The Campaign for America’s Future

No Compromise on the Public Plan!: Why Weakening the Public Option Would Weaken the Party Responsible

June 30, 2009 - 11:56am ET

Why are all the alternatives to a robust public plan now being floated in the health care reform debate – cooperatives, state or regional plans, a “trigger” for the public plan, a public plan prohibited from bargaining with drug companies – such profoundly bad ideas?

For one simple reason: they would fail to rein in health care costs’ out-of-control growth rate.

And the effects of such a failure would very likely include not just unsustainable public budgets and the eventual collapse of universal health coverage but political calamity for the party that made the reform.

One of the greatest political opportunities in memory could be converted into lasting disaster, if conservative Democrats have their way and we get health care reform without a robust public option. Any concessions made to those Democrats – and to the handful of Republicans still playing nice, just as long as health reform doesn’t bother the insurance industry – on the public plan will prove extraordinarily costly down the road. The cost would be measured first in dollars – as suggested in my previous posts in this series (here, here, and here) – and later in votes.

If sweeping health care reform gets passed this year, irreversibly associated with Barack Obama and the Democratic Party regardless of the number of Republicans voting for it, and if a few years after that reform cost growth in health care continues at its current clip, Democrats will be in serious political trouble for a long time.
Why is the public plan option so crucial, for cost control? Building on my prior three posts about market power in health insurance and health care provider markets, I want to offer a simple, straightforward answer to this question: bargaining power.

No reason to expect efficiency where there’s no competition

To briefly recap my two main arguments up to this point (in the prior posts):

If we do not significantly reduce the current rate of health care cost growth, we are in deep trouble as a country. President Obama has been both eloquent and insistent on this point since the debate over health care reform began. “The long-term fiscal balance of the Unites States will be determined primarily by the future rate of growth of health care costs,” in Office of Management and Budget (OMB) director Peter Orszag’s neat summation.
The rate of health care cost growth stops looking so strange and unexpected as soon as you take a serious look at the extent of consolidation and the lack of competition in most of the country’s health insurance and health care provider markets. Given the extent of concentration in those markets, extreme rates of health care cost growth – with nothing to be shown for them, in terms of better outcomes for health care consumers – become expected, normal. In short: why would anyone expect oligopolist insurers and oligopolist providers to restrain prices, without effective pressure from the purchasers of insurance?

Why we need the public plan

Many critics of President Obama’s proposed reform have argued that regulation alone could do the job of ensuring coverage and restraining cost growth. They are mistaken.

I have cited a number of empirical studies in my prior posts to substantiate the claim that most health insurance and health care provider markets are deeply uncompetitive. This sort of argument might lead some people to imagine that what’s needed is simply regulatory action to break up trusts and get competition working again. But any dream of “restoring” robust competition to health insurance and health care provider markets through improved rule-setting and rule-enforcing government action alone is just that: a dream.

More aggressive regulation (especially prohibiting exclusion of applicants from insurance coverage for “pre-existing conditions”), prosecution to prevent price-fixing collusion, and dismantling of the biggest oligopolists would all be important and valuable steps for the federal government to take, surely. Each might “bend the curve” of health cost growth downwards slightly. Yet all three of those steps taken together would not add up to a restoration of competition. Far from it.

Full-fledged competition – i.e., the kind most people have in mind when they hear the word “competition,” the almost magical efficiency-generating kind economists rhapsodize about – in health insurance markets simply is not possible.

There are several reasons for this impossibility of full-fledged competition in health insurance. Among the most important:

There are significant economies of scale in the provision of insurance, including the simple fact that risk pooling works best when the pools are large;
The costs of entry into a health insurance market are very high;
It is hard to imagine what a viable, desirable substitute product for health insurance could be, to introduce competition from outside; and
“Health care markets remain and will likely forever be local,” making a significant degree of concentration in all small- to medium-sized local insurance markets inevitable.

So no matter what we do by way of rule-setting and rule-enforcing government action, private health insurance markets will remain far from competitive.

