[Some Democratic candidates are pushing it as a free-choice
version of Medicare for All. That’s good rhetoric but bad policy.]
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THE 'PUBLIC OPTION' ON HEALTH CARE IS A POISON PILL  
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David U. Himmelstein and Steffie Woolhandler
October 7, 2019
The Nation
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_ Some Democratic candidates are pushing it as a free-choice version
of Medicare for All. That’s good rhetoric but bad policy. _

Supporters of single-payer health care march to the Capitol in
Sacramento, California., Rich Pedroncelli | AP

 

Health care reform has been the most hotly contested issue in the
Democratic presidential debates. Bernie Sanders and Elizabeth Warren
have been pushing a single-payer Medicare for All plan, under which a
public insurer would cover everyone. They would ban private insurance,
except for items not covered by the public plan, such as cosmetic
surgery or private rooms in hospitals. The other Democratic contenders
favor a “public option” reform that would introduce a
Medicare-like public insurer but would allow private insurers to
operate as well. They tout this approach as a less traumatic route to
universal coverage that would preserve a free choice of insurers for
people happy with their plans. And some public option backers go
further, claiming that the system would painlessly transition to
single payer as the public plan outperforms the private insurers.

That’s comforting rhetoric. But the case for a public option rests
on faulty economic logic and naive assumptions about how private
insurance actually works. Private insurers have proved endlessly
creative at gaming the system to avoid fair competition, and they have
used their immense lobbying clout to undermine regulators’ efforts
to rein in their abuses. That’s enabled them to siphon hundreds of
billions of dollars out of the health care system each year for their
own profits and overhead costs while forcing doctors and hospitals to
waste billions more on billing-related paperwork.

Those dollars have to come from somewhere. If private insurers
required their customers to pay the full costs of private plans, they
wouldn’t be able to compete with a public plan like the traditional
Medicare program, whose overhead costs are far lower
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But this is not the case: In fact, taxpayers—including those _not_
enrolled in a private plan—pick up the tab for much of private
insurers’ profligacy. And the high cost of keeping private insurance
alive would make it prohibitively expensive to cover the 30 million
uninsured in the United States and to upgrade coverage for the tens of
millions with inadequate plans.

Public option proposals come in three main varieties:

§_ A simple buy-in._ Some proposals, including those by Joe Biden
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Medicare-like public plan for sale alongside private plans on the
insurance exchanges now available under the Affordable Care Act. These
buy-in reforms would minimize the need for new taxes, since most
enrollees would be charged premiums. But tens of millions would remain
uninsured
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or with coverage so skimpy, they still couldn’t afford care.

§ _Pay or play._ This variant (similar to the plan advanced by the
Center for American Progress
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and endorsed by Beto O’Rourke
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would offer employers a choice between purchasing private insurance or
paying a steep payroll tax (about 8 percent). Anyone lacking
employer-paid private coverage would be automatically enrolled in the
public plan. The public option would be a good deal for employers who
would otherwise have to pay more than 8 percent of their payroll for
private coverage—for example, employers with older or mostly female
workers (who tend to use more care and incur high premiums) or with
lots of low-wage workers (for whom 8 percent of payroll is a
relatively small sum). But many firms employing mostly young, male, or
highly paid workers (e.g., finance and tech) would likely stay with a
private insurer.

 
§ _Medicare Advantage for All._ The public option approach favored
by Kamala Harris [[link removed]] would mimic
the current Medicare Advantage program. Medicare Advantage plans are
commercial managed care products currently offered by private insurers
to seniors. The Centers for Medicare and Medicaid Services (CMS), the
federal agency that administers Medicare, collects the taxes that pay
for the program and passes the funds ($233 billion in 2018
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along to the insurance companies. Under this approach, the public
option would operate alongside the private Medicare Advantage plans
and compete with them, as the traditional fully public Medicare
program currently does.

No working models of the buy-in or pay-or-play public option variants
currently exist in the United States or elsewhere. But decades of
experience with Medicare Advantage offer lessons about that program
and how private insurers capture profits for themselves and push
losses onto their public rival—strategies that allow them to win the
competition while driving up everyone’s costs.

