One of the most hotly debated proposals in health care reform is
the establishment of a new "public plan"--a health insurance
program operated by the federal government and modeled on Medicare.
In most variants of this idea, the public plan would "compete" with
existing health plans currently offered by employers, in the
individual insurance market, and/or in a new national health
insurance exchange. President Barack Obama has recently expressed
support for this idea:
I strongly believe that Americans should have the choice of a
public health insurance option operating alongside private plans.
This will give them a better range of choices, make the health care
market more competitive, and keep insurance companies honest.[1]
One prominent articulation of the public plan idea was recently
offered by Professor Jacob S. Hacker,[2] a political scientist at the
University of California at Berkeley, and promoted by the Institute
for America's Future (IAF).[3] Senator Max Baucus (D-MT),[4] Senator Edward
Kennedy (D-MA),[5] and Representative Fortney H. "Pete" Stark,
Jr. (D-CA)[6] have made similar proposals, and one has
been included in draft versions of the forthcoming Kennedy-Dodd
bill in the Senate and the recently published draft of the
America's Affordable Health Choices Act in the House.
Proponents of the public health plan idea claim that the high
cost of American health care is caused by private insurance
companies' expenditures on marketing,[7] efforts to deny claims,[8] high
executive salaries,[9] unrestrained pursuit of profit,[10]
and unwillingness to drive "hard bargains for reduced prices" from
hospitals and physicians.[11] They claim that the federal government
has superior "bargaining power" that allows Medicare--the nation's
largest existing public health plan--to achieve lower costs and
slower cost growth, and that the government could achieve similar
results with a public plan for the non-elderly.
Proponents also claim that competition from such a public plan
would reduce private-sector health care costs by forcing private
insurers to either reduce costs to the supposedly lower public plan
level or go out of business. Many even claim that if the entire
privately insured population were switched to a public plan, enough
could be saved in administrative costs alone to pay for covering
all Americans who are currently uninsured.[12]
This rationale for creating a new public program modeled on
Medicare is based on four erroneous beliefs: (1) that Medicare,
compared to private-sector health plans, provides comparable access
to health care at costs that grow more slowly than those of the
private sector; (2) that Medicare has lower administrative costs
than private insurance; (3) that Medicare uses superior bargaining
power to reduce health care costs without harm to patients; and (4)
that public health plans are more innovative, whereas private
health plans only follow the government's lead.
All of these beliefs are demonstrably false. Contrary to the
claims of public plan advocates:
- Total per-beneficiary health care costs are growing
faster for Medicare patients than for private insurance
patients. Medicare's per-beneficiary patient care costs appear to
grow more slowlythan costs in the private sector only if one
ignores the fact that Medicare is paying a rapidly shrinking share
of its beneficiaries' total health care costs. Total
per-beneficiary patient care costs for Medicare patients are
growing faster than total costs for patients with private
insurance. However, spending by the Medicare program is
growing more slowly than private insurance because much of the
growth in health care costs for Medicare beneficiaries is offset by
increased out-of-pocket spending by beneficiaries and other sources
of private-sector funding.
- Medicare's per-beneficiary administrative costs are
substantially higher than the administrative costs of private
health plans. The illusion that Medicare's administrative costs are
lower comes from expressing administrative costs as a percentage of
total costs, including patient care. Medicare's average patient
care costs are naturally higher because its beneficiaries are by
definition elderly, disabled, or end-stage renal disease patients,
so its per-person administrative costs are spread over a larger
base of health care costs.
- Medicare has no "bargaining power." To the extent that
the prices that Medicare pays health care providers are lower than
prices paid by private health plans, it is because of the
government's regulatory power, not because it reduces the actual
costs of providing care or has superior bargaining power.
Furthermore, lobbyists for physicians have persuaded Congress in
each of the past seven years to intervene to block scheduled
reductions in the prices that Medicare pays for physician
services--and in six of those seven years to replace the reduction
with an increase. This experience suggests that Medicare does not
in fact have any bargaining power that would enable it to lower
prices further, or even to maintain prices at current levels.
- Historically, public plans have more often been followers,
not leaders, in health care delivery innovation. It is
private-sector organizations that have introduced new
quality-improvement methods and new customer services, as well as
disease management and coverage of preventive care.
A public health care plan would not improve the current health
care situation and would likely make matters worse. Far from saving
enough to cover the uninsured, it would increase the cost of
covering even the presently insured at the current standard of
care. A public plan could reduce overall spending only at the cost
of substantial harm to patients.
Public Plan Claims
Advocates of a new public health care plan modeled on Medicare
justify their proposals based on a number of specific factual
claims. On closer examination, all of these claims turn out to be
false.
Claim #1: Medicare
has controlled cost growth better than private-sector health
plans.
Fact: When payments from all sources
are considered, spending on Medicare beneficiaries is increasing
faster than spending on the privately insured.
No one on any side of the health care debate claims that
Medicare's per-beneficiary health care cost is or could be lower
than the cost for the privately insured. Medicare beneficiaries are
by definition over age 65, disabled (as defined by Social Security)
for more than two years, or diagnosed with end-stage renal disease.
Clearly, Medicare beneficiaries require more health care on average
than those in the privately insured population.
However, advocates of the public plan idea do claim that
Medicare's costs per person are growing more slowly over time than
those of the private sector. For example, the Institute for
America's Future confidently declares:
Medicare has controlled health care costs much better than have
private health insurers over the last 25 years.…
Private health insurers' average annual spending per
enrollee grew 29 percent faster than Medicare spending between
1983 and 2006, and it grew 59 percent faster than Medicare between
1997 and 2006.Centers for Medicare and Medicaid Services data shows
that private health insurance spending per enrollee for comparable
benefits grew an average of 7.6 percent a year between 1983 and
2006 compared with Medicare's growth of 5.9 percent, or 29 percent
more. Between 1997 and 2006, private health insurance spending per
enrollee grew an average of 7.3 percent compared with Medicare's
growth of 4.6 percent, or 59 percent more.[13]
Each of the factual claims in this declaration is false,
misleading, or irrelevant to the conclusion drawn. We will see
that:
- Medicare benefits are not directly comparable to private
insurance benefits, and the source for the figures cited above, the
Centers for Medicare and Medicaid Services (CMS), makes no claim
that the quoted figures are for comparable benefits.
- The figures cited above include only spending by Medicare and
private insurance companies, excluding out-of-pocket spending and
other sources of funds. They also fail to account for the fact that
Medicare is paying a rapidly decreasing share of its enrollees'
total health care costs, while private insurers are paying a
stable, even slightly increasing, share of costs for the privately
insured.
