Will the public plan have higher premiums than private insurance?
By Ezra Klein | October 30, 2009; 10:07 AM ET
I’ve been saying that a public option with negotiated rates probably won’t post much of a price advantage against private insurers. But according to the Congressional Budget Office (pdf), that’s was overoptimistic. The public option’s premiums, they say, will actually be more expensive than private insurance.
Roughly one-fifth of the people purchasing coverage through the exchanges would enroll in the public plan, meaning that total enrollment in that plan would be about 6 million.
That estimate of enrollment reflects CBO’s assessment that a public plan paying negotiated rates would attract a broad network of providers but would typically have premiums that are somewhat higher than the average premiums for the private plans in the exchanges. The rates the public plan pays to providers would, on average, probably be comparable to the rates paid by private insurers participating in the exchanges. The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and attract a less healthy pool of enrollees.
To translate some of that back into English, the public plan will pay prices equivalent to those of private insurers and may save a bit of money on administrative efficiencies. But because the public option is public, it won’t want to do the unpopular things that insurers do to save money, like manage care or aggressively review treatments. It also, presumably, won’t try to drive out the sick or the unhealthy. That means the public option will spend more, and could, over time, develop a reputation as a good home for bad health risks, which would mean its average premium will increase because its average member will cost more. The public option will be a good deal for these relatively sick people, but the presence of sick people will make it look like a bad deal to everyone else, which could in turn make it a bad deal for everyone else.
The nightmare scenario, then, is that private insurers cotton onto this and accelerate the process, implicitly or explicitly guiding bad risks to the public option. In theory, the exchanges are risk-adjusted, and the public option will be given more money if it ends up with bad risks, but it’s hard to say how that will function in practice.
This also illuminates one of the more problematic inconsistencies in the health-care debate. Insurers have been blamed for, among other things, doing too much to discriminate against bad health-care risks and refusing to pay for care far too often. They’ve been blamed, in other words, for saying “no.” But they’ve also been blamed for doing too little to control costs.
But that is how they control costs. We saw this in the late-’90s, when tightly managed care brought cost growth down to the 4 percent range but also triggered a public backlash (it did not, however, appear to hurt health outcomes). Insofar as the public option has been presented as a big part of the answer to our health-care woes, it’s been in part because it won’t do the things that make insurers unpopular (the saying “no”), and in part because it will control costs. But the only way to make both those things true at once is to give the public option pricing power along the lines of Medicare, which it doesn’t have in either the House or Senate bills.
This, in sum, is why I’m pessimistic on the chances for the public option to substantially affect the insurance market. Pricing power was always the biggest piece, but when that was lost those many months ago, expectations for the public option never really changed. That was necessary for keeping people excited, but I worry it’s going to leave folks disappointed with the policy, and thus skeptical of public insurance more generally, which would be unfounded.
That isn’t to say that the public option can’t still do some real good, as I argue here (http://voices.washingtonpost.com/ezra-klein/2009/10/expansion_team.html). But there’s also a chance for it to become a real disaster. The most important factor here will be the strength of the risk adjustment in the exchanges, so keep an eye on that.