Competition: The Public Plan’s Fatal Flaw

The public choice plan has had many critics, but its support by President Obama and many Democrat advocates give it at least a 50/50 chance of being included in any final legislator.

Among its critics are those on one side who think that it will become a dumping ground for more expensive, less economically desirable patients. On the other are those who see it as a sneaky incremental way of putting private insurers out of business.

Almost wholly neglected is the fact that it embraces competition as the central means of controlling costs. Whatever its other shortcomings, that is its fatal flaw.

The nature of that flaw is threefold. First, it rests on the false premise that competition can control costs and that it is a good way to run a health care system. But it is impossible to find any country in the world, including our own, that has private sector competition as its foundation.

Our own system is slightly less than 50 percent private and that portion has gradually declined over the years. With the exception of a short period in the mid-1990s, when HMOs were riding high, the private sector has never stopped steady cost increases. They have ranged from as high as 12 percent a year to as low as 6 percent, its present level.

Competition has almost always failed to make much of a cost difference in health care (whatever it might have done with cell phone and TVs). The competition among private providers in the federal Employee Health Care Benefit program (FEHBP), often cited as a model, has failed to stop annual cost increases also.

The second flaw is that proponents of the public choice idea say that, while it will be modeled on the Medicare program, it will not be identical with it. Medicare does better than the private insurance industry in controlling costs, but the difference is marginal, in the range of 1 percent to 2 percent.

It does have lower administrative costs, but not nearly enough to make it a winner by large margin. It is no more sustainable at that lower rate than the private sector is at its higher rate. With the Medicare program projected to be insolvent in eight years because of its own cost escalation, any program modeled on it will have to find ways of doing much better, much better.

The third flaw stems from the other two. The competition will have no external cost controls built into it. If it fails to hold down cost increases, altogether likely, the health care system will simply have to swallow those results.

The gold standard for annual health care cost escalation is that it be no greater than the annual growth of the GDP. Not one of the proponents of public-private competition has made a case that it is particularly suited to move strongly in that direction. The public plan and the private plans together will have to draw upon the same doctors and hospitals that are already part of the cost escalation problem, make use of the same expensive drugs and medical devices, and rely on the same fee-for-service mode of physician payment that has helped give us a cost problem.

Even if we assume that, with a reasonably level playing field as advertised, the public program will win out competitively over the private insurers, it is implausible to believe that it could do so by a decisive margin. Competition will not magically confer upon it potent cost control power that it has lacked in the past. If, as the result of a truly level playing field, they come out even, we would be no better off anyway.

Other alternatives to the leading public choice model have been offered. Senator Kent Conrad, Democrat of North Dakota, has proposed nonprofit coops as a way of avoiding a government-dominated plan. Len M. Nichols and John M. Bertko of the New America Foundation have offered a plan that does not rely on the public plan’s potential competitive market power to control cost growth. But both ideas continue to assume that a market-based approach, just a different kind, will control costs. There are no good historical or other evidential grounds for supposing that to be true.

The final reform prize, many believe, will go to that plan which best combines private sector market values and new versions of government safety nets or imposed coverage mandates. Market values, principally expanded consumer choice and improved provider competition, surely have their political attractions, but they have never proved themselves in health care capable of controlling costs.

As the evidence of European systems shows, the unpleasant truth is that only price controls and other regulatory strategies can decisively work. If the private sector wants to avoid the imposition of such controls as the cost problem deepens in the future, then it is open to them to devise their own ways of doing so, and imposing on themselves various means of making them stick. That idea is no more naïve than a belief in cost control by competition.

Daniel Callahan is editor of the Health Care Cost Monitor.

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One Comment

  1. Alan Jay Weisbard says:

    I agree with my friend and colleague Dan Callahan’s skepticism about the prospects for holding down health care costs via market competition, but I disagree with the characterization of this as a “fatal flaw” for a public plan option in the current health care reform environment.

    Health care costs are driven by more than inflation; there is also a significant component of technological innovation, so that each year’s “product” differs in kind and quality from that of the prior year. Whether new technologies produce results that are worth their added costs is a debatable question; some do, some don’t, and we need better population-based research to get a better handle on the question (which a robust public plan might help to produce). A simple equation of the rate of increase in health care costs with general rates of inflation in the wider economy is almost certainly too simple.

    When comparing effectiveness in controllong costs and their rate of increase between approaches may yield relatively small percentage differences (and I’m not sure that is necessarily the case), when applied to numbers as large as total health care spending over an extended period of time, that small percentage difference can amount to an awful lot of dollars.

    A robust, nationwide public plan option, if allowed (indeed directed) to take advantage of its size and bargaining power, could force significant reductions in the costs of pharmaceuticals and help to reshape compensation for different medical services (including more advantageous treatment of primary care relative to procedures performed by specialtists). While the devil is in the details here, this too could make better, more intelligent and effective use of resources and provide better care to boot. Since prior administrations have been extremely reluctant to venture into these waters, data based on past performance is not necessarily well moored. Policies designed to rationalize spending might well be considerably more effective than prior experience would suggest. VA expenditures may well be a more reliable indicator here than Medicare data.

    Finally, one needs to assess a public plan as part of a dynamically evolving reform program. Surely a single payer system would allow far better use of proven means of cost-containment than would a public plan competing with private insurers, but for whatever reasons, a single payer system (which I would favor) appears not to be politically achievable at the moment. As the insurance companies and other large players well recognize, a robust, comprehensive, and national public plan option (which they forcefully oppose) carries with it the best prospect for moving, over time, to a more rational approach that would carry far better prospects for achieving quality universal coverage at an affordable price than anything else on the horizon. Properly viewed, a robust public plan option, while flawed (relative to the politically unachievable), is not fatally so; indeed, it offers better prospects for ultimate relief than alternative treatments currently “on the market.” Let’s give it a chance.

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