When insurers’ inherent uncompetitiveness gets combined with extreme concentration among health care providers, it becomes entirely logical and expected that health care costs would balloon out of control. The insurers stand between the providers and the purchasers of health care services in a three-party transaction. From the insurers’ perspective, on one side they find purchasers: diverse firms small and large, and families. On the other, they find the providers: increasingly consolidated firms that dominate local markets throughout the country. The bargaining power of the providers vastly exceeds that of us purchasers. They have market power; we’re disorganized (and also frankly confused by the whole byzantine system, its copays and deductibles and premiums and networks). Why would the insurers ever do anything other than strike deals with the providers (which raise prices for us health care consumers), given the lack of competition in both provider and insurance markets?

The only thing that can set this picture aright, that can bring balance and stability to the transaction, is the establishment of some real bargaining power on the purchaser side.

And the only way to do that is by offering a public plan option.

“The administrative efficiencies of government-run health insurance plans” – their dramatically lower overhead, compared to private insurers – and “the purchasing power of government to control costs” would be combined, in such a public plan, to introduce a degree of competition on price that is currently absent from oligopolistic insurer and provider markets. Regional or state-based public plans, cooperatives, and all the other compromise options on the table simply would not have the level of bargaining power required to eliminate waste and restrain cost growth. Without a robust public plan to compete with private insurers “we will continue to lack strong institutional mechanisms to rein in costs and drive value down the road, putting the broader goals of reform and our nation's public and private budgets at risk.” “The power of a large purchaser motivated to contain costs is needed to control rising health care expenditures,” note the Urban Institute’s John Holahan and Linda Blumberg.

The exercise of some “monopsony” (one buyer, multiple sellers) power by the government does not offer a panacea, but it is the best politically available means to rein in escalating costs. It will bring the three-party transaction into some balance – keeping the insurers honest, as President Obama has put it.

Universal coverage can boost economic growth

Building this countervailing bargaining power can be – very happily, for anyone with some degree of social conscience – a byproduct of offering universal coverage. But this will only happen if a robust public plan is offered alongside private insurance plans in the new insurance “Exchange” to be created by health reform legislation.
Some of us, of course, simply view access to quality health care as a social right. We’d be willing to pay a significant price, to sacrifice some economic efficiency or personal income, in order to achieve universal exercise of that right. (And I’d argue that far more people fall in this category than recognize that they do so. The principle of rationing by willingness/ability to pay would, I think – if it was articulated in clear terms – strike most people as seriously immoral and inhumane when it comes to the distribution of health care services.) But with health care reform no such deal needs to be brokered. It is precisely through the aggregation of our purchasing power that comes with universal coverage and a public plan that we can restrain cost growth, eliminate waste, enhance growth.

Our economy is weighed down – and will within a decade or two be positively wrecked, if present trends continue – by skyrocketing health care costs that yield no gain in health outcomes. In a marvelous feat of historical irony, it is precisely the decision to assert a sweeping social right that can save us from this great drag on growth – if we assert that right by creating a new public plan that challenges private insurers to restrain costs.

If we instead choose to assert that right – to bring universal coverage – in a way that avoids the private health insurance industry’s ire, we will be left with something like what Massachusetts now has: near-universal coverage, yet with no restraint whatsoever on health care costs. Such a path – which is exactly what all the “centrist” forces in both parties are now proposing, under many guises, as alternatives to a robust public plan option – would buy us a few years of feeling good about ourselves at the cost of both our country’s economic future and the very capacity to continue providing coverage to all.

Without restraint on health care cost inflation, we are screwed as a country. That’s regardless of what we do or don’t do about the equity (universal coverage) question. Without the exercise of some collective bargaining power on prices, it’s hard to imagine how we could ever restrain the health care cost inflation, given the characteristics of health insurance and health care provider markets. And that’s why a public plan option must be non-negotiable, in the health care reform debate now raging in Washington. It’s not that reform without a robust public plan option will be less effective. It will be ineffective, thus temporary and – as I’ll discuss in a moment – politically self-destructive.

An historic political opportunity

Happily, the public needs little convincing. The poll numbers are astounding. This should be the biggest political home-run of a generation.

