Fears of the public option are overblown

Revival of the so-called public option in health reform legislation has big business in a big tizzy. I listened in on a Business Roundtable briefing yesterday where two talking points were hammered on repeatedly:

  • The public plan will result in cost shifting to the private market, raising costs for businesses that provide insurance
  • The public plan will stifle innovation (e.g., in new treatments) by focusing on cost above all else

I’m slightly puzzled about why the Roundtable (which represents large businesses) feels so strongly about this. First, it is far from inevitable that a public plan would result in cost shifting. Second, the innovation argument is at best a mixed bag. Maybe a public plan would reduce the introduction of costly new technologies (and maybe not). But it might bring innovations in another area where they’re needed: cost control.

Big employers assume that the public option would undercut commercial premiums. Let’s examine that notion a bit.

There are three main ways a public option could conceivably offer a lower premium than competing private plans:

  • Lower administrative costs: public plan proponents point to research that shows Medicare administrative costs are lower than for private plans
  • Lower reimbursement rates to providers: the government might impose rates on providers or use its power to extract lower rates
  • Lower utilization of medical services: government might provide more effective medical management

It’s unlikely that the public option will have a significant cost advantage, at least initially:

  • Administrative costs:
    • A public plan would incur many of the same administrative costs as private plans, e.g., marketing, claims management, medical management, provider profiling. It’s hard to see why these would cost the government less than the private sector
    • One reason Medicare administrative costs are low is that the government does little to manage medical costs.  As a result higher medical costs offset the administrative savings. Traditional Medicare also does little marketing and doesn’t pay commissions whereas a public plan probably would spend in these areas
    • A public plan would have some advantages, namely no need to pay taxes, or earn a profit. (Of course you could say the same for non-profit health plans)
    • Reimbursement rates:
      • If a public plan passes, it probably will not allow the public option to impose rates on providers (e.g., Medicare rates). Instead the public plan would negotiate with providers, just like private payers. The public option is not likely to be the largest player in many regions and therefore it seems unreasonable to expect it will be able to obtain deeper discounts than others. This is especially true because only a small slice of the population will even be eligible to participate in the public plan.
      • The public option will face political pressure (e.g., from doctors) not to push too aggressively on rates, and Congress has demonstrated its sympathy to providers on this point as illustrated by its failure to adhere to the Medicare Sustainable Growth Rate rules, which it overrides nearly every year
      • If the public plan manages to push rates down –because it is focusing on price more than its competitors are—private plans are likely to seek and obtain contracts that match the public plan’s rates. This is different than the situation with Medicare and Medicaid, where commercial plans understand they must pay more than Medicare and Medicaid rates to keep providers viable. They won’t feel the same way when they’re competing with a public plan
      • The public plan will find it politically untenable to offer a narrow provider network, which is the most straightforward way to control costs. That will provide an opportunity for private insurers to offer narrower, lower priced products
      • Utilization management
        • There is no reason to expect that a public option would do a better job managing utilization than private payers. Medicare, for example, does a poor job today
        • To the extent that sicker patients choose a public plan, they would drive utilization up. It seems to me this could happen since private plans would like to avoid these patients whereas the public plan presumably would not

Interestingly, not all businesses oppose the public option. I spoke today with John Arensmeyer, founder and CEO of Small Business Majority (SBM). He told me his group has chosen not to make the public option their “signature issue” but that “it’s one component to provide additional competition and choice, especially in states that are dominated by one or two carriers.”

In a poll of its members –who like small business people are mostly Republicans and independents– SBM found that 70 percent favor the establishment of a public option while only 19 percent want a system with private payers only.

SBM’s very sensible small business prescription for healthcare reform includes the following:

  • Cost containment: Reduce costs throughout the system and level the playing field
  • Choice: Create more coverage choices for businesses and employees, and make the healthcare system more competitive
  • Convenience: Simplify the system for busy small business owners
  • Coverage: Guarantee affordable healthcare coverage for all Americans

I still can’t figure out why big business is so against the public option. I personally don’t think it’s going to be such a big deal one way or the other.


I  asked the Business Roundtable spokesman a follow-up question yesterday and just got my answer:

Q: How certain are you that introduction of a public plan will lead to cost shifting? Will that cost shifting occur right away or will it develop over time?

A: Depending on how the legislation is ultimately drafted, it could lead to cost shifting immediately. For example, if the legislation permits the public plan to use the Medicare rates, there are several studies that have already demonstrated that providers shift costs to employer-sponsored coverage to compensate for inadequate Medicare payments.   If the legislation does not specify rates, it is presumed that any public program is likely to reimburse providers at a lower rate and have a lower cost of doing business.

October 29, 2009

8 thoughts on “Fears of the public option are overblown”

  1. You really need to look into SBM’s background. They are a democrat front group that has turned into the go-to small business group fro dem’s in order to provide political cover.

    Who are their members?
    Who funds them?
    When were they founded?

  2. Actually events since this was posted indicate the CBO thinks the public plan will have higher premiums than regular plans because they’ll attract sicker folks and the possibilities for management of them will be diminished due to the political nature of the public plan.

    It’s all speculation at this point, but I think it brings home the idea that nothing is for sure.