- When payments from all sources are considered, spending on
Medicare beneficiaries is increasing faster than spending on
the privately insured.
In other words, Medicare is not controlling costs. Rather, it is
allowing costs to grow faster than costs for private insurance but
shifting an increasing share of those costs onto other payers,
including the beneficiaries themselves.
Medicare benefits are not comparable to private insurance
benefits. The claim of comparable benefits is highly doubtful,
and it is based on an obvious misreading of the source data. In
fact, CMS, the source of the figures cited in the IAF's report,
makes no claim that the per-enrollee figures are for
comparable benefits. It lists figures for "common benefits,"
which refers to the types of services covered by both types
of health plans. A note to the CMS data clearly states that
"[c]ommon benefits refers to benefits commonly covered by Medicare
and Private Health Insurance. These benefits are hospital services,
physician and clinical services, other professional services and
durable medical products."[14]
Providing common benefits does not necessarily mean
providing comparable levels of those benefits. The fact that
Medicare and private insurance both cover these types of services
does not in any way imply that they cover them to the same extent,
and indeed they do not. Medicare requires higher co-payments and
deductibles than most private insurance plans and, unlike most
employer-sponsored plans, has no catastrophic limit on
out-of-pocket expenses.[15] For example, a comparison of Medicare,
the Blue Cross Standard Option of the Federal Employees Health
Benefits Program (FEHBP), and the median private-sector large
employer plan found that the private employer plan was 12 percent
to 35 percent more generous than Medicare, depending on health
status, and that the FEHBP plan was 6 percent to 48 percent more
generous.[16] A congressional study concluded that
Medicare is the least generous of the leading forms of health
insurance.[17]
Medicare beneficiaries evidently concur with this judgment,
because about half of them purchase private-sector Medigap or other
private supplemental insurance to help with the high cost of
Medicare co-payments and non-covered services. Many others enroll
in managed-care plans, or Medicaid if they are eligible. As of
2005, only 11 percent of Medicare beneficiaries relied exclusively
on Medicare for their health coverage.[18]
Private insurance pays an increasing share of health care
costs for Medicare beneficiaries. The claims of slower spending
growth are based on the growth in Medicare spending divided by the
number of enrollees, not the total cost of health care for those
enrollees. It ignores not only Medicare's high co-payments, but
also the growing percentage of Medicare enrollees who are covered
by other primary insurance, including private insurance, and
therefore cannot actually receive Medicare benefits except in very
limited circumstances even if they have substantial health care
needs. These individuals are enrolled in Medicare, and many pay
Part B premiums ($1,156.80 to $3,699.60 per year, depending on
income[19]) but find their eligibility for Medicare
benefits restricted by the Medicare Secondary Payer (MSP) program
because they are also covered by private insurance.
Under the MSP program, Medicare coverage is by law secondary to
other insurance, which means that private insurance is legally
obligated to pay before Medicare pays. For MSP beneficiaries,
Medicare will pay only if the private insurance payment plus the
patient's statutory Medicare co-pay is less than the amount
Medicare would have paid in the absence of other insurance. Even
then, Medicare pays only the difference (minus the co-pay).[20]
Because most employer-sponsored plans pay more than Medicare,[21]
Medicare makes relatively few and typically small payments for MSP
beneficiaries. For example, a worker over age 65 could be enrolled
in Medicare, pay Medicare Part B premiums, and have substantial
health care needs but receive little or no benefit from Medicare.
Yet such individuals are still counted in the statistics as
Medicare enrollees. Because Medicare pays only a very small portion
of their costs, counting them reduces Medicare's average cost per
enrollee.
As the Social Security retirement age increases and more people
work longer and retain their employer-sponsored insurance longer,
the number of MSP enrollees will continue to increase. By law,
employer-sponsored health plans may not discriminate on the basis
of Medicare eligibility. The law also imposes substantial penalties
on Medicare-eligible individuals who do not enroll in Medicare (and
begin paying the Medicare Part B premiums) within three months of
reaching age 65.[22]
However, the current retirement age for full Social Security
benefits is nearly 67.[23] As a result, a substantial number (almost
2.8 million in 2008) and an increasing percentage (6.07 percent in
2008) of Medicare enrollees have employer-sponsored health
insurance[24] because either they or their spouses
still work.
Indeed, as Table 1 shows, the proportion of Medicare enrollees
with employer-sponsored primary insurance has increased steadily,
more than doubling from 2.66 percent in 1996 to 6.07 percent in
2008. In addition to these workers, several other categories of
enrollees with other primary coverage cost Medicare either zero or
substantially less than their actual health care costs due to MSP
rules. These include military retirees with TRICARE For Life,
certain military veterans who qualify for Veterans Health
Administration benefits,[25] and some people covered by workers'
compensation or other liability insurance.
The total percentage of Medicare enrollees subject to MSP has
more than doubled from 4.0 percent (1.53 million) in 1996 to 8.7
percent (3.98 million) in 2008. As a result, reported growth
in Medicare spending per enrollee has slowed down artificially
because the increasing proportion of enrollees subject to MSP is
partially offsetting the increased spending on those Medicare
enrollees who are eligible for primary Medicare benefits.[26]
Because of this and other factors, Medicare's share of total
spending on health care services for non-institutionalized Medicare
enrollees fell from 72.2 percent in 1997 to 50.8 percent in 2005.[27]
The remaining 49.2 percent was covered by a combination of private
insurance, including employer-sponsored insurance (for employees
and retirees) and individually purchased Medigap plans (21.4
percent); beneficiaries' out-of-pocket spending (15.7 percent); and
other public plans, including TRICARE, Veterans Health
Administration, and Medicaid (12.0 percent). Total spending per
capita in 2005 was $12,157, including $6,180 paid by Medicare and
$2,603 paid by private insurance.[28]
Over time, Medicare's share of health care spending for Medicare
beneficiaries has fallen, while private insurance's share has
risen. In 1997, Medicare's share was 72.2 percent, and the
private-insurance share was 12.2 percent. Total spending per capita
in 1997 was $5,438, including $3,925 from Medicare and $662 from
private insurance.[29]
While total per-capita health care spending for Medicare
enrollees increased by 124 percent from 1997 to 2005 (an average of
10.6 percent per year), spending by the Medicare program increased
by only 57.5 percent (5.8 percent per year). Meanwhile, private
insurance spending on Medicare beneficiaries increased by 294
percent (18.7 percent per year), and out-of-pocket spending by
Medicare beneficiaries increased by 205 percent (15.0 percent per
year).
