Debating the Public Option

In "The Perils of the Public Plan," Paul Starr warns that a public-insurance option could turn into exactly the opposite of what progressives want. Here he discusses the problems with the Prospect's two other co-founders, Robert Kuttner and Robert Reich.

Paul Starr:
According to last week's Washington Post, the public option is the "crux" of the health-reform debate and the "greatest challenge" for Senate negotiators to overcome. That's an accurate description of the current political scene, but it's true only because so many people, including members of Congress, are responding ideologically to the idea of government involvement.

The public option is not the biggest question in reform. Under the proposals being considered, it would be offered only within insurance exchanges at the state and regional level. The far bigger question is how those exchanges work:

Are they open to all employers and individuals -- required, in fact, for employers below a given size -- or open only to the individual and small-group market?

Do the exchanges have the power to risk-adjust the premiums paid to health plans?

Can they regulate the marketing strategies and benefit designs of private insurers?

The public plan will likely end up as a dumping ground for high-cost, mostly low-income people if the exchanges are open only to the individual and small-group market and have inadequate power to risk-adjust premiums or to regulate private insurers' marketing and benefit design.

In other words, we could get a public plan that instead of "disciplining" private insurers, as the president said last week, actually buttresses their dominance of the system. Watch what you wish for.

Robert Kuttner:
The public option, as it is evolving, is even more dubious than Paul Starr's apt critique suggests. Under the House leadership bill, people who have coverage through their employers are ineligible. So the proposed, head-to-head competition between the public plan and private competitors is left to employers, not individuals.

What's distressing is that progressives have put all their eggs in this leaky basket. It's clear that Jacob Hacker's original inspiration -- that over time the superior efficiencies of a true public plan would crowd out private alternatives -- is being undermined by the politics of compromise. Even Sen. Max Baucus, not exactly a lefty, remarked the other day that he wished that single-payer hadn't been taken off the table, if only for tactical reasons.

In public opinion polls and in liberal advocacy, the badly flawed public option has become a kind of proxy for what most Americans really want -- national health insurance. That's the true public option. It would be far more cost-effective, because it would eliminate so many industry middlemen and would remove the incentive to put health dollars into profit centers. Politically, protecting the public option from industry mischief is no less a heavy lift than single-payer. It's a pity that all the progressive energy that's gone into defending the public option hasn't gone to advocate national health insurance.

Robert Reich:
Paul Starr worries that the public plan would end up a dumping ground for the sicker and more expensive. If that were the likely outcome, private insurers, the pharmaceutical lobby, and the American Medical Association would be all in favor of it. But they're apoplectic about a public option because they fear exactly the opposite, which also seems to me more likely: By virtue of its scale and scope, a public plan would have the bargaining power to get lower drug prices and better deals with health providers, thereby eating into their profits. And they worry that the lower administrative costs of a public plan that doesn't have to show a profit, or spend on marketing and advertising, will further erode their margins. Of course we need to pay attention to the precise organization of the risk exchanges, but that's mainly to make sure the public plan is allowed to exert full competitive pressure on the private plans.

I'd prefer a single-payer, but it's got no skin in the game. The only practical hope we have for expanding coverage and taming health-care costs lies with the public option. That's why it's the epicenter of the current fight. The House is supportive, but the Senate is backing off because Republicans and Blue Dog Democrats have been told it's a Trojan horse for single-payer. And the medical-industrial lobbies are hard at work convincing the public that the public option will lead to a wholesale government takeover of the health-care system.

Yesterday the president said he might sign a health-care bill that did not include a public option. That's exactly the wrong message. If progressives fail to work hard for a public option because it's not a single-payer, or we allow the other side to demagogue a public option, we miss the moment.

Paul Starr:
I don't agree with Robert Kuttner that progressives should be insisting on single-payer (Medicare for All), which would provoke an overwhelming political backlash not just from the health-care industry but from the large number of Americans who are satisfied with what they have. Moreover, I am leery of putting all our expenditures for health care on the public budget, which might have the effect of crowding out other desirable public needs. And I am skeptical about the wisdom of permanently centralizing decisions about so large a share of the economy (one-sixth and growing).

But I am also leery of the approach to reform that is now the focus of efforts in Congress. That approach creates two points of vulnerability that could end up undermining reform. First, employers would decide whether to provide insurance directly or to pay into an insurance exchange. Firms with young and healthy workers are likely to insure directly, while those with higher-cost workers go into the exchange. That means the risk pool in the exchange would start out on the wrong foot -- or in the lingo of insurance, it would suffer from "adverse selection."

Second, within the exchange, the public option would compete against private insurers, many of which have built their businesses by avoiding people with high medical costs. Some of the techniques they have used in the past would be prohibited, but they are still likely to be able to game the system.

Moreover, many people favor the public option precisely because they see it as needed for the chronically ill, people with disabilities, and other groups who haven't been well served by private insurers. The trouble is that if the public plan is favored by those groups, it will have higher costs. In the world of health insurance, no one wants to be in a "club" with sick people, so over time the healthy would migrate to private plans, and the public option would become a choice of last resort.

Robert Reich seems to consider the "apoplectic" opposition of private insurers and other health care interests as proof that the public option, in whatever form, is a good idea. The industry is genuinely scared of a public plan that would pay doctors and hospitals Medicare rates, which run 20 to 30 percent below what private insurers now pay providers for the under-65 population. According to the most widely cited estimate, a public plan on those lines, if offered to all employee groups and individuals, could enroll more than 100 million people who now have private insurance.

