Health Care Legislation, Part 3:
Making sense of the 'public option'
26 Oct 2009 in Regulatory Economics, Regulatory Policy, Legislation
It's in the House Energy and Commerce Committee bill, which the Speaker has not brought to the floor for a vote because it lacks enough votes to pass. It's in the Senate Health, Education, Labor and Pensions bill. It was in the Senate Finance Committee bill, then it was removed to secure one Republican vote. As the Senate leadership tries to merge these competing bills, news stories say that it's back in. Or back out. Or back in under certain conditions.
It's all very confusing. We sort it out.
WHAT IS THE ORIGIN OF THE "PUBLIC OPTION"?
In early 2007, candidate Barack Obama proposed significant changes in both US health care policy and how medical goods and services would be delivered. On August 4, we published a detailed description of the campaign's proposal, showing how it evolved during the campaign. Obama settled on the public option in its third iteration (published June 18, 2007) and retained it throughout the rest of the campaign. This public option contained three key features:
- Limited access. The public option would be open only to "individuals without access to affordable insurance coverage."
This language contains important elements of ambiguity. For example, the size of the eligible group depended on how several other policy levers are tuned -- the definition of "affordable," for example. Still, a fair reading of the proposal is that the public option was designed to act like the insurer of last resort. For almost everyone, access to health insurance would be secured through employment, because elsewhere the proposal included a broad employer mandate.
- "Guaranteed issue." No one eligible for the public option would be denied coverage due to high risk, such as pre-existing conditions or chronic illness.
By itself, "guaranteed issue" is not a problem. As long as insurers can properly rate prospective customers and charge premiums commensurate with risk, they can underwrite almost everyone. Guaranteed issue becomes a problem when it is combined with "community rating" -- insurance jargon for charging essentially the same rate regardless of risk. If community rating is included, the market for insurance cannot survive unless the purchase of insurance is mandated. This is the reason why both HR 3200 and the outline of the Senate Finance Committee bill include individual mandates, with potentially significant taxes levied on those who choose not to purchase insurance. These taxes are not intended to raise revenue but to deter people from free-riding.
The Obama campaign proposal included guaranteed issue, but it was silent on community rating and individual mandates. Moreover, the campaign proposal applied guaranteed issue only to the public option. The campaign did not propose to require private insurers to practice guaranteed issue.
- "Comprehensive benefits." The public plan would be "similar to the Federal Employees Health Benefits Program (FEHBP), and cover all essential medical services, including preventive, maternity and mental health care."
This is not a bare-bones insurance plan. As we noted in an earlier post, the FEHBP is a rich insurance plan costing $12,000 or more per year. In short, the Obama campaign's proposed public option would have been very expensive.
- "Affordable premiums, co-pays and deductibles."
Most of the cost of insurance under the public plan would not be paid by the insured, but by a third party. The Obama campaign was highly complimentary of the FEHBP, and insureds pay about one-third of the cost. But third-party payment is one of the undisputed reasons why health care costs in the US are high. Consumers perceive medical care as a free or nearly-free good. When something valuable is made available at little or no cost, there will be excess demand.
In sum, the Obama campaign proposed a public option that serves as the foundation for proposed legislation. No one should be surprised that it is a key element of President Obama's legislative initiative. It is not a creation of the Democratic congressional leadership, as many commentators have claimed.
HOW DID THE OBAMA CAMPAIGN PROPOSE TO PAY FOR THE PUBLIC OPTION?
In short, it didn't. The proposal claimed that there would be cost savings from electronic health records, increasing competition in the private health insurance market, and by permitting the reimportation of pharmaceuticals from Canada and Europe. Whatever their substantive merits, it is impossible for these changes to offset a significant fraction of the cost of the proposed public option. The campaign said that 45 million Americans lacked health insurance. If just 25% signed up for the Obama public option, it would increase federal outlays by about (45 million x 25% x $8,000 =) $90 billion per year. Recent news stories, such as this one by Alexi Mostrous in the Washington Post, suggest that cost savings may be ephemeral.
The $90 billion per year budget outlay figure is not an equilibrium estimate, either. The campaign proposal was a rich government benefit that is certain to be popular among those eligible to receive it -- so popular, in fact, that those not eligible would be expected to clamor to be included. For the out-of-pocket cost of about $4,000 per year, a person unable to get affordable private health insurance (however that would be defined) could get something worth about $12,000 per year. Thus, unless the Administration and Congress figured out a way to deter people from wanting it, actual budget outlays could be unbounded.
