Why No Public Option Now

Some 30 million senior citizens currently enjoy benefits through Medicare Advantage, a benefit program that uses an insurance exchange concept, defined provider networks, and negotiated provider rates. The benefit design basis is that of the Medicare program, with additional benefits added. Plans primarily compete on the attractiveness of those additional benefits and how favorable the provider network appears. Remembering that 85 – 90% of the premium dollar is paid to providers, the viability of the Medicare Advantage product primarily resides in the ability of a health plan to negotiate provider contracts and keep utilization rates below Medicare actuarial determinants. Medicare Advantage has been a tough business model many insurers have avoided. The primary reason is the difficulty in securing provider contracts at acceptable payment levels to make for a realistic business case. CMS is reducing support of the Medicare Advantage program and we are seeing providers moving away from Medicare Advantage contracts unless those contracts pay better than standard Medicare reimbursement schedules. The concept behind government run insurance options has always been very simple: Give the beneficiaries what they want and then tell the providers what they can receive monetarily for providing those benefits. There is no negotiation involved. The result has been government payment schemes that are below the cost of providing the service, causing providers to increase rates to non-government beneficiaries or simply get out.


The concept behind the Public Option is exactly like that of Medicare Advantage. But the business model grows more complex because of the addition of employer interests. What has been lost in much of the public debate on health reform, in my opinion, is the notion that all the variation in commercial benefit designs is really in response to the needs of the employer community, not the insurance community. Employers are desperate to lower their health insurance costs! As the Public Option requires standardization of benefit design, this effectively removes a major tool for the private employer community to help control their health benefit cost. Unless there is some massive rate regulation scheme introduced by government on the provider community, I’m afraid the employer community will have their thin profit margins shrink even further unless more jobs can be moved offshore!

The National debate has targeted insurance companies and their profits as the villain. Even if all private insurance carriers were to become non-profit, the additional money released for “more appropriate” uses is extremely small, somewhere in the range of $5 billion. That said, the economic evidence and Medicare Advantage experience suggests the Public Option will further consolidate the insurance sector, place further pressure on employers to move jobs offshore, and pressure the provider community to reduce costs or opt out completely. Rather quickly, the end result will be rationing of benefits on a large “social” scale rather than a more distributed scale as seen currently. Maybe this is exactly the medicine America needs and wants but I doubt it! While the Public Option may move the social reform agenda forward, it is not at all clear care and service to the average American Citizen will improve. It will just shift and likely reduce the overall availability of services, often the unfortunate collateral damage of fundamental social agenda. Leave the Public Option off the table for now and seek to improve the delivery system using market-based tools. Thoughts?