Total health care spending for Medicare beneficiaries is
growing more than twice as fast as the part covered by
Medicare, shifting larger shares to out-of-pocket spending
(from 11.5 percent in 1997 to 15.7 percentin 2005) and nearly
doubling the share paid by private insurance (from 12.2 percent in
1997 to 21.4 percent in 2005).
To make a valid "apples-to-apples" comparison between Medicare
and private insurance, we can take the amounts spent on private
insurance beneficiaries from each source of funds (from the
National Health Expenditure tables) and subtract the amounts spent
on those who are beneficiaries of both private insurance and
Medicare. This will give us the amounts spent on those who are
beneficiaries of private insurance but not Medicare. (To obtain
per-beneficiary costs, we divide by the number covered only by
private insurance). We can then compare cost growth for the
non-Medicare population with that for the Medicare population
without any overlap between the two groups.
The results of these calculations are shown in Table 2. During
the same eight-year period, payments by private insurance for
private-only beneficiaries grew 85.5 percent (8.0 percent per
year); out-of-pocket costs grew 99.2 percent (9.0 percent per
year); and the total cost of health care for private-only
beneficiaries grew 81.7 percent (7.7 percent per year).
In other words, although per-enrollee spending by
Medicare is growing slower (5.8 percent per year) than
per-enrollee spending by private insurance (8.0 percent annually),
total spending on health care for Medicare enrollees is
growing faster (10.6 percent annually) than total spending on
health care for the privately insured (7.7 percent annually).
Medicare spending is growing more slowly because Medicare has
become much less generous, paying a rapidly declining share of its
beneficiaries' health care costs. As noted above, Medicare's share
of its beneficiaries' costs has dropped from 72.2 percent in 1997
to 50.8 percent in 2005, while the share of health care costs paid
by private insurance for its beneficiaries has increased slightly
from 63.2 percent to 64.5 percent. (See Chart 2.)
Furthermore, people who are enrolled in Medicare and have
private insurance are counted as beneficiaries of both.[30]
The numbers in Table 2 correct for this double-counting, but the
numbers cited in the IAF report do not. Thus, Frank Clemente and
Jacob S. Hacker's approach for the IAF counts health care costs for
these beneficiaries in both the Medicare and private categories. In
the case of Medicare enrollees with private insurance subject to
MSP, their approach gives Medicare "credit" for having the
enrollees, even though private insurance pays most of their health
care costs.
One reason why Medicare's cost growth is underestimated is that
the share of enrollees subject to MSP has increased. Another reason
is that neither category includes out-of-pocket spending by the
beneficiaries or spending by other sources, both of which have been
increasing faster for Medicare beneficiaries than for the privately
insured. (See Chart 3.)
In summary, to claim that Medicare spending is "controlling
health care costs" more effectively than private health plans do,
Clemente and Hacker count all of Medicare's enrollees but only some
of their health care costs--the costs paid by the Medicare program.
Because Medicare's share of the total costs has fallen
significantly, Medicare appears to control costs better than
private insurance does when in fact the opposite is true.
For an increasing percentage of Medicare beneficiaries, someone
other than Medicare is paying more of those costs. When the full
cost of health care for Medicare beneficiaries is considered,
private health plans are clearly doing a better job of controlling
spending growth.
Claim #2:
Medicare's administrative costs are lower than the private
sector's.
Fact: Per beneficiary, Medicare's
administrative costs are substantially higher than the private
sector's.
This claim has been repeated in the media so frequently that it
is often mistaken as an indisputable fact. For example, Professor
Jacob Hacker claims:
Perhaps the most obvious advantage of public insurance is that
it is inexpensive to administer. The public Medicare plan's
administrative overhead costs (in the range of 3 percent) are well
below the overhead costs of large companies that are self-insured
(5 to 10 percent of premiums), companies in the small group market
(25 to 27 percent of premiums), and individual insurance (40
percent of premiums).[31]
Some go even farther and claim that Medicare administrative
costs are so much lower than those of private insurance that, as
New York Times columnist Paul Krugman claims, "eliminating the
excess administrative costs of private health insurers...would by
itself more or less pay the cost of covering all the uninsured."[32]
Hacker does not cite a source for Medicare's administrative
costs being "in the range of 3 percent," but this appears to match
CMS budget figures, which ranged between 2.8 percent and 3.4
percent from 2000 to 2005.[33] The budget request for fiscal year (FY)
2009 estimated total administrative CMS spending at $18.6 billion,
or 2.6 percent of the estimated $703.9 billion in total benefit
payments under these programs.[34]
This approach to administrative costs has three major
problems:
- It includes only costs that appear in the CMS budget for
Medicare, which does not account for all non-benefit costs of
Medicare.
- Expressing administrative costs as a percentage of total costs
is highly problematic because most Medicare administrative costs
are accounted for by activities not directly related to the level
of health care expenditures. Medicare's beneficiaries need more
health care on average than the privately insured, so this approach
spreads out Medicare's administrative costs over a larger base. A
better approach is to express administrative costs on a
per-beneficiary basis, which is more closely related to how the
costs are incurred.
- For private insurance, the prevailing definition of
administrative costs includes some actual health care services,
such as disease management and on-call nurse consultation. These
are inadvertently counted as administrative costs for private
insurance. Medicare does not incur these costs because it does not
provide these benefits.
In the private sector, corresponding costs incurred by health
insurance companies would be included in the administrative costs
because administrative costs are calculated as the difference
between premiums collected and health benefit claims paid.
Therefore, all other costs are necessarily included.[35]
This includes the costs of health care services that do not result
in a benefit claim, such as disease management and on-call nurse
consultations.
Furthermore, the figures for private insurance administrative
costs include state taxes on health insurance premiums paid by
private insurance plans.[36] The state taxes vary from state to state
but historically have averaged just over 2 percent.[37]
Medicare is exempt from these taxes because the Constitution bars
states from taxing the federal government.
A recent study by Benjamin Zycher estimates the administrative
costs that are not included in the Medicare budget, including
overall policy management and the interest cost associated with
operating capital.[38]
Management determines overall policies for Medicare's goals,
coverage, benefit levels, and pricing. In the private sector, a
corporate board of directors and top-level executive management
make these decisions. Congress, the President, and their staffs
make these decisions for Medicare, and the associated expenses are
reflected in the operating budgets of Congress and the Executive
Office of the President.[39]
Private health insurers must raise capital to cover fixed
assets, such as buildings and information systems, and working
capital to cover possible variations over time between premium
collections and paid claims. This is reflected in interest payments
and dividends. The U.S. Treasury handles this function for
Medicare.[40] The Medicare Trust Funds reimburse the
Treasury for the operational costs of this function, but not for
the portion of the interest on the national debt that is
attributable to Medicare. In the federal budget, this interest is
reported as a lump sum for the entire federal government. The
portion attributable to Medicare is not included in the CMS budget,
but it is a necessary cost of operating Medicare.
