The “Public Option”: Obamacare’s Final Bailout
(A version of this Health Alert was published by RealClearHealth.)
Most Americans disapprove of Obamacare. In a poll conducted in July by the Kaiser Family Foundation, which supports the goals of Obamacare, 46 percent of respondents disapproved of the law while only 40 percent approved. The first poll was conducted in April 2010, when Obamacare was fresh off the press. Then, 46 percent of the public favored the new law, while 40 percent opposed. In July 2010, half of respondents voiced support for the law. In the mind of the American public, that was Obamacare’s high-water mark. It has been downhill since then.
Nevertheless, Obamacare’s proponents insist it is going quite well. In a remarkable development, JAMA, the Journal of the American Medical Association, a peer-reviewed scholarly journal of the medical profession, published an advocacy piece by President Obama himself in its august pages. Obama reluctantly acknowledges price competition and choice in Obamacare exchanges might not have worked out quite as well as advertised. His proposed solution would be a so-called “public option” in regions where few health insurers compete.
Hillary Clinton, the Democrats’ presumptive presidential nominee, has also recently endorsed a public option. The public option is a throwback to Democratic health reform proposals before Obamacare. During the campaign for the Democratic presidential nomination in 2008, it was Senator Obama who proposed a public option and Senator Clinton who dismissed it as unworkable.
When it came time to legislate health reform in the wake of the Democratic wave election of 2008, Obama’s public option did not make it into the law. Keep this in mind: When they had the run of the table in the nation’s capital, controlling both houses of Congress and the White House, Democrats agreed the public option was unworkable. Now that Obamacare has creaked along for six years, both the President who signed the law and the woman he endorses to succeed him insist it is just the thing to fix Obamacare’s most obvious problem: Insurers dropping out of the health insurance exchanges, unable to profit even after increasing premiums by double digits every year.
Recall what most Americans believe to be the most offensive characteristic of Obamacare: It compels individuals, as a condition of residing in the United States, to buy health insurance. Health insurers are the only industry which has this privilege. Nevertheless, they have not been able to profit in Obamacare exchanges for two reasons. First, exchanges have attracted older and sicker beneficiaries than had been expected. So, costs were much higher than insurers had anticipated. Second, the Administration believed it could protect insurers from losses by manipulating certain elements of the Affordable Care Act to pay money to insurers without Congressional appropriations. This turned out not to be the case. By the time Obamacare’s exchanges started operating in 2014, Republicans controlled Congress and forced the Administration to stop paying these monies to insurers. Even today, Congressional Republicans are discovering ways in which the Administration is paying money to insurers without appropriations, and plugging those holes.
The public option would address this by offering a plan that looks like Medicare: Insurers would administer it but taxpayers would bear all the financial risks. If legislated, I anticipate it would accelerate insurers’ exits from Obamacare’s exchanges. It is unlikely exchanges will ever become profitable, like Medicare Advantage or Medicaid managed care are. Those programs have bipartisan political support, while Republican politicians are fully committed to opposing Obamacare’s exchanges.
A public option, however, administered by the same contractors (which are subsidiaries of health insurers) which process Medicare claims, would be a good business opportunity for insurers. So, they should be quite happy to allow Obamacare beneficiaries to be shifted from risk-bearing plans to a government plan.
Who bears the risk? Taxpayers and their children, of course! The political charm of a public option is that it can be funded by federal debt at historically low interest rates. Like Medicare’s Hospital “trust fund,” which is on track for bankruptcy in 2028, any public option’s future costs will be far greater than our ability to pay for them. However, both Mr. Obama and Mrs. Clinton will have departed the scene by then. Expect the “public option” to become the centerpiece of Democrats’ post-Obamacare health reform agenda in this election.
Obama said, “If you like your plan, you can keep your plan.” Not true, all of my clients have had their insurance terminated and the insurance company, TIME Insurance Company, run out of business.
It is reported that 667 counties in the USA will have just one insurance company to choose from in 2017.
Obamacare is a nightmare and should be repealed.
Vote Trump – Hillary is on blood thinners – she is too sick to be President.
Do you think President Trump will tweet before he pushes the button sending us all to oblivion?
