up two or three of them and you are uninsurable.

    I’m all for individual high-deductible policies, with or without the HSA. I agree with you that anyone who can get one should consider doing so, and dismiss the employer tax break as false economy. But these are already available in most states, so I don’t see where any policy reform is required in this area.

  13. tina miller says:

    This health insurance thing in PA is now a huge thorn in residents side. We keep getting conflicting info that they are mandating coverage for all regardless. First who on earth said healthcare is a right? That is like saying vacation time is a right. The only reason insurance is where it is….is because of govt interference a few decades ago when they regulated maximum wages. For instance John Doe Cleaners in competition with Suzy Doe Cleaners wants good employees so they pay for good employees. Oh but big bad govt steps in and says maximum pay is XYZ. So how do the 2 cleaners compete to get the good employees? They had to be inventive. So John Doe Cleaners says…hey I will pay for you personal health insurance and offer 1 week paid vacation. Suzy ups the anti with paying for you personal health ins and your families and 2 weeks paid vacation. Thus health ins by employers was born and now has turned into this huge conglomerate all cuz the govt stuck their nose somewhere it doesn’t belong. Nothing in the constitution says I have a right to vacation time, health insurance, driving a green car, gas, roof over my head, food in my stomach…you get the point. It only allots me the freedom of speech, freedom to be armed and in essence to be FREE. Well if they impose a tax on me for insurance when I have it through employer anyway to cover someone else that doesn’t, that is infringing on my freedom. If someone out there can’t take care of their own insurance then maybe they should find a job that covers it. Or find a job that pays more to pay their own insurance. Why should I have to take care of everyone else. I take care of myself and that is the only way it should be. We are responsible for our ownselves and our own successes and failures. This country is so out of control with this entitlement and fair doctrine and I have utterly had it. I guarantee if this keeps up we are going to have war here. Does govt understand how fed up people are? I don’t think so cuz they keep up with this. Why does the govt think so m any have bought guns? Why do they think gun sales are up? Have they ever once stopped to think what is going thru the average Americans mind? Well I know cuz I am an average American. YOU WILL NOT TAKE AWAY MY FREEDOM AND TELL ME HOW AND WHAT TO DO WITH MY MONEY AND MY LIFE.

  14. Bart says:

    “Well if they impose a tax on me for insurance when I have it through employer anyway to cover someone else that doesn’t, that is infringing on my freedom.”

    But I’m paying taxes to make up for your tax-free employer-provided coverage. Doesn’t that infringe on my freedom?

  15. Bart says:

    P.S. I would assume that employer-provided coverage would satisfy the proposed individual mandates. I haven’t seen anything to the contrary.

    I’m not in favor of the individual mandate, at least not yet, but to me it’s much less onerous than some of the other proposals, such as an employer mandate.

  16. Bart says:

    Linda: Again, I was not advocating for a public option, and certainly not for the Colorado public plan. I was mainly trying to establish what the figures being compared really meant. My initial impression was that you were saying that $212 was the per-capita cost to insure everyone in Colorado, and $250 the equivalent cost for the public plan. In retrospect, it’s obvious that neither is the case. The $212 average cost was for a narrow subset of the population (unless individuals without private coverage are not “persons”) and the $250 is a heavily subsidized number not indicative of the true cost.

  17. Linda Gorman says:

    Bart, we are not discussing optimal reforms here. The numbers that I gave are indicative of the current situation with a lower private insurance premium cost for the medically underwritten policies and a higher out-of-pocket one for the medically uninsurable in an already existing public plan.

    The proponents of yet another public plan claim that they are offering an option that would improve the current situation. The question, in view of the existing prices and plans, is why they think that?

    Proponents of more public plans persist in pushing them while dismissing all other possible reforms. They fail to explain why another public plan is desirable. Lewin’s Colorado modeling suggests that there is little need for one. Finally, existing public plans make medical care difficult to access, have high costs, and are mired in financial mismanagement that, in the case of Medicare, has led to insolvency.

    Judging from the results in Massachusetts, individual mandates would adopt requirements that would make many existing health insurance policies invalid for satisfying the mandate.

    The maximum deductible allowed in Massachusetts, for example, is lower than about half of the policies purchased in the individual market according to the 2007 AHIP survey.

    An individual mandate means that the government gets to define what health insurance is, and can force you to purchase whatever some committee determines that you need. Existing evidence suggests that the people who want to do that want different things than a large fraction of people who actually purchase their own health insurance. See my post on this at at http://www.john-goodman-blog.com/designing-health-insurance-evidence-from-massachusetts/

  18. Ron Greiner says:

    Of course Blue Cross of Mass. has qualifying insurance because they help write the legislation.

    There is not much competition to Blue Cross of Mass. so the premiums are really high.

    The Blues own Ted Kennedy and John Kerry. Remember when Kerry was running for President and kept saying, “I have Blue Cross.”

    Got the blues, paying way to much for health insurance?

    Bart, in Mighigan you are correct. By state law there are no exclusionary riders so these people (with small medical problems) are just declines. Guess what company gets these declines. If you guessed Blue Cross of Mighigan you would be correct.

    Blue Cross of Mighigan was a big supporter of Senator Debbie Stabenow (D-MI) in her last election.

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