Moreover, these measures of administrative costs ignore the
large drag that Medicare taxes impose on the economy.[41]
This reduced economic output is caused by the increasingly higher
taxes imposed to pay for most of Medicare.[42] No private health
plan can incur this type of cost, but it is nonetheless a real cost
to the economy.
Medicare Administrative Costs per Beneficiary. The real
problem, however, is not so much what is included in administrative
costs, but how that figure is interpreted. The figures cited by
Clemente, Hacker, Krugman, and nearly all of the policymakers and
analysts who discuss health care administrative costs express these
costs as a percentage of total program outlays (administrative
costs divided by the total of administrative costs and paid benefit
claims).
This is not the most informative approach. To understand why, we
first note that administrative costs can be divided broadly into
three categories:
- Some costs, such as setting rates and benefit policies, are
incurred regardless of the number of beneficiaries or their level
of health care utilization. These may be regarded as fixed costs,
since they must be incurred regardless of the size of the
program.
- Other costs--such as enrollment, record keeping, and premium
collection--depend on the number of beneficiaries, regardless of
their level of medical utilization.
- Claims processing depends primarily on the number of claims for
benefits submitted.
Claims processing accounts for only a small share of
administrative costs. Claims processing is the only category
that is at all sensitive to the level of health care utilization.
However, it is correlated with the number of claims paid, not their
dollar value or the intensity of service provided, because the cost
of processing a $100 claim is generally the same as the cost of
processing a $1,000 claim. In the case of Medicare, this category
represents only a very small share of administrative costs. In FY
2005, Medicare spent $805.3 million processing claims.[43]
This was 4.04 percent of Medicare's administrative costs--which is,
in turn, only 0.234 percent (that is, less than 24 cents for every
$100) of total Medicare outlays.[44]
Clearly, only an extremely small portion of administrative costs
is related to the level of health care benefit claims, and even
that is related only tangentially to the dollar value of those
claims. Therefore, expressing all administrative costs as a
percentage of benefit claims gives a misleading picture of the
relative efficiency of government and private health plans.
This is especially the case when comparing plans with
populations that have different levels of health care needs.
Medicare beneficiaries are by definition elderly, disabled, or
patients with end-stage renal disease. Private insurance
beneficiaries may include a small percentage of people in these
categories, but they consist primarily of people under age 65 who
are not disabled. Naturally, the average Medicare beneficiary needs
more health care services than the average person with private
insurance. Yet the bulk of administrative costs are incurred on a
fixed program-level or a per-beneficiary basis. As a result,
expressing administrative costs as a percentage of total costs
makes Medicare's administrative costs appear lower, not because
Medicare is necessarily more efficient but merely because its
administrative costs are spread over a larger base of actual health
care costs.
In short Medicare's administrative
costs are a lower percentage of the total not because Medicare has
cheaper administration, but because it has more expensive
patients.
Therefore, comparing the administrative costs of Medicare and
private health insurance as a percentage of total costs, including
health care expenses, is misleading. Indeed, comparing the
administrative costs of any health plans with vastly different
demographic characteristics on this basis would be misleading. It
would be more informative--and a better measure of administrative
efficiency--to compare programs on the basis of administrative cost
per beneficiary.
To make this comparison, we take the total Medicare
administrative costs calculated by Zycher and divide by the number
of beneficiaries instead of by total outlays. We make the same
calculations for private health insurance. For Medicare, we include
only primary Medicare beneficiaries. This excludes enrollees who
are subject to the Medicare Secondary Payer rules, because they
have private primary health insurance and therefore receive
Medicare benefits only in extremely limited circumstances.[45]
These individuals are included in the figures for private health
insurance, so this approach avoids the problem of double-counting
individuals and avoids counting those whose Medicare enrollment
costs (and Part B premiums) are largely a waste from the point of
view of patient care.
The results are shown in Table 3. On a per-beneficiary basis,
Medicare's administrative costs are substantially higher
than the administrative costs of private insurance. For 2000-2005,
administrative costs per patient averaged about 20 percent higher
for Medicare than for private insurance. In 2005, the most recent
year for which all necessary data are available, Medicare
administrative costs were $509 per person, compared to $453 per
person for private insurance.
Actual Health Care Counted as Administrative Costs. The
per-beneficiary approach still puts private insurance at a
disadvantage because it fails to account for some health care
services that are inadvertently counted as administrative costs for
the private sector. For example, many private insurers provide
disease-management services for patients with chronic conditions
and/or on-call nurses for patients to consult by phone. Because
insurance companies provide these services directly, they do not
result in paid benefit claims. Therefore, they are reported as
administrative costs because private-sector administrative costs
are reported as the difference between premiums collected and
claims paid.
Medicare does not provide these types of services and therefore
does not pay for them. Private insurers provide these services to
attract customers, but perhaps also in an attempt to reduce health
care utilization. Disease management is intended to increase the
level of preventive care for those with chronic conditions,
benefiting patients and reducing costs in the long run by reducing
the need for and costs of associated adverse health events.[46]
On-call nurses are intended to direct patients to appropriate care
when they cannot contact their primary care physicians. This is
believed by some to reduce costs in the long run, for example, by
reducing unnecessary emergency room visits and the incidence of
more severe adverse health events caused by forgoing appropriate
emergency room visits.
In both cases, providing these additional services increases the
apparent administrative costs of private insurance and may reduce
claims costs. Both effects further increase the apparent
percentage of administrative costs in private health plans.
Administrative Costs of Providers. In addition, both
Medicare and private insurance impose substantial administrative
burdens on doctors, hospitals, and other health care providers.
Both our calculations and those of the public plan advocates
account only for the administrative costs of the payers, not those
of the payees.
Some proponents of public plans argue that the providers' cost
of dealing with a multitude of private insurers imposes substantial
costs that are not imposed by Medicare. Different insurers have
different billing procedures, and many private insurers impose
requirements such as precertification for elective hospitalization,
prescription drug formularies,[47] utilization review, and
coverage limitations for some services. This is certainly true, but
Medicare also imposes other costs that are not imposed by private
insurers, such as placing the responsibility for verifying
eligibility (e.g., whether Medicare is the primary or secondary
insurer) on the provider and employing unusual and complex
date-of-service restrictions for some services.[48]
Recent studies have estimated physicians' cost of dealing with
billing and insurance companies at 27 percent,[49] 14 percent,[50] 10
percent,[51] and 6.9 percent[52] of revenue, but none of
them differentiate systematically between the administrative
burdens of Medicare and those of private insurance. Nor do they
account for all types of costs imposed by Medicare and private
insurance. Without such a study, it is impossible to say anything
definitive about the relative levels of administrative costs
imposed on providers by Medicare and private insurance.
