It's A Health Care Problem: Not A Debt Problem

Today’s Managing Health Care Costs Quote is

The federal government does not have a spending problem per se. 
What it has is a health-care problem

Click to Enlarge.  Link  

That’s from James Surowiecki in this week’s New Yorker. 

He’s pointing out, as many progressive bloggers and columnists  have recently noted, that the Ryan plan would lower overall federal spending by shifting costs of Medicare to the elderly and costs of Medicaid to states and to beneficiaries. 

The Affordable Care Act has laid out a series of cuts (or decreases of planned increases) which would help make Medicare more affordable, but would be painful for doctors, hospitals, pharmaceutical companies and medical device manufacturers.  It would cut as much as a trillion from health care spending over the decade. By contrast, the Ryan plan would increase the overall cost of health care while shifting the burden away from government.

A third approach would lower the deficit far more – and that’s offering a public option to compete with existing health plans. That’s because the government could negotiate lower prices and exert more cost-control pressure on health care providers.  This isn’t especially welcome among insurers or providers.  The CBO suggested this could save $15 billion a year by 2020. 

There is a historic “iron triangle” of cost, quality and access – you can’t change one without making a tradeoff in another. There are some places where it appears we can increase quality and decrease costs (more childhood immunizations and fewer hospital acquired infections and medical errors). Alas, the dollars in these areas are small.

Surowiecki suggests a new iron triangle: senior access to care, reduction of the debt, and no change in provider payment. He tells us we can only have two of these three simultaneously.

The Managing Health Care Costs Indicator will be back with the next post.

NYT Vs. NYT on Public Option

The New York Times today has an editorial urging support for a public option.  The Times quotes the CBO, which has suggested that even a weakened public option could lower costs.  On the op-ed page, Paul Starr argues that the public option, as currently proposed will not save money. I have previously suggested that the public option might actually lead to higher prices and higher overall costs through decreasing health plan leverage in some markets.  

Can the Public Option Raise Costs?

The public option is reborn, with Harry Reid promising a public option in the Senate health care reform bill, and Nancy Pelosi committed to a public option in the House bill.  Progressives are jubilant – they feel that a government plan is an important counter to the influence of private, largely for-profit, health insurance plans.  They note how well Medicare runs, and say (correctly in my belief) that Medicare helps contain medical care unit price. Conservatives are aghast --  the government is already doing more than enough to disturb the free market, thank you very much.

What does a public option mean for health care costs?

It depends on the public option.

The Congressional Budget Office suggested that a public option would substantially lower costs.  There’s a big “if", though.  The public plan would lower costs not through administrative savings, but rather through deeper discounts by enforcing the Medicare fee schedule (or Medicare + 5%).   Here’s a link to a good diagram from the Blue Cross Blue Shield Foundation showing that currently  Medicare is a net deficit payer for hospitals, which “make it up” by extracting higher payment from commercial health plans.  If a substantial number of employed people were on a plan with Medicare or near-Medicare rates, either the extra costs passed on to remaining private insurers would escalate dramatically, or prices would come down.  And medical prices are higher in the US than in any other country. 

What if a public option had to play on a “level playing field?”  The level-playing-field public option would have

• Higher costs for delivering care
• A platoon of network contracting specialists across the country negotiating contracts
• Difficulty convincing hospitals and physicians in rural areas to accept its preferred fee schedule
• A much less complete network
• A much larger challenge in marketing itself, which would lead to higher advertising and customer relations  costs

In some markets, the public option without leverage of enforcing Medicare-like prices or tying participation to Medicare eligibility might even raise unit prices.   This could happen because the new hobbled public option might actually fragment the insurer market further, in the context of a consolidated provider community.  Each of the insurers in this scenario has less leverage to demand price concessions, which could lead to prices for all insurers going up.

It would be ironic if the public option actually increased unit costs.


Background: A post in June about public option http://managinghealthcarecosts.blogspot.com/2009/06/public-plan-some-perspectives.html


Addendum: Nancy Pelosi has announced that the public option in the House bill will include a requirement to negotiate rates with providers.