But what would happen in that event? The resulting sudden drop in the flow of funds to the health-care sector would cause a monumental financial crisis throughout the system. There is no way that Congress is going to bring on that kind of a crisis, which would immediately discredit reform. So if a public plan is introduced, it is going to have to pay rates that are closer to those of private insurers. The ability of a public plan to constrain growth in prices -- that is, its ability to control costs through its bargaining leverage -- could only be exerted gradually. But the public option may never be able to get to that point if it first becomes a dumping ground for high-cost people.

What ought to be done to minimize adverse selection into the public plan?

First, the exchanges need to have broad-based risk pools. That would be the case if all employers with fewer than, say, 100 employees were required to purchase coverage through the exchanges (an idea that even Alain Enthoven, the father of "managed competition," recently endorsed in The New York Times). The exchanges might also be workable if the terms offered to small and midsize employers were so attractive that few of them decided to buy coverage outside.

Second, all insurers in the exchanges must be subject to rules that make it impossible for them to deny coverage, or to discourage the sick from enrolling, or to use marketing or other strategies to cherry-pick the healthy. The exchanges must also have the power to implement a system of risk adjustment that provides a bonus to plans if, after open enrollment, they find themselves with a population with predictably higher costs and that imposes a tax on plans that sign up a population with predictably lower costs.

The exchanges themselves should be created under direct federal authority unless a state opts out and meets federal standards. If the exchanges are left to the 50 states to establish in the first instance, they will all have to enact corresponding legislation, write regulations, and create new administrative systems. The time it takes to put the new system into the field -- and the opportunities for industry to undermine the integrity of reform -- will be much greater.

If these conditions are met, we will at least have a reasonable institutional foundation for assuring coverage for all and controlling costs in the long run. If the public plan is to be offered only within the exchanges, the design of the exchanges is logically more important than the public option. For if the exchanges are badly designed, the public plan is sure to be a high-cost option of marginal significance.

The public option has gotten all the political attention, but the real "crux" of reform is the system of rules that govern all competing plans. If the Democrats can't get a strong public plan through the Senate but can get a strong design of the exchanges by trading off a weak public plan, they should take that deal and pass the bill.

Robert Kuttner:
It's interesting and significant that the three co-founders of the Prospect are reprising the three major strands of progressive views on health reform. Robert Reich is arguing that the Obama plan, with the public option, is the best practical brand of reform available. Paul Starr, holding out for something that looks a lot like the Clinton plan, argues (convincingly in my view) that the most likely form of the public option will backfire. And I continue to be the single-payer guy. We've been having different versions of this friendly argument for two decades, as has the progressive community.

Reich says that single-player has "no skin in the game." Well, let's put some there, rather than being apologists for a threadbare cloak of a public option.

Where Starr and I disagree is on both his diagnosis of Medicare for All, and on his optimism that "exchanges" could be designed in a way that would meet his hopes (the exchanges sound a lot like the purchasing pools of the Bill Clinton plan that Paul Starr helped devise).

Although Starr and Reich seem to disagree, they have one thing in common. They are both somewhat wishful about what it would take politically to legislate the crucial details of either the Obama public option (Reich) or the exchanges (Starr) necessary to achieve meaningful reforms. In order for the fine print in either approach to do the job, progressives would need first to crush the industry influence in Congress that is very likely to hobble either strategy. And both Reich and Starr are right that a weakened version of the Obama plan could well be worse than nothing.

The political reality is that Medicare for All is no harder politically than a version of the Obama plan that would meet all the tests that Reich and Starr apply. And it would be far simpler and more cost effective.

I think Starr is much too harsh on Medicare for All, both as a program and as a politics. He says that most people like what they have. But it is possible for privately negotiated benefits to complement universal Medicare, just as some retirees now get additional benefits to supplement the present Medicare program.

He insists that national health insurance would crowd out other public outlays, but because Medicare for All would deliver good health care so much more efficiently, there would be net savings to society; after a transitional period, they would translate into budget savings. With national health insurance, we could cover everyone for around 12 percent of gross domestic product (the typical wealthy country spends around 9 percent) compared to the current 15 percent.

Starr is also anxious about "centralizing" the outlay of one-sixth of GDP via government-organized health insurance (it's really more like one-eighth). But it is decentralized, fragmented, and profit-driven health insurance that has put us in the current fix. "Centralized," government-sponsored Medicare for the elderly works far better than any private-sector competitors. There's no logical reason why it can't work for the whole population.

The regulatory and political nightmare of doing everything that Starr insists is necessary to get a system of insurance exchanges to work efficiency is actually far more of a daunting challenge than having a single system under direct public control. And the odds are that the Obama administration, by the time it is done reassuring Max Baucus, the health insurance industry, the drug companies, and the Blue Dogs, will settle for far less than Starr's formula.

Reich may say that if we just work hard enough, we can prevent that fate and still get a good program. But Obama began with less than what we need, and he has not painted this as a battle of the people against the interests. The bill gets weaker with each succeeding round. I suspect that by the time there is finally legislation for him to sign, Reich and Starr will both feel that it falls way short. It is high time for progressives to stop settling for badly flawed second bests and to throw their energy into a first best that could rally popular support and produce a system that serves everyone.

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