Public plan ought to save money

July 9, 2009, the Rutland Herald, by John Franco

One of the most contentious issues in the current national health care reform debate is whether to create a public plan. According to a June New York Times/CBS News poll, 72 percent of Americans favor a government-administered health plan that will compete with private plans, and a wide majority believes that the government will do a better job in holding down health care costs.

Vermont's experience points strongly in favor of this option. Vermont created its own "exchange" in 2006 with Catamount Health Care, which is now provided by two private insurers, Blue Cross and Blue Shield of Vermont and MVP. They have no public competition in the exchange because Gov. Douglas refused it. Without it, the unsubsidized per-person premium awarded to these insurers when Catamount was launched in 2007 was nearly 30 percent higher than the one Blue Cross quoted to the Vermont Senate's consultant, Dr. Kenneth Thorpe in 2006 when the legislation was adopted. Worse, it is 12 percent higher than the premium awarded by Massachusetts' Commonwealth Care, despite the fact that Vermont's per-capita health care costs are 20 percent lower than those in the Bay State.

The private insurers and the GOP are fighting the public plan tooth and nail. They claim it is a single-payer Trojan horse that will drive them out of business because of unfair competition. True to form, Congress has reacted to this industry push-back with equivocation and half measures. The remedy for the "unfair competition" argument is to do what Vermont did with Catamount — specify that everyone in the exchange will pay the same Medicare reimbursement rates no matter who the insurer. But the GOP is already screaming about government-administered prices in Medicare, so the Senate's latest version of the reform bill prohibits the public plan from using Medicare rates at all.

The public plan would still have lower administrative overhead, and that scares the competing private insurers to death. Therefore, unlike the Health Care for America proposal, which would allow an employer like the city of Rutland willing to pay the full unsubsidized public plan premium to voluntarily join in the public plan, the bill limits availability to individuals, and to a limited degree to small businesses. By 2019 private insurance will still be providing coverage for 193 million Americans.

This could have the unintended consequence of higher costs for the insurance plans of medium-sized employers which are too big to participate, including some municipalities and school districts. The problem comes from that squishy little thing called the cost shift. That's where higher prices are paid for medical services by some to compensate for lower prices paid by or free services provided to others. It works like a balloon. Holding down the cost pressure at one end of the balloon transfers the pressure, causing the other end to bulge out with higher costs. While aggressive cost-containment by the public plan may contain cost pressures over a bigger area, it still involves only one part of the balloon, resulting in an even bigger bulge on the remainder.

Large insurance plans have greater bargaining power to negotiate more favorable provider rates, thus better insulating themselves from the cost shift. The bulge is therefore further shifted to the portion of the balloon inhabited by the medium-sized private plans with weaker bargaining power, perhaps including your school district.

Nor do the providers want to give up their prerogatives to squeeze the balloon. The hospitals say they hate the cost-shift squeeze, but they really love it. By keeping the insurance system balkanized, they get to play the insurance plans off against one another, doubling their revenues in the past eight years. Consequently the spending of Vermont's 14 community hospitals now accounts for nearly 6 percent of the entire state economy.

Sweet.

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