History proves that Hillary is the War Hawk who will invade.
Hillary is on blood thinners and can’t even make it through a debate without leaving the stage to hide in the bathroom. Hillary is too sick to be President.
Steve, Ron is right. Trump opposed sending troops to Iraq and Libya. I think even Obama didn’t want to send troops to Libya, but from news reports, Hillary convinced him to do so.
I wonder if Hillary got payola from that decision since she got payola from so many other decisions to the detriment of the American people.
If health insurance is unaffordable for individuals, it cannot be any more affordable collectively. The public plan option is another step towards Medicare for All, a quasi-single payer system that does little to contain costs and transfers them to future taxpayers instead.
One word:
Rationing.
Even the advocates of a public option have not outlined how it would work, for example:
– who provides capitaal for reserves?
– who provides cash for marketing, staffing, claims, et al?
– what fee schedule is used?
– what if doctors or hospitals do not accept that fee schedule?
– What premium is changed?
– Is this a composite level premium, or age rated?
– What happens in year 2 if claims exceed premiums?
I spent an entire day surfing the net to see if this was defined anywhere. I found next to nothing.
We may yet need a public option, Democrat or Republican. I have another post coming on that.
Who provides “capital for reserves” for Medicare or Social Security? Nobody! That is the political genius of it. If the public option was an insurer forced to keep a balance sheet according to the usual standards, that would just be a resurrection of the CO-OPs which have dropped like flies.
My guess is that the public option would pay Medicare rates. Providers who participate in Medicare will be required to accept the public option insurance too if the want to continue to participate in Medicare. It will be priced below whatever private insurers offer.
If premiums are insufficient to cover claims + administrative costs, general federal revenue will be used to cover the shortfall. In other words, it won’t compete on a level playing field with private insurers even if the initial legislation requires it to. A way will be found to get around such a provision rather than let the public option go out of business like the CO-OP’s did.
Note to John G:
I liked your post on the public option, but it had a certain smugness in the way you implied that this was just another Democratic bad idea.
If the ACA keeps losing insurers at the rate it is losing them now, even a Republican President or Congress may have to look at something like a public option.
If a state has no private insurers willing to join the under-65 market, what will legislators do? At least 18 million persons would be affected, too many to ignore.
They could offer to let insurance companies underwrite again. They could go to the largest insurer in a state and offer to backstop them financially. They could expand Medicaid and Medicare. (which would in effect be a public option.)
Republicans will not be spared these hard choices.
I am working on that. Allowing underwriting again would be politically very hard to achieve. It needs better risk adjustment. CMS is working on that but is unlikely to work out.
Come on John, you just can’t throw away the U.S. Constitution and the possibility of freedom here in the United States. You should consider free markets and fight for them instead of running with your tail between your legs and say that only Socialism will work now politically in the land of the free.
What a loser’s limp!
The nation could again use “the Massachusetts model.” Massachusetts is always used as the template for national health insurance policy. We began an uncompensated care pool — which more important included 40 free community health centers statewide (in a relatively small state geographically) as well as funding for uncompensated hospital care — in 1988. Eight so-called major “healthcare reforms” later (four Medicaid waivers, Weldcare, RomneyCare, Devalcare, and Obamacare), we still have an uncompensated care pool — still funded by taxes on healthcare insurance and hospital fees. RomneyCare in particular was specifically supposed to eliminate the uncompensated care pool and its related taxes — replaced by the large increase in sales taxes that funded RomneyCare — but it didn’t happen
John
You are right
Medicare does not need reserves
It is not political genius
It is actuarial and financial stupidity
For the same reason the private market without subsidies cannot compete with expensive ACA plans with subsidies
We are working on providing non compliant ACA plans which will pay 90 percent of all claims
A community fund will be set up to pay any penalties
As you note, John, CMS has a very hard task.
The current risk adjustment program has small plans which are broke being forced to pay adjustments to carriers like Blue Cross, which are also losing money but are far from broke.
In several northern european nations, the risk adjustments are not limited to moving money from profitable plans. A large amount of risk adjustment funds come from extra taxes.
This level of honesty does not seem possible here.