  3. You did a nice job explaining your argument but I will sum up the way it is in one sentence and I would challenge you to refute this:

    When the government “competes” they always win.

    That is just the way it is but I would love to hear your thoughts to attempt to convince me otherwise.

  4. That’s a reasonable challenge. Certainly if the government fixes the market they win.

    However, a few counter-examples come to mind:

    United Parcel Service v. the US Postal Service

    Private buses between Boston and New York City v. Amtrak

    Freecreditreport.com v. Annualcreditreport.gov

    Maybe I can think of some others.

  5. REALITY!!

    ( http://my.firedoglake.com/iflizwerequeen/2011/05/16/how-about-a-little-truth-about-what-the-majority-want-for-health-care/ )

    ( Gov. Peter Shumlin: Real Healthcare reform — http://www.youtube.com/watch?v=8yFUbkVCsZ4 )

    ( Health Care Budget Deficit Calculator — http://www.cepr.net/calculators/hc/hc-calculator.html )

    ( Briefing: Dean Baker on Boosting the Economy by Saving Healthcare http://t.co/fmVz8nM )


    As you all know. Had congress passed a single-payer or government-run robust Public Option CHOICE! available to everyone on day one, our economy and jobs would have taken off like a rocket. And still will. Single-payer would be best. But a government-run robust Public Option CHOICE! that can lead to a single-payer system is the least you can accept. It’s not about competing with for-profit healthcare and for-profit health insurance. It’s about replacing it with Universal Healthcare Assurance. Everyone knows this now.

    The message from the midterm elections was clear. The American people want real healthcare reform. They want that individual mandate requiring them to buy private health insurance abolished. And they want a government-run robust public option CHOICE! available to everyone on day one. And they want it now.

    They want Drug re-importation, and abolishment, or strong restrictions on patents for biologic and prescription drugs. And government controlled and negotiated drug and medical cost. They want back control of their healthcare system from the Medical Industrial Complex. And they want it NOW!


    For-profit health insurance is extremely unethical, and morally repugnant. It’s as morally repugnant as slavery was. And few if any decent Americans are going to allow them-self to be compelled to support such an unethical and immoral crime against humanity.

    This is a matter of National and Global security. There can be NO MORE EXCUSES.

    Further, we want that corrupt, undemocratic filibuster abolished. Whats the point of an election if one corrupt member of congress can block the will of the people, and any legislation the majority wants. And do it in secret. Give me a break people.

    Also, unemployment healthcare benefits are critically needed. But they should be provided through the Medicare program at cost, less the 65% government premium subsidy provided now to private for profit health insurance.

    Congress should stop wasting hundreds of millions of dollars of taxpayer money on private for profit health insurance subsidies. Subsidies that cost the taxpayer 10x as much or more than Medicare does. Private for profit health insurance plans cost more. But provide dangerous and poorer quality patient care.



    This is what the American people are shouting at you. Both parties have just enough power now to do what the American people want. GET! IT! DONE! NOW!

    If congress does not abolish the individual mandate. And establish a government-run public option CHOICE! before the end of 2011. EVERY! member of congress up for reelection in 2012 will face strong progressive pro public option, and anti-individual mandate replacement candidates.

    Strong progressive pro “PUBLIC OPTION” CHOICE! and anti-individual mandate volunteer candidates should begin now. And start the process of replacing any and all members of congress that obstruct, or fail to add a government-run robust PUBLIC OPTION CHOICE! before the end of 2011.

    We need two or three very strong progressive volunteer candidates for every member of congress that will be up for reelection in 2012. You should be fully prepared to politically EVISCERATE EVERY INCUMBENT that fails or obstructs “THE PUBLIC OPTION”. And you should be willing to step aside and support the strongest pro “PUBLIC OPTION” candidate if the need arises.

    ASSUME CONGRESS WILL FAIL and SELLOUT again. So start preparing now to CUT THEIR POLITICAL THROATS. You can always step aside if they succeed. But only if they succeed. We didn’t have much time to prepare before these past midterm elections. So the American people had to use a political shotgun approach. But by 2012 you will have a scalpel.

    Congress could have passed a robust government-run public option during it’s lame duck session. They knew what the American people wanted. They already had several bills on record. And the house had already passed a public option. Departing members could have left with a truly great accomplishment. And the rest of you could have solidified your job before the 2012 elections.

    President Obama, you promised the American people a strong public option available to everyone. And the American people overwhelmingly supported you for it. Maybe it just wasn’t possible before. But it is now.

    Knock heads. Threaten people. Or do whatever you have to. We will support you. But get us that robust public option CHOICE! available to everyone on day one before the end of 2011. Or We The People Of The United States will make the past midterm election look like a cake walk in 2012. And it will include you.

    We still have a healthcare crisis in America. With hundreds of thousands dieing needlessly every year in America. And a for profit medical industrial complex that threatens the security and health of the entire world. They have already attacked the world with H1N1 killing thousands, and injuring millions. And more attacks are planned for profit, and to feed their greed.

    Spread the word people.

    Progressives, prepare the American peoples scalpels. It’s time to remove some politically diseased tissues.

    God Bless You my fellow human beings. I’m proud to be one of you. You did good.

    See you on the battle field.


    jacksmith – WorkingClass 🙂

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