The Medicare Advantage Comparison. Through Medicare
Advantage (MA),[53] Medicare beneficiaries can enroll in a
privately operated health plan, usually a health maintenance
organization (HMO), as an alternative to the traditional
fee-for-service (FFS) Medicare plan. The MA plans bid a specific
per-capita amount to provide benefits equivalent to Part A and Part
B FFS Medicare payments, after which Medicare pays the MA plan a
risk-adjusted amount (which is a function of the bid and other
factors) for each patient enrolled.
MA plans may also provide additional benefits beyond those
provided by the Medicare FFS plan, funded by cost savings achieved
relative to per-capita payments and/or by charging enrollees an
additional premium. In essence, Medicare Advantage is somewhat like
a voucher system--private insurance for Medicare enrollees paid
for, at least in part, by Medicare.[54]
Some argue that comparing Medicare's administrative costs with
the administrative costs of private insurance plans is
inappropriate because, compared to the privately insured
population, Medicare patients have higher levels of health care
utilization. As noted above, we maintain that making the comparison
on a per-beneficiary basis solves this problem because
administrative costs are not primarily a function of the level of
utilization.
However, others argue that a better way to compare private and
public plans is to compare FFS Medicare with Medicare Advantage,
because both draw enrollees from the population of elderly,
disabled, and end-stage renal disease patients. The idea is that
Medicare Advantage is operationally comparable to private insurance
because it is operated by private companies and that it has a
beneficiary population that consists of people eligible for
Medicare.
This claim deserves a closer look to assess its validity. Hacker
states this argument as follows:
These administrative spending numbers have been challenged on
the grounds that they exclude some aspects of Medicare's
administrative costs, such as the expenses of collecting Medicare
premiums and payroll taxes, and because Medicare's larger average
claims because of its older enrollees make its administrative costs
look smaller relative to private plan costs than they really are.
However, the Congressional Budget Office (CBO) has found that
administrative costs under the public Medicare plan are less than 2
percent of expenditures, compared with approximately 11 percent of
spending by private plans under Medicare Advantage. This is a near
perfect "apples to apples" comparison of administrative costs,
because the public Medicare plan and Medicare Advantage plans are
operating under similar rules and treating the same population.[55]
However, Medicare Advantage is not "a near perfect 'apples to
apples' comparison" for two main reasons:
First, they are not "operating under similar rules and
treating the same population." MA is a different system serving a
different population that operates under different rules. Indeed,
one major purpose of the MA program is to allow beneficiaries to
opt for a program with different rules. Nor does it treat "the same
population," even though all Medicare beneficiaries are eligible
for MA and 80 percent live in an area with at least one qualified
MA plan.[56] MA enrollment exhibits substantial
self-selection. Medicare beneficiaries who rate their health status
as "fair," "good," "very good," or "excellent" are twice as likely
to chose Medicare Advantage as those who rate their health status
as "poor." Those who qualify for Medicare based on age are twice as
likely to choose Medicare Advantage as those who qualify based on
disability or end-stage renal disease. In short, Medicare Advantage
tends to attract the healthiest Medicare patients.[57]
This factor would not be a problem in comparing administrative
costs on a per-patient basis, but when comparing administrative
costs on a percentage-of-costs basis, it presents precisely the
same sort of problem--although perhaps to a lesser degree-- as is
presented by comparing Medicare to private insurance for the
non-Medicare population.
Second, and much more serious, Medicare Advantage is
primarily an HMO program. As of 2006, 84.1 percent of MA enrollees
were enrolled in HMO plans.[58] Some administrative costs
incurred by MA plans, especially HMO plans, include not just the
cost of running the health plan, but also costs of administration
incurred by providers (e.g., doctors and hospitals). This
introduces a serious discrepancy between what costs are included as
administrative costs for Medicare FFS and what costs are included
for MA plans.
For the Medicare FFS system, reported administrative costs
include only costs incurred at the level of administering the
health plan. Administrative costs incurred by doctors and hospitals
are reflected in the payments made to doctors and hospitals and are
counted in the benefit claims paid. This means that administrative
costs incurred by physician practices, hospitals, and other
providers are not included in the standard measure of Medicare FFS
administrative costs. In other words, some costs that are counted
as administrative in some MA plans are counted as patient care in
FFS.
Yet this does not mean that these costs are entirely ignored and
unknown. Congress explicitly recognizes the administrative burden
that it places on providers in the complex rule structure used to
determine FFS payments to physicians and other professional
providers, such as podiatrists and physical therapists.[59]
Clerical and other indirect administrative costs are recognized
as part of the practice expense (PE) component of the
Resource-Based Relative Value System (RBRVS) that Medicare uses to
determine the prices it pays for physician (and other professional)
services through the physician fee schedule. The PE component is
intended to account for the operational costs of a medical practice
beyond the cost of the physician's time and effort. These costs
include both clinical expenses, such as medical supplies and pay
for nurses and other non-physician clinical staff, and
provider-level administrative costs. In 2005, total practice
expense accounted for 45 percent of total physician FFS payments
(averaged over all physician specialties), of which 38.4 percent
was for cost categories that might reasonably be classified as
administrative in nature.[60]
This means that 17.3 percent[61] of payments to physicians
represents physician-level administrative costs. This amount is not
included in the administrative costs for traditional FFS Medicare,
but corresponding costs, as well as similar costs for hospital
payments, are included in the CBO figures for some, if not all,
Medicare Advantage plans.
An administrative cost figure for Medicare FFS that would be
comparable to figures reported for Medicare Advantage would be the
portion of the payments to providers that are related to their
administrative expenses plus the program-level administrative
expenses reflected in the CMS budget (3.1 percent for 2005). This
would be approximately 19.4 percent for 2005, for example. (Other
costs incurred by government agencies in support of Medicare are
not included in either figure.)
Administrative costs for MA plans have been reported at
different levels. For example, the CBO reported 11 percent for
2005,[62] and the GAO reported 16.7 percent for
2006.[63] Both figures are below the administrative
portion of the PE component of physician fee schedule payment, even
before adding in the administrative costs of Medicare as a
whole.
In short, the claim that private health plans have higher
administrative costs than public plans because Medicare Advantage
plans have higher costs than the Medicare FFS plan is not a valid
claim. When the same cost categories are included for both,
Medicare Advantage plans do not have higher administrative costs
than the Medicare FFS plan.
