Sunday, November 1, 2009

The essential Exchange and the puzzling public option

(This post talks about HR3962. This is the health reform bill introduced by House Speaker Nancy Pelosi on Thursday. It’s also known as the ‘‘Affordable Health Care for America Act’’ or “AHCAA”. You can download a pdf of the 1,990 page bill here. Section and page references in my post are tied to that pdf.)

One of the features that seems to show up in every Democratic health care bill is “the Exchange”. As I understand it, the Exchange is basically a marketplace for insurance policies. Any insurance company that wants to can offer policies via the Exchange. These policies will have to meet certain minimum coverage requirements; most if not all the bills establish levels of coverage. The least comprehensive policies are Basic or Bronze; those with more features are Enhanced or Silver; those with still more are Premium or Gold. There is also a Premium Plus (or Platinum) level. It seemed to me that in the older bills any insurance company that wanted to offer products on the Exchange had to offer all three levels: Bronze, Silver, and Gold but I may remember that wrong - and I’m not going to dig back through the bills to refresh my memory. In HR3962 it looks like an insurance company can offer just a Basic (Bronze) plan. The other plans are optional. (Division A, Title III, Subtitle A, Section 303; page 167)

Insurers offering policies via the Exchange must comply with government rules regarding how premiums are calculated, how pre-existing conditions are handled, and so on. I’m almost positive HR3962 applies these rules to insurance sold both inside and outside the Exchange. (Division A, Title II; page 89 on) I suspect the other Democratic bills do also since making rules within the Exchange more stringent than rules outside the Exchange would result in the Exchange becoming a high-risk insurance plan.* However if an individual State has more stringent rules for health insurance companies than those set out by HR3962, the individual State can enforce those rules with regard to insurers selling plans on the Exchange to individuals in the State provided the State is willing to pay the Federal government for the privilege. (Division A, Title III, Subtitle A, Section 303; page 170-171)**

When I read about earlier Democratic versions it sounded to me like government subsidies would be available only for insurance purchased through the Exchange. I’m not sure if that is the case with HR3962. (Division A, Title III, Subtitle C, Section 342(a)(1)(D); page 247)

It is within the context of the Exchange that the public option exists. The Federal government will offer insurance plans on the Exchange just as any private insurance company does. The original thinking - and that apparently preferred by liberals - was that the public option would peg its reimbursement rates to Medicare, paying at Medicare rates or Medicare plus 5%. There has also been uncertainty over how much the Federal government would subsidize the public option with tax dollars. HR3962 removes the Medicare peg and makes clear that there will be no subsidization of the public option. According to the (understandably) very positive ten-page summary (pdf) provided via the House Committee on Education and Labor:

The bill establishes a public health insurance option available within the Exchange to ensure choice, competition and accountability. Like other private plans, the public option must survive on its premiums. The Secretary of Health and Human Services will administer the public option and negotiate rates for providers that participate in the public option. The public health insurance option is provided startup administrative funding, but it is required to amortize these costs into future premiums to ensure it operates on a level playing field with private insurers.

I find the removal of the Medicare peg both understandable and puzzling. It’s understandable because reimbursement rates pegged to Medicare rates might have resulted in relatively few health care providers being willing to participate in the public option “network”. Especially when the public option is first starting up it probably will not be able to promise a large enough volume of subscribers to make health care providers willing to take extremely low reimbursements.***

I find removal of the Medicare peg puzzling because it makes it less certain that the public option will be less expensive than private insurance - especially that offered by non-profit companies. Since the public option cannot dictate reimbursement rates and will not receive any taxpayer money there is no obvious reason to believe it will be cheaper than private non-profit insurance companies. Since the public option will receive startup funding and it must pay back that funding the public option may well be more expensive than private non-profit insurance companies at least until the startup funding is repaid.****

I assume that the bill authors believe the public option will be cheaper than the private option even under the rules of HR3962 for one of three reasons. First, the full administrative overhead may not be attributed to the public option. The summary I quoted above says:

The Secretary of Health and Human Services will administer the public option and negotiate rates for providers that participate in the public option.

If some or all of the administrative costs - including what I assume is a fairly painful and labor-intensive process of rate negotiation - are attributed not to the public option as a stand-alone “insurance company” but are rather folded into the general HHS budget then the public option could be less expensive; it’s administrative costs will be - or rather, appear to be - very low.

