The Public Plan Option

There has been a big debate of late around the creation of a Public Plan option for healthcare, as currently proposed in the House’s “America’s Affordable Health Choices Act.” The basic outline of a public plan is that the government—in the form of a panel operating under the auspices of the Surgeon General’s office—will define a health benefit and pay for it through premiums charged to individuals. As currently described there are limits on who will be eligible to purchase this public plan insurance.

On the one hand, you have the WSJ and others who think the public plan option is a stalking horse for a single payer system (see here), and on the other, you have the house’s summary of the bill (here) that describes it in far rosier terms about choice and a basic benefit. Nate Silver, from fivethirtyeight.com, had a nice observation on the right’s antipathy to a public option.

In any event, the “public option” is really just a way of saying that the federal government will become an insurer and will charge premiums for the insurance it offers. Now, whether it will in fact administer the insurance, I am not at all sure. In many instances, they may contract with an ASO (Administrative Services Organization) that looks and acts like an insurance company, but has no financial skin in the game.

(This ASO relationship is commonly used in our current system by large employers that opt to “self-insure.” There are a variety of reasons why an employer would elect to do this, which I can cover at another time, if there is interest.)

Crowd-out and SCHIP:

The major concern of the right at this time appears to be “crowd-out”. Crowd-out is what occurs when there is a public plan that is so attractive that people leave private insurance for it. This was a major issue with the SCHIP program, and there have been a number of interesting papers written about it, such as this survey from the Robert Wood Johnson Foundation. In any event, it is not near the hyperbole you see (here) from the Heritage Foundation

(As an anecdote, I also want to note some of the ways in which crowd out occurs: In 2002 we were living in New York City. We were insured through my employer, so when my son was born, we expected to move up to the “family” plan that was available to us. Of course, this turned out to be an increase of I think about $350 per month. Child #2 would have been free, but there was no option available to us to include just one child. New York at the time permitted anyone to sign up for its State Child Health Insurance Program (SCHIP). But the regulations stipulated that if you made too much money (as we did) then you would receive no subsidy for the health insurance. So we signed up for it. Want to know how much we were charged for unsubsidized coverage? $132 per month. Same pediatrician, same coverage limits, almost the exact same everything. The only difference was that we no longer had to pay copayments when we saw the pediatrician. If the “public option” does anything similar, it will be a huge boon to families all over the country.)

A recent analysis of possible healthcare reform proposals by The Lewin Group suggests that given different variables, between 32M and 119M people will switch from private insurance to a public plan. In either scenario, about 27-28M people will go from being uninsured to insured. The two scenarios basically have to do with whether the public option is available only to small employers and the uninsured, or if it is open to anyone—even those employers currently offering private coverage (who choose to dump it in favor of the public option). For what it is worth, the 119M is about 2/3 of the entire private insurance market.

Obama has also talked about this in terms of only allowing small employers, individuals, and the self-employed to purchase the public option, but in all fairness, I think it is only a matter of time before it is open to large employers, too. While it will radically change the economics of the healthcare system, I don’t think this is likely to lead to the “dreaded” single payer system that is the bane of the WSJ. To my view, two things are likely to happen:

1) The insurance industry, much as in France, will morph from an all encompassing insurance system to one that focuses on supplementary insurance. In other words, private insurance will be available for anything above and beyond what is covered by the “public option”; and

2) The profit motive will drive private insurance companies to innovate around the use of different healthcare models to achieve better outcomes with a different mix of providers and provider types. In doing so, they will be able to offer the same coverage, but at a lower cost. Now, while it is true that among the largest drivers of costs is inpatient stays (typically in the form of preventable readmissions), I could easily see a health insurance company providing direct on-site home transition support to prevent subsequent inpatient stays. That’s not “managed care” that denies services to improve the bottom line, that’s “well-managed” care the keeps costs low by providing high quality services.