The "Bigger Is Always Better" Argument. While only a
small portion of administrative costs is related to the level of
health care claims, it is difficult to determine from the available
data how much of the administrative costs is a function of the
number of beneficiaries and how much is incurred at the level of
the entire program. This latter category would include
policymaking, benefit design, and determination of premiums and
payment rates.
If a substantial portion of the administrative costs is fixed
relative to both the level of claims and the number of
beneficiaries, it is tempting to argue that these costs ought to be
spread over as many beneficiaries as possible. Taken to the logical
extreme, one might be tempted to argue that incurring these costs
for more than one plan is wasteful and, therefore, that the most
efficient solution is to include the entire population in a single
plan.[64]
Despite this enticing line of reasoning, the evidence indicates
that health insurance provision is much more complicated and that
this argument fails to account for other important factors and
therefore does not hold up in practice.
First, traditional Medicare is only one plan. In the
private sector, thousands of health plans cover a total of more
than 200 million people.[65] Medicare covers about 42 million
Americans and is much larger than the next-largest plan. Each of
the thousands of other plans spreads its fixed costs over many
fewer people than Medicare does. If Medicare and each private plan
had identical program-level fixed costs, the per-person costs for
the entire private insurance sector would be substantially higher
than the per-person costs for Medicare.
For example, if there were 1,500 private plans and each plan
incurred fixed costs equal to Medicare's fixed costs, then the
entire private sector would have fixed costs 1,500 times greater
than Medicare's fixed costs but could spread the costs over only
five times as many people. If this were true, the fixed-cost
component of per-beneficiary administrative costs for the private
sector would be 300 times Medicare's fixed costs. But even the
private sector's most ardent detractors do not make this claim.
Rather, the evidence indicates that per-beneficiary administrative
costs are lower in the private sector than in Medicare.
It might be argued that in the private sector, either most of
the costs are not truly fixed, or private plans are phenomenally
more efficient than Medicare at fixed-cost administrative
functions, or there is a lot of "free riding" on the activities of
others--or perhaps it is a combination of the three. Free riding
sometimes leads to economic inefficiencies, but in this case, free
riding (if any) would limit any gains from consolidation because
those gains have already been realized.
Second, free riding can--and does--go both ways.
Medicare's pricing system depends largely on surveys asking
physicians to estimate their costs and on cost reports filed by
hospitals. When CMS decides to cover a new service under Medicare,
it must determine a price to pay. Normally, it tries to obtain data
from providers on the cost of providing that service. This sort of
data is available only if the service is already being performed
and, if it is, usually because at least some private insurers
already cover it. In those rare cases in which data from providers
are unavailable, either CMS or one of its regional
claims-processing contractors essentially has to "make up" a price,
based on cost estimates uninformed by appropriate data.
If Medicare were the single payer, this inaccurate and expensive
procedure would need to be used for all new services rather than
just for a few unusual cases. Without the ability to free-ride off
the data obtained from private plans, there would be two adverse
outcomes: Medicare's pricing would become even more arbitrary than
it already is, and its program-level fixed costs would
increase.
Claim #3:
"Bargaining power of public health insurance plans significantly
reduces provider costs."[66]
Fact: Public plans do not bargain with
providers, and bargaining power cannot affect provider costs. When
providers use the political process to seek payments higher than
those offered by public plans, they often succeed.
Public plans do not actually bargain with providers, at least
not in the usual sense of the term. Public plans issue regulations
specifying prices that amount to a take-it-or-leave-it offer to
providers. Providers cannot bargain with Medicare or other public
plans. However, they can lobby Congress, which establishes public
plans' payment rules by statute, and Members can often influence
CMS decisions in a more informal matter.
When it comes to "bargaining power," the providers almost
always win. To the extent that lobbying constitutes bargaining,
CMS has demonstrated little if any bargaining power when compared
to, for example, physician and hospital groups seeking to influence
Congress, the final arbiter of payment rates for federal public
plans.
Beginning in 1999, Congress began requiring CMS to adjust the
Part B conversion factor each year according to a statutory formula
known as the Sustainable Growth Rate (SGR).[67] The conversion
factor is a multiplier used to convert "relative value units" for
each physician service into the dollar payment for that service.
The SGR formula specifies an adjustment of the conversion
factor--and, by extension, all payments under the Medicare
Physician Fee Schedule--by a uniform percentage. The formula is
designed to prevent total Medicare physician spending from growing
faster than the Medicare population, the economy, and the amount
necessary to implement changes in benefit coverage.
Every year starting in 2002, the SGR formula has called for
reducing physician fees--a so-called negative update to the
conversion factor. However, every year since 2002, physician groups
have lobbied Congress to set aside the SGR and provide a positive
or zero update instead. Every year since 2003, they have succeeded.
Since 1999, when the SGR formula was supposed to take effect, it
has called for a negative update for every year except for 2000 and
2001. Only in 1999 and 2002 did Congress allow the statutory
reduction to go into effect. (See Table 4.)
Medicare's "bargaining power," so lauded by public plan
advocates, is clearly no match for the lobbying and voting power of
thousands of well-organized physicians.
Bargaining power cannot affect provider costs.
Notwithstanding the claim in the IAF proposal, no level of
bargaining power wielded by a public plan--or any plan--could
affect the costs that providers incur in delivering health care
services. The costs depend solely on the inputs (e.g., labor, time,
equipment, and supplies) needed to produce the services and the
prices paid for those inputs.
No amount of bargaining power wielded by a public health
insurance plan or anyone else, for example, can enable a provider
to stitch a wound with three sutures when four are required.
However, payments that are too low might force a provider to
provide less than the optimal level of care in order to survive
financially.
Perhaps the IAF meant to say that the Medicare-like bargaining
power could reduce not the costs incurred by providers, but rather
the prices paid to providers. Indeed, the IAF points out that
Medicare pays about 19 percent less to physicians and 25 percent
less to hospitals than is paid by private health plans.
Yet this is not so much the result of bargaining power as it is
the result of Medicare's position as an effectively monopsonist[68]
purchaser of health care for the elderly. Because Medicare controls
a substantial percentage of patients, it can cut prices, exploiting
providers much as a monopolist exploits consumers. Providers must
either accept Medicare's low payment rates or cut themselves off
from a sizable percentage of current and prospective patients.[69] As
The Washington Post observed, Medicare uses "its
800-pound-gorilla capacity to dictate prices."[70] Of course, the
SGR experience shows that, even as a monopsonist, Medicare's
ability to reduce prices is limited by the ability of providers to
influence Congress.
Both the IAF and Hacker use the term "bargaining power," but no
actual bargaining takes place. Rather than utilizing bargaining
power with providers, it is more accurate to say that Medicare
dictates prices, subject to the lobbying power of providers and the
whims of Congress.