HOW CAN THE FEDERAL BUDGET COST OF OBAMA'S PROPOSED PUBLIC OPTION BE CONTROLLED?
There are only three a ways to control the cost to the federal government of a public option:
- Limit who is eligible.
- Limit the size of the program benefit.
- Align the incentives of program beneficiaries with cost control.
As noted above, the Obama campaign proposal signaled a limited intent to limit who would be eligible. However, it proposed not to limit program benefits and not to align program beneficiaries' incentives with cost control. That is clear by the requirements for comprehensive benefits with premiums, copayments and deductibles that are "affordable." This is a highly unstable combination; it would face insatiable demands to expand eligibility. If there is a stable equilibrium, it's one in which the public option becomes the only US health care option. The reason is that no private insurer can compete with a public option in which beneficiaries pay just one-third of the cost and get essentially unlimited health care services. Who would buy that insurance product if they had access to the public option?
That leaves two other ways to control costs:
- Shift costs off budget.
One of the enduring myths about legislation is that budget outlays are the same thing as "costs." Legislation can be made to look less expensive than it really us simply by shifting costs off budget. The primary way this is done is by legislating through regulation rather than by legislating through spending. For example, another element of the Obama campaign proposal was to require all private insurance plans to include comprehensive benefit packages similar to the Federal Employees Health Benefit Plan. The budget cost of this regulatory requirement is negligible, but its social cost is substantial. When the "cost" of legislation is "scored" by the Congressional Budget Office, these regulatory costs are ignored. The only "costs" that count are federal budget outlays.
The process of converting the campaign's proposed public option into legislative language has forced legislators and the Obama Administration to figure out how to pay for its on-budget outlays. They have proposed numerous ways of shifting costs off budget. There are three main forms of cost-shifting that have been proposed.
First, the public option can be statutorily required to pay claims at Medicare rates. Medicare currently pays 60% to 80% of the cost of care. Providers can pass on some of these costs to private insurance. This makes private insurance more expensive. Using the same approach to fund the public option would further raise the cost of private insurance.
Second, new taxes can be imposed to offset budget outlays with new revenues. Taxes imposed on private insurers raise the cost of private insurance.
Third, the Medicaid program can be expanded. This reduces the scope of eligibility for the public option, thereby reducing its apparent federal budget outlays. But this shifts costs from the federal budget to State budgets. Unsurprisingly, the States have strenuously objected to indirectly bearing the cost of the public option.
Finally, there are numerous ways to shift costs off budget without actually making any substantive programmatic change. For example, new taxes have been proposed on the richest health care plans (so-called "Cadillac" plans). Faced with these taxes, most Cadillac health care plans would vanish from the market. However, the arcane rules of budget scorekeeping allow Congress to count these taxes as reductions in net outlays even though they are imaginary.
Similarly, Congress can promise spending cuts that it has no intention of actually implementing. A decade ago Congress promised to cut payments to Medicare provides by billions of dollars. In fact, Congress has never let these payment reductions actually happen, instead enacting legislation every year to suspend them. Budget scorekeeping rules allow Congress to claim these reductions in outlays at the time the promise is made. This rewards accounting subterfuge and has no impact on actual outlays. The success of accounting subterfuge depends on it being poorly understood by the public, and the sheer volume of public attention focused on health care has made it unusually hard for Congress to engage in accounting subterfuge.
Recently, the Senate leadership brought a bill to the floor (S. 1776) that would have eliminated 10 years of previously promised future Medicare program cuts, at a budget outlay of $247 billion. The argument in favor of the bill was that it would be more honest -- after all, it was clear that Congress was not going to allow these cuts to go into effect. The argument against the bill is that it was inherently dishonest because it would artificially reduce the cost (that is, federal budget outlays) by $247 billion, making it easier to achieve the political target of "costing" (that is, having 10-year budget outlays under $900 billion. The bill, which failed 47-53 on a cloture motion, belongs in the category of accounting subterfuge because it changed only how federal budget outlays were counted and would have had no effect on their magnitude or incidence.
- Ration health care services.
If all else fails to control federal budget outlays, the public option can be altered in ways that ration care. We use the term "rationing" to define any scheme for limiting service delivery other than by price. There are three broad types of rationing.
First, rationing can be achieved by queuing -- that is, making program beneficiaries wait in line. This is a conventional tool of non-price allocation, as it has the appearance of fairness insofar as it looks like everyone is treated the same. Queuing is one way many other nations with nationalized health care models, including Canada and the UK, ration care.
