May 21, 2009
By Linda Gorman
The Obama administration has proposed a government-run health insurance plan generally referred to as a “public option.” Some believe that government can do a better job of running a health plan than private companies can. Others argue that a government-run health insurance plan will improve Americans’ health insurance choices.
The problem for public option proponents is that private insurance plans work reasonably well, at least if one defines well as good financial protection and ready access to the technologically advanced health care of one’s choice at the lowest possible cost.
Proponents of the public option planned to test marketed it in Colorado. The effort was put on hold two years ago.
The reason you haven’t heard of this before is that the public option cost more than private insurance. How much? According to the Lewin Group, roughly $8,547 for each of the 6,400 previously uninsured people that were expected to sign up.
These cost estimates don’t include the Medicaid and SCHIP expansions that were assumed to take place before the public option was instituted. They would theoretically have reduced the number of Coloradoans without some sort of third party payer coverage to 115,600 out of a population of roughly 4.6 million. At $8,547 for the 0.1 percent of the population likely to be interested in the public plan option, proponents could have purchased private health insurance for each participant and had enough money left over to buy each participant a new care every four years.
The public plan was to have been financed in one of two ways. The first financing option was charging a monthly premium of $225 per person per month, or $2,700 a year. That was the amount that the plan’s designers considered affordable for health insurance. They tinkered extensively with the benefits to make the public plan come under that premium amount.
The second financing option was to fund the plan by levying an additional income tax of 8.1 percent on everyone who joined it. The tax would be collected in lieu of a premium. This option was preferred by the policy reformers who supported a public plan option. In general, they believed that all payments for health care should be means tested. Unacquainted with the concept of deadweight losses from tax systems, they thought that piggy-backing on the tax system to collect premiums would necessarily reduce costs.
Going into the modeling process, the public option proponents were certain that their idea would attract all kinds of people. They believed that there were huge numbers of people who wanted to purchase health insurance, and thought that coverage of routine items made their plan better than private plans. They also assumed that members would be able to find a physician or dentist willing to accept the public plan’s payment rates.
What public plan proponents didn’t consider carefully enough was that in Colorado (where mean household income is $55,517) the average person could already buy health insurance in the individual market for about $212 a month, $13 less than the $225 that the public plan’s proponents considered an “affordable” premium. Since those who are uninsured are likely to be more sensitive to premium costs than those who have insurance, the higher premium on the public plan was not especially attractive.
When the public plan was financed by charging everyone in it an additional 8.1 percent income tax, the modeling showed that the public plan was a good deal only for those with individual incomes below $31,320. The problem with income tax finance is that Colorado households with incomes below that level typically are either young and healthy singles or are retirees already covered by Medicare. Median household incomes for those aged 15 to 24 (5.6 percent of all households) was $27,375. For those aged 25 to 44 (40 percent of all households) it was $57,646.
When Lewin ran the numbers, the public option proponents found that a the public option in Colorado was a solution to a problem that relatively few people had. It was an extremely expensive way to cover a few people. Provided costs, premiums, and coverages are fairly estimated, and government doesn’t bend the rules in its favor, one would expect to see the same modeling results at the national level.
The Colorado public option had several other problems, problems that also apply at the national level. A thorough airing of them might serve to dampen enthusiasm for a national public option even for those who feel that no possible harm could come from having the federal government add health insurance to its failing ventures in banking and automobile manufacturing.
The problems include:
1. Having premiums that are the same for everyone means that the plan would not charge people based on their medical risk. If premiums are set to pay for the medical risk of the sick, premiums would be so high that no healthy people would enroll. If premiums are set to attract the healthy, then sick people would enroll in droves and the public plan would end up with a high, and expensive, proportion of bad risks. Proponents were against risk passed premiums and proposed using a waiting list “ensure a normal distribution of risk.” As in all other government run systems, the preference for equality above all created a waiting list. In this case the list would be just to get into a government funded coverage plan. The waiting lists for care would, no doubt, follow over time.
2. Because public plan proponents they did not believe in using price as a rationing mechanism, they worried that people would transfer into the public plan when they needed extensive surgical or dental work and then out again once they were fixed up. They concluded that people who opted for the public plan should be locked in for long periods. This presented a knotty enforcement problem, especially if people wish to move out of the state, or the country, for various periods of time. Would people who joined a public plan have to agree to be locked into it for years? Would they still have to make payments to it if they moved out of the country for some period?
3. Portability was limited. In Colorado, the health coverage under the public option was portable only in the sense that if one changed jobs but stayed in the state coverage was continuous. People who might want treatment out-of-state, or want continuous coverage if they moved, or spent months out-of-state, were out of luck. This is one of the problems in Massachusetts. People who buy Commonwealth Connector plans are buying health insurance that will not pay for out-of-state care. In Colorado, some Colorado residents routinely go out-of-state for care in remote border areas. With prior approval, many US private plans pay for health care obtained out of the US. Would a government run plan pay for health care outside of its jurisdiction or would it put unacceptable limits on the ability of its enrollees to obtain the kind of care they want from the people they want regardless of their location?
4. There was an evident animus towards private insurance arrangements on the part of those who favor government run health coverage. Proponents of the public option test in Colorado favored regulations, taxes, and fees that made private health insurance and private health care more expensive relative to public insurance, and to health care provided by government. Proponents were proud of the fact that the public option plan would “not involve insurance companies” unless one “might be hired to handle claims.”
This article originally appeared in John Goodman’s Health Policy Blog, May 13th, 2009.