Rather than bargaining, Medicare has two bureaucratic
procedures for determining relative prices. Payments for
hospital services (Part A) are determined according to the
Inpatient Prospective Payment System (IPPS) and the Outpatient
Prospective Payment System (OPPS). The IPPS is based on the
Diagnostic Related Group (DRG) relative weights, a system adopted
by Congress in 1983. The OPPS is based on ambulatory payment
classifications (APCs), each of which has a payment rate. The
payment for each DRG and APC is based on hospital cost reports
submitted to CMS, data on wages in the hospital's area, and various
"adjustments" for variables such as age distribution and
socioeconomic conditions in the hospital's county and the ratio of
interns and residents (if any) to the number of beds.
Payments for physicians and other professionals (Part B) are
based on the Resource-Based Relative Value System and forecasts of
service utilization levels. Each service is assigned a number of
relative value units (RVUs) for each cost component of the service.
The total number of RVUs is then adjusted for geography and other
factors and multiplied by the conversion factor to determine the
dollar amount of the payment.
Medicare does not bargain with providers; rather, providers
"bargain" with each other for a nominally fixed payment pool.
Under the RBRVS, costs are "measured" in an explicitly scheduled
lobbying process, not by financial audits. Every year, certain
services are scheduled for review by the RBRVS Update Committee
(RUC), a committee convened by the American Medical Association
(AMA) and made up of representatives of physician specialty
societies. Three times each year, the associations representing the
relevant physician specialties present their cases that the costs
for their services have increased more than the costs of other
specialties since the last review.
In effect, the RUC allocates a nominally fixed total amount of
Medicare payments among the various physician specialties by
assigning each service a number of RVUs. Medicare physician
payments for each service are determined by multiplying the RVU
value for that service by that year's conversion factor.
As a committee convened by the AMA, which is a private
organization, the RUC technically has no legal authority and serves
the CMS only in an advisory capacity through the public comment
process. However, CMS has accepted the RUC's recommendations for 95
percent to 99 percent of the services under review since 2005 and
an average of 94.5 percent since the RUC was established in 1993.[71]
In determining RVUs, lobbying skill, political clout, and
provider self-interest substitute for the patients' interests and
preferences, which would otherwise be expressed through market
mechanisms. This process frequently misallocates health care
resources because pricing errors discourage physicians from
providing services that are priced too low and encourage them to
seek patients who need services that are priced too high.[72]
These complex administrative payment systems focus entirely on
crude estimates of the resources expended (costs) in providing each
service without any consideration of the relative benefits to
patients or the quality of service provided. In other words, the
DRG and RBRVS systems specify a higher payment for a high-cost,
low-value service than for a low-cost, high-value service. Except
for geographic adjustments, every provider receives the same
payment regardless of quality, outcome, or patient satisfaction.
Not surprisingly, these systems are more often referred to as
determining "reimbursements" rather than "prices."
In both cases, CMS simply sets a relative price for each
service. The price might vary from region to region or from
hospital to hospital, but no one from CMS negotiates with providers
on prices for services. The Medicare price is essentially a
take-it-or-leave-it offer, published in the Federal Register
as a regulation. The closest the process comes to negotiation is
when an association of providers hires lobbyists to influence CMS
decisions during the public comment period before the regulation is
finalized or to lobby Congress to change or override the formulas
to their members' advantage. Neither of these is normally
considered bargaining in the context of a mutually consensual
business transaction.[73]
This phenomenon could not be generalized to "a public health
insurance plan that competes with private plans on a level playing
field."[74] Medicare does not compete with
private insurance on a level playing field, either for providers or
for patients. Medicare uses an "any willing provider" principle,
meaning that any licensed provider willing to accept Medicare's
payment rates and conditions is accepted, regardless of quality or
any other factors. Notwithstanding the small but growing number of
working Medicare-age individuals, retirees and the non-working
disabled still make up more than 90 percent of Medicare's patients,
and most have few other options for primary health insurance.
If a public plan tried to compete with private payers on a level
playing field for the business of working Americans and offered
providers payments 19 percent to 25 percent lower than those
offered by private payers, few providers would participate in the
public plan. Those who did participate would probably be
lower-quality providers who have difficulty attracting patients or
even being admitted to private health plans.
If all providers were compelled to accept the public plan and
its much lower payment rates to solve this non-participation
problem, the competition would not be on a level playing field.
Private health plans cannot force providers to participate and
accept whatever rate they offer. However, by charging lower
premiums, forcing providers to participate in the plan, and paying
providers less, the public plan could attract all of the patients
and put the private plans out of business.
Some providers would no doubt drop out. For example, financially
marginal hospitals would close, some doctors would retire early,
and perhaps fewer people would pursue medicine as a career. Those
who wanted to remain in business would have no choice but to accept
the public plan's lower payments. The result would be a government
monopoly--a single-payer government health care--with lower
payments, fewer providers, longer wait times, providers with less
ability to invest in new technology, and other manifestations of
reduced access to care.[75]
This would inevitably start a "race to the bottom" in
quality and access to specialized care, adversely affecting the
health care of those in the public plan or any surviving private
insurance plan with which it would "compete."
For all of the status quo's deficiencies, this race to the
bottom would yield considerably worse results. If the public plan
compels providers to participate and establishes lower payment
rates and concomitant lower premiums, physicians could not drop out
and make their living from other patients because there would not
be enough other patients. Physicians would be forced to choose
between submitting to the plan's terms or ceasing to practice
medicine and either retiring or finding another profession. The
inevitable result would be much lower payment rates and lower
income for physicians.[76]
The only exceptions would be for the few patients who were
wealthy enough to pay out-of-pocket for health care services at
prices higher than the public plan and for the physicians who could
attract their business. The result would be a two-tiered system, as
is common in many countries with dominant or "universal" public
health plans. The only way to prevent this two-tier system from
developing is to outlaw the individual purchase of heath care
services.[77]
Patients would also suffer, especially in the long run. Fewer
highly talented people would willingly undergo the years of
training under difficult working conditions and low pay needed to
become physicians, and this would lead inevitably to reduced access
to health care and longer wait times. Lower payments would also
force physicians to invest less in advanced medical equipment, and
physicians would likely spend less time with each patient. In
addition, with fewer people undergoing the training necessary to
conduct medical research, new treatments and cures would be
developed at a slower rate, resulting in slower decreases--and
perhaps even increases--in morbidity and mortality.