In US Health Insurance, Good Guys Finish Last

A public option plan that facilitates enrollees’ genuine access to
health care can’t compete with private insurers that avoid the
expensively ill and obstruct access to care. Despite having overhead
costs almost seven times
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that of traditional Medicare (13.7 versus 2 percent), Medicare
Advantage plans have grown rapidly. They now cover more than one-third
of Medicare beneficiaries, up from 13 percent in 2005. Greed has
trumped efficiency
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and the efforts of regulators to level the playing field have been
overwhelmed by insurers’ profit-driven schemes to tilt it.

Private insurers employ a dizzying array of profit-​enhancing
schemes that would be out of bounds for a public plan. These schemes,
which continually evolve in response to regulators’ efforts to
counter them, boil down to four strategies that are legal, in addition
to occasional outright fraud.

§_ Obstructing expensive care._ Plans try to attract profitable,
low-needs enrollees by assuring convenient and affordable access to
routine care for minor problems. Simultaneously, they erect barriers
to expensive services that threaten profits—for example, prior
authorization requirements, high co-payments, narrow networks, and
drug formulary restrictions that penalize the unprofitably ill. While
the fully public Medicare program contracts with any willing provider,
many private insurers exclude (for example) cystic fibrosis
specialists
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and few Medicare Advantage plans cover care at cancer centers like
Memorial Sloan Kettering. Moreover, private insurers’ drug
formularies often put all of the drugs—even cheap generics—needed
by those with diabetes, schizophrenia, or HIV in a high co-payment
tier.

Insurers whose first reaction to a big bill is “claim denied”
discourage many patients from pursuing their claims. And as discussed
below, if hassling over claims drives some enrollees away, even
better: The sickest will be the most hassled and therefore the most
likely to switch to a competitor.

§ _Cherry-picking and lemon-dropping,_ or selectively enrolling
people
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who need little care and disenrolling the unprofitably ill. A
relatively small number of very sick patients account for the vast
majority of medical costs
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each year. A plan that dodges even a few of these high-needs patients
wins, while a competing plan that welcomes all comers loses.

In the employer market, cherry-picking is easy: Private insurers offer
attractive premiums to businesses with young, healthy workers and
exorbitant rates to those with older, sicker employees. As a letter
this summer to _The New York Times_ put it, like casinos, health
insurers are profitable because they know the odds of every bet they
place—and the house always wins.

The CMS, in theory, requires Medicare Advantage plans to take all
comers and prohibits them from forcing people out when they get sick.
But regulators’ efforts to enforce these requirements have been
overwhelmed by insurers’ chicanery. To avoid the sick, private
insurers manipulate provider networks and drug formulary designs.
Despite the ban on forcing enrollees out, patients needing high-cost
services like dialysis or nursing home care have switched in droves
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private plans to traditional, fully public Medicare. And as a last
resort, Medicare Advantage plans will stop offering coverage
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in a county where they’ve accumulated too many unprofitable
enrollees, akin to a casino ejecting players who are beating the
house.

Finally, Medicare Advantage plans cherry-pick through targeted
marketing schemes. In the past, this has meant sign-up dinners in
restaurants difficult to access for people who use wheelchairs or
offering free fitness center memberships
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appeals mainly to the healthiest seniors. But higher-tech approaches
are just around the corner. Will Oscar, the health insurer founded by
Jared Kushner’s brother—with Google’s parent company as a
significant investor
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the temptation to use Google’s trove of personal data to target
enrollment ads toward profitable enrollees like tennis enthusiasts and
avoid purchasers of plus-size clothing or people who have searched
online for fertility treatments?

§ _Upcoding,_ or making enrollees look sicker on paper than they
really are to inflate risk-adjusted premiums. To counter
cherry-picking, the CMS pays Medicare Advantage plans higher premiums
for enrollees with more (and more serious) diagnoses. For instance, a
Medicare Advantage plan can collect hundreds of dollars more each
month from the government by labeling an enrollee’s temporary
sadness as “major depression” or calling trivial knee pain
“degenerative arthritis.” By applying serious-​sounding
diagnoses to minor illnesses, Medicare Advantage plans artificially
inflate the premiums they collect from taxpayers by billions of
dollars while adding little or nothing to their expenditures for care.