I’m told that in Germany, all premiums are paid into a Central Fund which are then distributed to the individual insurance companies based on risk adjustment. In turn the risk adjustment calculation for each individual insured is based on 80 different metrics. It seems to work for them which, I presume, shows it can be done.
Medicare Advantage also pays insurance companies based on both risk adjustment and their bids against a benchmark in each county where they compete in the marketplace. It’s an imperfect system because it is, at least in part, based on medical claims which have an 18-24 month lag factor, especially for new enrollees in the system. Nothing is perfect. On the other hand, how many even healthy seniors could afford to buy a health insurance policy in the underwritten market? Not very many as a percentage of the total.
I am skeptical that a “closed system” whereby premiums alone pay enough to have well functioning risk adjustment is possible. In Germany or Switzerland, despite the nominally private nature of the insurers, most premium is tax-funded.
In Switzerland, about one-third of hospital costs are funded by general tax revenue. The remaining healthcare costs funded by premiums paid by individuals with help from subsidies plus out-of-pocket payments. As of about three years ago, 45% of the population qualified for a subsidy. That percentage would probably be higher in the U.S.
Everyone 26 and older paid the same premium for the same coverage in a given canton (26 cantons in all). People can choose their deductible up to a maximum limit of approximately U.S. $2,500 per person.
In theory, risk adjustment could work within what you call a closed system but the risk adjustment state of the art needs to be more advanced than it is now in the U.S.
I recall the same figures (but it is a long time since I have studied Switzerland). If the hospitals and insurance premiums were not heavily subsidized, would mandatory private health insurance guarantee universal coverage, or would a large number of people bail out? I think Obamacare suggests large subsidies, like in Switzerland, are needed.
“It seems to work for them which, I presume, shows it can be done.”
We are different nations with different political economic systems, therefore, such presumption is foolhardy. Take your example of Germany where it tolerates a two tiered system. Look at the headlines where the news media talks about healthcare inequality. How will it look at the two tiered system? Then we have to remember what we are comparing. Germany has a median income about the equivalent of Alabama’s. How would that work out if we want NYC care?
Doesn’t Alabama barter with pigs and chickens?
You ask
“On the other hand, how many even healthy seniors could afford to buy a health insurance policy in the underwritten market? Not very many as a percentage of the total.”
Before Medicare, the answer to your question was around 60%, at a time when only about 70% of people under 65 had health insurance. So I think you are buying into revisionist leftist history that insuring us would not be possible and that our grand parents were dying in the streets in the 1960s
Before Medicare, there wasn’t nearly as much that medicine could do for us patients. Think heart surgery, cancer treatment, specialty drugs, etc. It was a very different world back then.
I guess I do not understand how insurance works
After 1965 seniors had a lot more discretionary income than they had before. Medicare crowded out alternative insurance options..
That is very accurate. When I think of how much less expensive medical innovation would have been in the absence of Medicare, the lost opportunity depresses me.
alan, be cautious on comparisons with Germany,
see the attached
https://www.quora.com/Are-Germans-content-to-earn-19-less-than-Americans-in-2014
Many americans think that Germans are better off than we are. I still remember seeing more Germans than Americans at the Grand Canyon. Most German workers not only get longer vacations, but in some cases they get a bonus to help pay for vacation travel.
Bob, I am cautious about all comparisons and that was basically my point. Germans are well to do today, but the future doesn’t look that rosey for them.
Check out any article by Elizabeth Rosenthal on how Germans receive high tech procedures at low costs……
http://beerfarts.us.com/forum1/viewtopic.php?p=163365&sid=dfe30e2eea46173b12c2c26c0ce65f1c
The key is in Germany, the health care industry is price controlled. I have seen no disastrous impact from this.
John Graham, February 2015: “The Medicare contractors for traditional Medicare are mostly not health insurers.”
John Graham, August 2016: “A public option, however, administered by the sane contractors (which are subsidiaries of health insurers) which process Medicare claims…”
Glad to see you changed your analysis of who runs Medicare.
(I am guessing you meant “same” not “sane” in the August 2016 sentence but maybe not?)
I got a lot of negative feedback for that (February 2015) sentence because I did not clarify that most Medicare contractors are separately incorporated subsidiaries of health insurers. I just can’t win.