Claim #4: "Public
insurance has pioneered new payment and quality-improvement methods
that have frequently set the standard for private plans."[78]
Fact: Private-sector organizations
have introduced new quality-improvement methods, new customer
services, disease management, and coverage of preventive care.
Given the history of American health care over the past several
decades, this is an astonishing claim, supported only by enticing
speculation but no examples or evidence.[79]
In fact, in the past several decades, the private sector has
produced many new ideas in health care provision. Government health
care programs have adopted a few of these, have considered others
in recent years, and ought to consider still others. Private-sector
innovations include HMOs, new drug treatments, disease management,
and on-call nurses.
It is important here to differentiate between traditional
fee-for-service Medicare, which is operated by the federal
government and serves as the model for new public plan proposals,
and Medicare Advantage, which is essentially private health
insurance that is paid for in part with Medicare funds. Medicare
Advantage has the potential to allow for innovation within certain
constraints, but it is not a public plan. On the contrary, as noted
above, Medicare Advantage has been criticized by public plan
advocates for having characteristics that make it "too similar" to
the private health plans that those advocates oppose.
Examples of private sector innovations include:
- Staff-Model HMO. Kaiser Permanente, a private-sector
(not-for-profit) company, pioneered the integrated staff-model
health maintenance organization, and the (public) Veterans Health
Administration adopted a similar organizational structure.
Integrated care is not available in traditional Medicare, nor has
this approach been adopted by any other civilian federal
agency.
- Managed-Care HMO. Private insurance companies first
developed the managed-care HMO to coordinate care and reduce
spending. Medicare has allowed patients access to private-sector
HMOs and other private-sector managed-care options through Medicare
Advantage, but the traditional Medicare public plan does not use
any managed-care practices.
- Drug Treatments. Over the past 40 years, many drug
treatments have been developed, replacing much more costly surgical
treatments. Perhaps the most famous example is histamine-2 receptor
antagonists such as Tagamet (cimetidine), which greatly reduced the
number of patients needing surgery for peptic ulcers, saving money
and providing much better results for patients.[80] Nearly every
private insurance plan has covered prescription drugs for decades.
Medicare began to cover prescription drugs only three years ago and
undoubtedly paid for many more expensive non-drug treatments
because it did not cover drugs earlier.
- Disease Management. Private health plans have taken the
lead in implementing disease-management programs for chronic
illnesses, resulting in better clinical results and, according to
some studies, lower costs. Medicare has begun to offer disease
management in a very limited fashion years after the private
sector, and only as part of the Medicare Prescription Drug Program
(Part D), which is run primarily through private-sector drug
plans.[81] Privately run Medicare Advantage programs
often offer disease-management programs, but the traditional
Medicare program does not.
- On-Call Nurses. Many private health plans have on-call
nurses, available 24 hours a day through a toll-free telephone
number. This can improve outcomes for patients and may reduce costs
in urgent care situations outside of office hours by enabling
patients to make better decisions about seeking emergency care.
Providing medical advice by phone can reduce the need for emergency
care in circumstances when the advice is sufficient for the
patient. Medicare has no such program and does not cover any such
program. It has no way to pay nurses or other professionals for
providing this type of service unless a private plan competing in
Medicare Advantage chooses to provide it as part of its benefit
package.
- Transparency and Quality of Health Care Providers.
Several private health plans have begun to provide patients with
detailed information about the quality of health care providers,
based on clinical outcomes achieved by those providers. For
example, UnitedHealth's Premium Physician Designation Program is a
leader in this field.[82] Medicare has sought to imitate this type
of program with the misnamed "pay-for-performance" (P4P) concept,
in which physicians are paid small bonuses for strictly complying
with treatment protocols that are determined to be appropriate for
the average patient, regardless of the needs of any particular
patient the physician might be treating. However, Medicare is
prohibited by law from excluding low-performing providers from
participating in Medicare, and it has no system to identify such
providers to patients.[83]
Medicare's contribution to the "innovation" stream has consisted
primarily of the RBRVS and DRG payments systems, which encourage
payers to focus entirely on providers' costs and explicitly ignore
any value provided to patients.
No Cost Advantage to the Public Plan
Concept
Despite the claims of "public plan" proponents, the available
evidence from the nation's largest and oldest public plan does not
indicate that a new or expanded public plan modeled on Medicare
could provide Americans with health care that is comparable to that
offered by existing private plans, much less at a lower cost.
Contrary to their claims:
- Medicare has not achieved slower cost growth than private
plans. It has merely created the illusion of slowing cost growth by
shifting an increasing fraction of its enrollees' health care costs
onto other payers, including the beneficiaries themselves.
- Compared to private health plans, Medicare has higher, not
lower, per-beneficiary administrative costs.
- It does not have "bargaining power" to reduce prices, just an
administrative pricing system that uses crude measures of provider
costs and explicitly ignores the value provided to patients while
being subject to intense, often successful lobbying by providers to
increase prices.
- Nor has Medicare been a leader in innovation, quality
improvement, or cost control.
The current Medicare program, which covers one-fifth of the
American population, has unfunded future liabilities of over $36
trillion.[84] A public plan with Medicare's essential
characteristics that covered the entire population--or a
significantly larger fraction of it--would not reduce costs and
would be even more financially unsustainable.
Furthermore, by its nature, any public plan would be driven by
congressional interventions, bureaucratic processes, and lobbying
rather than by incentives to innovate in the financing and delivery
of quality, efficient health care. This same phenomenon was evident
with Fannie Mae and Freddie Mac, "public plan" mortgage companies
that were established to compete with private lenders to "keep them
honest" and increase levels of home ownership. Driven by
congressional interventions, an implicit government guarantee, and
lending policies at odds with economic reality, these public
mortgage companies collapsed and threw the entire financial system
into chaos. A "Freddie Doc" would eventually produce similarly
disastrous results.
A public plan "cure" would be no better than the status quo and
might well prove to be much worse than the "disease" it is intended
to cure. Americans clearly need health care reform, but a public
plan is the wrong kind of reform. Contrary to the claims of
President Obama, Professor Hacker, Representative Stark, Senator
Baucus, and Senator Kennedy, a public plan could not achieve cost
savings or substantially reduce the number of uninsured without
substantially reducing the quality and access to health care that
Americans currently enjoy.
Robert A. Book, Ph.D., is Senior Research
Fellow in Health Economics in the Center for Data Analysis at The
Heritage Foundation. The author thanks Joseph R. Antos and Walton
J. Francis for helpful discussions and comments on earlier drafts,
Benjamin Zycher for answering copious questions about
administrative cost data, Paul L. Winfree and Tim Carr for help
with private insurance enrollment data, and John W. Fleming for
designing creative graphic representations of complicated
quantitative concepts.