72% support a government-administered public plan, according to a recent New York Times/CBS News poll. The Employee Benefits Research Institute – a group funded by the likes of JPMorganChase, Wal-Mart, General Dynamics, Morgan Stanley, Blue Cross Blue Shield, CIGNA, and United Health – found 83% in support of the public plan option.

If you’re unfamiliar with the world of public-opinion polling, let me assure you: these are historic-victory, beat-the-living-daylights-out-of-the-opposition polling numbers. When you add in the facts that a) the public plan option has already been widely framed as a controversial, partisan policy issue, and b) it has already made its way onto many voters’ radar, these margins are astonishing.

This is, without much room for argument, the best electoral opportunity the Democrats have seen in a generation; and it is quite possibly the best opportunity they will see for a generation to come. If they screw it up – by failing to restrain cost growth, when they extend coverage – it could be their Waterloo.

Harnessing competition

Self-proclaimed defenders of “Competition” and “The Free Market” always argue that government is woefully inefficient and wasteful. But as President Obama pointed out in a press conference last week, one can’t oppose a public plan on the grounds that it will compete the private insurers out of existence and still make such arguments about government inefficiency. It’s simply “not logical.” One of the views – a) inherent government wastefulness or b) the danger posed to private insurers by a public plan – must be relinquished in order for the other to be maintained, if one is to meet minimum standards for logic.

No one should hold their breath waiting on public plan opponents’ repentance for illogic, of course. But the president’s explanation of the rationale for a public plan calls attention to one of his reform proposal’s most important, defining characteristics: its very American belief in the good that comes from enhanced competition.
Rather than dismantling the private insurance system to replace it was a universal-coverage system in which government is, in a sense, the monopoly insurer and monopsony purchaser (as advocates of a “single-payer” health policy propose), President Obama proposes that we simply offer a public plan to compete with the private ones. If government provision of insurance proves wasteful and inefficient, private insurers will outperform the public plan. If the public plan proves more efficient, and grows as a result, it’s hard to see – from not just the standpoint of social welfare but of economics – why any rational citizen, outside the adversely affected industries, would see that as a bad thing.

Market-power-wielding firms will of course fear, and fight against, the enhancement of competition, even in small degree. That’s not really a critique of health insurers but a simple statement of fact regarding any firm that wields substantial market power. A public plan (with administrative efficiencies and some monopsonistic bargaining power) could force the private insurers to rein in their premiums, introducing a degree of competition on price and thereby cutting into the profits the insurers and the provider conglomerates have been enjoying.

Why would anyone expect the insurers to accept such a fate without kicking and screaming? Such protests should not, however, be confused with serious arguments about what’s good for society.

Conclusion

The fundamental falsehood in all the attacks on “Big Government” made by opponents of the public plan is the unspoken assumption that health insurance and health care provider markets are currently competitive – and thus that a public plan offered within a new insurance exchange would reduce rather than enhance competition. To confuse the absence of government action with the presence of competitive markets is at once the dumbest and the most widespread of the intellectual fallacies propagated by conservatives as “economics”.

Democrats habituated to caution and conservatism during the party’s long period lacking a critique of laissez-faire ideology need to listen to the political winds (and poll numbers!): the general public no longer believes in this dumb dichotomy between government and markets, policy-making action and competition. The usual bogeymen and scare tactics just aren’t resonating, this time around.

Voters want a robust public plan option. And voters will judge the Democratic Party for years to come on the success or failure of this reform – a reform which, given the characteristics of insurance and provider markets, has no chance of reining in out-of-control cost growth without the introduction of some substantial new bargaining power for the purchasers of health care services.

Attempts to “triangulate” on health care – whether they’re driven by ideological identification with the anti-government ethos that’s been dominant for so long, a habit of political caution, belief in the electoral or inherent virtues of bipartisanship, or some combination among these – will, if they succeed, steal defeat from the jaws of a sweeping social, political and economic victory.

Phillip Cryan received his Masters degree in Public Policy from the University of California, Berkeley’s Goldman School in May 2009. His report on the expected effects on employment from adoption of a “play-or-pay” employer contribution policy for health care was published by the Institute for America’s Future and the Economic Policy Institute in June.