Though most upcoding stays within the letter of the law and merely
stretches medical terminology, the CMS’s (rare) audits of
enrollees’ charts indicate that Medicare Advantage plans are
collecting $10 billion annually
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from taxpayers for entirely fabricated diagnoses. And that’s only a
small fraction of their overall take from upcoding. Private insurers
keep most of this pilfered money for their profits and overhead, but
they use a portion to fund added benefits (for example, eyeglasses or
slightly lower co-payments for routine care) that attract new
enrollees and help private plans to seemingly outcompete traditional
Medicare.

§ _Lobbying to get excessive payments and thwart regulators._
Congress has mandated that the CMS overpay Medicare Advantage plans by
2 percent (and even more where medical costs are lower than average).
On top of that, Seema Verma, Trump’s CMS administrator, has taken
steps that will increase premiums significantly and award unjustified
“quality bonuses,” ignoring advice
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from the Medicare Payment Advisory Commission that payments be trimmed
because the government is already overpaying the private plans. And
she has ordered changes to the CMS’s Medicare website to trumpet the
benefits
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of Medicare Advantage enrollment.

In sum, a public option insurer that, like traditional Medicare,
doesn’t try to dodge unprofitable enrollees would be saddled with
more than its share of sick, expensive patients and would become a de
facto high-cost, high-risk pool. The CMS’s decades-long efforts to
level the playing field have been thwarted by insurers’ upcoding,
belying their promises of fair competition. And insurance companies
have used their political muscle to sustain and increase their
competitive advantage over traditional Medicare. The result: The
public plan (and the taxpayers) absorbs the losses while private
insurers skim off profits, an imbalance so big that private plans can
outcompete a public plan despite squandering vast sums on overhead
costs, CEO salaries, and shareholder profits.

Single Payer Would Save, Public Option Won’t

This year alone, private insurers will take in $252 billion more than
they pay out
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equivalent to 12 percent of their premiums. A single-payer system with
overhead costs comparable to Medicare’s (2 percent) could save about
$220 billion
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of that money. A public option would save far less—possibly zero, if
much of the new public coverage is channeled through Medicare
Advantage plans, whose overhead, at 13.7 percent, is even higher than
the average commercial insurer.

Moreover, a public option would save little or nothing on hospitals’
and doctors’ sky-high billing and administrative costs. In a
single-payer system, hospitals and other health facilities could be
funded via global, lump-sum budgets—similar to the way cities pay
fire departments—eliminating the need to attribute costs to
individual patients and collect payments from them and their insurers.
That global budget payment strategy has cut administrative costs at
hospitals in Canada and Scotland to half the US level
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persistence of multiple payers would preclude such administrative
streamlining, even if all of the payers are charged the same rates.
(Under Maryland’s mislabeled global budget system, the state’s
hospitals charge uniform rates but continue to bill per patient; our
research indicates that their administrative costs haven’t fallen at
all, according to their official cost reports.)

Similarly, for physicians and other practitioners, the complexity
involved in billing multiple payers, dealing with multiple drug
formularies and referral networks, collecting co-payments and
deductibles, and obtaining referrals and prior authorizations drives
up office overhead costs and documentation burdens.

The excess overhead inherent to multipayer systems imposes a hidden
surcharge on the fees that doctors and hospitals must charge all
patients—not just those covered by private insurance. All told, a
public option reform would sacrifice about $350 billion annually of
single payer’s potential savings on providers’ overhead costs,
over and above the $220 billion in savings it could sacrifice annually
on insurers’ overhead.

Finally, a public option would undermine the rational health planning
that is key to the long-term savings under single payer. Each dollar
that a hospital invests in new buildings or equipment increases its
operating costs by 20 to 25 cents in every subsequent year. At
present, hospitals that garner profits (or “surpluses” for
nonprofits) have the capital to expand money-making services and buy
high-tech gadgets, whether they’re needed or not, while neglecting
vital but unprofitable services. For instance, hospitals around the
country have invested in proton-beam-radiation therapy centers that
cost hundreds of millions of dollars apiece. (Oklahoma City alone now
has two
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Yet there’s little evidence that those machines are any better for
most uses than their far cheaper alternatives. Similarly, hospitals
have rushed to open invasive cardiology and orthopedic surgery
programs, often close to existing ones. These duplicative investments
raise costs and probably compromise quality.

