Two Wall Street Journal editorials have already tackled this issue — explaining the unfairness of public/private health insurance competition and the likely crowd-out of private insurance, based on a Lewin report. So is there anything else to say? Actually, quite a lot. Bottom line: It’s very hard to do this right; but if the advocates are intellectually honest, they can start with the State Children’s Health Insurance Program (SCHIP) and adopt a proposal Gene Steuerle and I made some years ago.
Here’s the background. Everyone is assuming that President Obama will keep his campaign promise to create a parallel system for health insurance. Those who don’t get insurance through an employer would have the opportunity to buy insurance in an Exchange. Details on how the Exchange would work are murky; and the clearer they become, the worse the whole idea sounds. But that’s not the problem. The deal-killing issue is whether one of the plans in the Exchange will be a government plan.
Two immediate questions jump to mind. What would it mean for a public plan to compete with a private plan? Why would anyone want that to happen? Let’s consider each of these in turn.
We are the Children
If competition means anything, it means the competitors compete on a level playing field. In thinking about what this might look like, some people point to the current arrangement under which private Medicare Advantage plans offer seniors an alternative to participation in conventional Medicare. The trouble with this analogy is that the playing field is in no sense level.
As an entitlement program, conventional Medicare has a blank check drawn on the U.S. Treasury. No matter how sick a senior gets, no matter how many resources are used in treatment, no matter how high the costs mount, Medicare can always count on the Treasury to pay the bills. No such blank check is available to private plans, however.
As a practical matter, it appears that some private Medicare plans are “overpaid” in the sense they are getting premiums that exceed the average expected cost for their enrollees. This fact is frequently trotted out by the critics who claim the field tilts in favor of the private players. Yet even if true, let us note that conventional Medicare’s funds are not limited to the average expected cost of the enrollees either. Conventional Medicare always pays whatever the doctors and patients happen to spend.
On a real level playing field, every player has the same chance to succeed or fail. This means that the (risk-adjusted) premium to be paid on behalf of every potential enrollee is fixed in advance. The only way a plan can get income is by attracting the enrollees along with their premium payments. But if every plan’s revenues are determined only by its success in attracting enrollees, then every plan can potentially fail. I would argue that if public plans can fail just as private plans can, they are “public” in name only and in reality indistinguishable from private plans.
There are other issues to be resolved in creating a level, competitive playing field. For example, you can’t have public plans enforce contracts by reliance on the criminal law (as Medicare does) while private plans are forced to use the civil courts. The law must be the same for all players. You also cannot allow the public plan to use the monopsonistic power of government to push down provider fees and have them set by force of law, while the private players must pay market rates. If the public plan is entitled to pay Medicare rates, private plans must have that same option as well.
A level playing field means that the public plan would have no advantage either with respect to generating revenues or controlling costs. That means that the public plan is not really “public” in any meaningful sense of the word. It would be just one more plan.
That leads us to the second question. The only rational reason anyone would want a public plan to compete with private ones is the belief that a public plan might (by reason of its publicness) be able to accomplish something private plans could not. But what would that something be?
To appreciate the difficulty, consider that in most places Medicare is administered by Blue Cross. But Blue Cross is also a private insurer in the commercial insurance market. Is there any reason to believe that Blue Cross (when running Medicare) can do something for the government that it cannot do just as well or better for the private sector (when acting as a private insurer)?
In a similar way, most women and children covered by Medicaid are in plans administered by private insurers. Is there any reason to think that UnitedHealthcare or Aetna can do something for Medicaid (in their role as Medicaid contractors) that they cannot do as well or better in their role as private insurance?
In all these cases, the answer must be “no.” An entity surely doesn’t get better or worse at something when it exchanges its private hat for a public hat, or vice versa.
What then is driving the insistence on having a public plan in the Exchange? One could argue that some Democrats on Capitol Hill are simply dedicated to the proposition that public/private competition is a good thing. But this premise is undermined by other evidence.
For the most part, advocates of a public health plan in the Exchange are some of the very people who are among the loudest critics of allowing private schools to compete with public schools for the same revenue dollars. They inevitably can be counted on to oppose using Medicaid dollars for private insurance. And many of them would like to kill the Medicare Advantage program altogether.
Granted, the left is very inconsistent on this issue. Paul Krugman has editorially railed against the “privatization” of Medicare (meaning Medicare Advantage) on numerous occasions. But I have never seen him complain about the fact that Blue Cross administers conventional Medicare. And most of the critics of the “privatization” of Medicaid are completely silent about the fact that most Medicaid is already administered by private commercial health insurers. Still, it’s hard to escape the conclusion that advocates of public/private competition are really rooting for a public-only health care system.
As a test of this hypothesis, consider the expansion of SCHIP which Congress passed in January. Estimates are that up to four million children will be added to the program as a result of the expansion; and half of those will drop their private insurance coverage to take advantage of free insurance from government. In their private plans, these children were able to see almost any doctor or go to any facility. Yet since most SCHIP plans pay Medicaid rates, the treatment options in the public plan will be much more limited. Not only are taxpayers getting hit with the cost of the program, in half the cases access to care is going to get worse.
So in keeping with the idea of public/private competition, why not allow the new money to follow the child. Let SCHIP programs across the country compete with employer plans and private insurance. Given a cost of about $2,000 per child, if a child chooses SCHIP, SCHIP gets the money. If a private plan is chosen, the money would go to the private plan.
If the proponents are sincere in their desire to foster public/private competition, let’s start with the SCHIP program and see how well it works.