The Obama campaign proposal was silent about using queues to ration care.
Second, rationing can be achieved by imposing paperwork burdens. Obvious examples include requirements to obtain referrals, second opinions, or other procedural hurdles common in managed care settings.
The Obama campaign proposal promised to reduce paperwork burdens.
Third, rationing can be achieved by reducing reimbursement rates so that fewer service providers are willing to accept public option program beneficiaries. Federal reimbursement rates for Medicare and Medicaid are low, and providers respond by limiting the number of Medicare and Medicaid patients they serve. This makes health care harder to obtain, which indirectly reduces the budget outlays needed to pay for it. Similar restrictions can be imposed on pharmaceuticals, with analogous effects.
The Obama campaign was silent on the subject of reimbursement rates, in particular, telegraphing no intention of setting public option reimbursement rates at below-market Medicare levels, which the bills under debate now would do, in order to control costs (that is, federal budget outlays).
Fourth, rationing can be achieved by restricting access to medical goods and services. This can be motivated by cost-effectiveness considerations -- that is, empirical evidence that a particular therapy offers inferior results per dollar expended than other options. Invariably, these calculations apply to the average patient and not to specific patients. New therapies that are no better than an existing alternative on average may have significant benefits to specific patients.
The Obama campaign placed a large bet that costs could be controlled using health effectiveness research. Moreover, the proposal intended to apply the results of this research to all health care, not just health care delivered via the public option.
A crucial feature of the campaign proposal is that cost-effectiveness research would have been patient-centered. It would establish an "independent institute to guide reviews and research on comparative effectiveness, so that Americans and their doctors will have the accurate and objective information they need to make the best decisions for their health and well-being" (emphass added).
Nothing in the campaign proposal suggested that comparative effectiveness research would be used by the federal government to make decisions on behalf of "Americans and their doctors" -- that is, to ration care. However, in both the House and Senate bills this is clearly the purpose of comparative effectiveness research. The House bill, for example, expressly prohibits the proposed new Center for Effectiveness Research from using research results to deny coverage, but this prohibition is not extended to the Centers for Medicare and Medicaid Services or to the new Health Choices Administration. It is inconceivable that government would spend billions of dollars per year on this research without giving itself the authority to use it.
Fifth, rationing can be achieved by changing physician incentives. Whereas currently the medical profession's default orientation is to provide life-sustaining care unless competently instructed otherwise, this default could be changed to deny such care unless competently instructed to provide it. This simple change in the default (what Richard Thaler and Cass Sunstein call the "choice architecture") can have astounding effects on decision-making and on the large fraction of costs (that is, federal budget outlays) devoted to end-of-life care.
The Obama campaign was silent on this subject but it's been a significant feature in proposed legislation and President Obama has frequently stated his endorsement of it. The House bill, for example, would establish new financial incentives for physicians to offer unsolicited advice concerning end-of-life care, with the clear expectation that more patients and their families would respond to this advice by opting for palliative rather than life-extending care. Standards would be set indirectly by committees of "consensus-based organizations" under contract to the federal government, which would then ratify these nominally external standards and incorporate them into new physician quality rankings. While it may be inflammatory to call these committees "death panels," their clear purpose is to change the culture of medical care and thereby rationing end-of-life care, albeit subtly and indirectly.
WHAT PROBLEMS WERE THE PUBLIC OPTION SUPPOSED TO SOLVE?
It's useful to step back to remind ourselves what problems the public option was supposed to solve. There are two: (1) the high percentage of people in the US without insurance and (2) the high cost of medical care in the US.
The Obama campaign designed its proposed public option in a way that makes solving the second problem harder than it otherwise would have been. Many ideas have been put forward to reduce health care costs, none of which were included in the campaign's public option proposal. Worse, several features of the proposal -- comprehensive benefits, guaranteed issue, "affordable" out-of-pocket costs -- all work against reducing costs.
The campaign proposal probably would have significantly reduced the proportion of US residents who are uninsured. That's because the proposal insisted that out-of-pocket costs to beneficiaries must be kept very low. Among the uninsured who want health insurance, the Obama campaign's proposal was very attractive financially.
The public policy dilemma is that the campaign did not propose any way to pay for its public option. To date, no one has come up with a way to fund a public option that would increase federal outlays $100 billion per year (if 25% of the uninsured signed up) to $400 billion per year (if they all did).