Meanwhile, primary care and mental health services have languished,
and rural hospitals and other cash-strapped facilities that provide
much-needed care spiral toward closure. As in Canada and several
European nations, a single-payer system could fund new hospital
investments through government grants based on an explicit assessment
of needs, instead of counting on private hospitals to use their
profits wisely
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That strategy has helped other nations direct investments to areas and
services with the greatest need and to avoid funding wasteful or
redundant facilities. Public option proposals would perpetuate current
payment strategies that distort investment and raise long-term costs.

Because a public option would leave the current dysfunctional payment
approach in place, it would sacrifice most of the savings available
via single-payer reform. The bottom line is that a public option would
either cost much more or deliver much less than single payer.

Why Not Import German, Swiss, or Dutch Health Care?

Public option proponents often cite Germany, Switzerland, and the
Netherlands as exemplars of how private insurers can coexist with
thriving public health care systems. But they ignore the vast
differences between those nations’ private insurers and ours.

The nonprofit German “sickness funds
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which cover 89 percent of the population (only wealthy Germans are
allowed to purchase coverage from for-profit insurers), are jointly
managed by employers and unions—a far cry from our employer-based
coverage. The government mandates identical premium rates for all the
sickness funds, takes money from those with low-risk enrollees and
subsidizes others with older and sicker ones, and directly pays for
most hospital construction. All sickness funds offer identical benefit
packages, pay the same fees, and cover care from any doctor or
hospital.

Although the details differ, a similarly stringent regulatory regime
applies in Switzerland
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whose system descended from Otto von Bismarck’s original German
model, and as in Germany, the government funds most hospital
construction. While for-profit insurers can sell supplemental
coverage, only nonprofits are allowed to offer the mandated benefit
package.

Since 2006, the Netherlands has been transitioning from the
German-style universal coverage system to a more market-​oriented
approach
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championed by corporate leaders. However, the government pays directly
for all long-term care, and a strong ethos of justice and equality has
pressured both public and private actors to avoid any erosion of
social solidarity. The Netherlands has long enjoyed ready access to
care, and its system hasn’t descended (yet) into an American-style
abyss. But under the new regime, hospital administrative costs have
risen nearly to US levels, overall health costs have increased
rapidly, doctors complain of unsustainable administrative burdens, and
even in such a small nation, tens of thousands of people are
uninsured. Insurers spend massively on marketing and advertising, and
private insurers’ overhead costs average 13 percent of their
premiums. Moreover, the United States and the Netherlands aren’t the
only places where for-profit insurers’ overhead costs are high: They
average 12.4 percent in Switzerland, 20.9 percent in Germany, and
26.2 percent in the United Kingdom.

Transforming the immensely powerful, profit-driven insurance companies
of the United States into benign nonprofit insurers in the Swiss or
German mold would be as heavy a lift as adopting Medicare for All. Nor
can we count on the cultural restraints that have thus far softened
the Dutch insurers’ rapacious tendencies and prevented a reversal of
that country’s long-standing health care successes.

A final point: While allowing private insurers to compete with a
public plan amounts to a poison pill, the same isn’t true for
supplemental private plans that are allowed to cover only those items
excluded from the public benefit package. While Canada bans the sale
of private coverage that duplicates the public plan’s benefits, it
has always allowed supplemental coverage, and that hasn’t sabotaged
its system.

The efficiencies of a single-payer system would make universal
coverage affordable and give everyone in the United States their free
choice of doctors and hospitals. But that goal will remain out of
reach if private insurers are allowed to continue gaming the system.
Preserving the choice of insurer for some would perpetuate the
affordability crisis that has bedeviled the US health care system for
generations. Proponents of the public option portray it as a
nondisruptive, free-choice version of single payer. That may be good
campaign rhetoric, but it’s terrible policy.

David U. Himmelstein
[[link removed]]David U.
Himmelstein is a Distinguished Professor of Public Health at the City
University of New York at Hunter College.

Steffie Woolhandler
[[link removed]]Steffie
Woolhandler is a Distinguished Professor of Public Health at the City
University of New York at Hunter College.

_Copyright c 2019 The Nation. Reprinted with permission. May not be
reprinted without__ _permission
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Distributed by__ _PARS International Corp
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