The second reason the public option might be less expensive than private non-profit insurance companies is that the private companies are hideously inefficient and the public option will be better managed. At first glance this seems unlikely: organizations are pretty much the same whether they’re private or government and I haven’t seen any overwhelming evidence that government entities tend to be more efficient than private ones. However there is a lot of verbiage in HR3962 about different reimbursement models and perhaps those who support the HR3962 form of the public option believe the government will achieve cost savings using those models. (Division A, Title III, Subtitle B, Section 324; page 218 on)

The third reason the public option might be less expensive than private non-profit insurance is that the private companies are really price-gouging. Title I, Section 104 is actually entitled, “Sunshine on price gouging by health insurance insurers” so I think I’m pretty safe is asserting that many of those who support the HR3962 form of the public option are so sure price-gouging is rampant that they believe any public option in any form will be less expensive than any private option. This is why the rationale for the public option so often includes ideas like competition and keeping insurance companies honest. Supporters are convinced that even a non-profit like Alabama Blue Cross Blue Shield is charging more than it needs to in order to, well, something: pay its executives huge salaries; stuff its coffer in hopes of being bought out (although who benefits from a buyout when there are no shareholders is a little unclear - unless it’s those same executives getting golden parachutes); or perhaps just because that’s what companies do.

It’s also possible that those who support the HR3962 version of the public option are aware it will be more expensive and want it anyway but then I run up against a real puzzle: why do they think that anyone who wants health insurance will sign up for the public option? The only people who could enroll in the public option will be able to participate in the Exchange. As far as I can tell all policies offered via the Exchange will be eligible for a government subsidy. So why would someone pick a more expensive government “insurance company” plan over a less expensive private insurance company plan? If those who support HR3962 are aware it will be more expensive then they are about to create a $2Billion-plus government health insurance company with no customers. (Division A, Title III, Subtitle B, Section 322(b)(2)(A); page 215) Surely this can’t be the case.


* I’m not entirely sure that HR3962 requires non-Exchange-offered (NEO) health insurance policies to meet the type of coverage requirements Exchange policies must. That is, NEO policies have to meet requirements with regard to pre-existing conditions and rescission and so on but they may be able to offer less comprehensive policies than even the Exchange Basic. I find this unlikely - it would appear to undercut the whole idea of the Exchange - but I haven’t yet run across language that specifically prohibits this. It’s a big bill and life is short.

** This presents an interesting situation. Let’s say New Jersey has more stringent requirements than the Exchange; for example, New Jersey requires insurance companies to pay for poofles. If New Jersey wants to force Exchange-offered plans to meet its requirements, it has to pay up. If it doesn’t pay up then Exchange-offered plans will, of course, be cheaper than non-Exchange offered plans. This will drive everyone who doesn’t want poofles to the Exchange-offered plans thus making the cost of non-Exchange offered plans skyrocket. Those who want a plan that covers poofles will not be able to afford the coverage and eventually there will be no non-Exchange-offered plans in New Jersey.

If New Jersey does pay up then all of us in New Jersey get to keep poofle coverage. This is a situation where the cost of a government requirement for health insurance companies cannot be hidden in a policyholder’s bill but will show up right on everyone’s tax return. The poofle lobby will need to be ready with a really good campaign to convince New Jerseyans that retaining poofle coverage is worth the extra tax burden.

*** This Politico article presents a different explanation for the removal of the Medicare peg:

conservative and moderate Democrats have pushed party leaders to let doctors and hospitals negotiate their reimbursement rates, arguing plans tied to Medicare would give the government an unfair advantage over the private market and imperil rural hospitals with a high percentage of patients with government-funded coverage.

That makes sense but I do wonder how many health care providers would have participated in if the peg hadn’t been removed.

**** After I wrote this last night I heard Senator Lieberman on “Face The Nation” this morning. He said:

The Congressional Budget Office said on Thursday when the House Democrats put out their health care reform plan with a public option in it that the public plan would end up charging higher premiums than the average premiums charged by the commercial health insurance companies.

(The Reading list for this post is going up as a separate post. There’s a lot of it and it’s heavily annotated.)

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