Public option and provider reimbursement nudges

On Twitter, there is a long and productive discussion about provider pricing and the recent study on commercial payer rate variations.  Part of the discussion went back to this Washington Post article on price suppression from October 2010.

The administration decided not to seek lower drug rates for Medicare, and it didn’t press for a “public option,” a government-run insurance plan that people under 65 could buy into. While supporters of the public option sold it as a way to compete with insurers, the real target was hospitals and doctors. A public option would have created a nationwide purchaser of health care that could have exerted leverage on providers to cut prices. This would have lowered the law’s costs by reducing the subsidies needed to make insurance affordable….

“The public hates the insurance industry and trusts doctors and hospitals,” said Richard Kirsch, head of the liberal coalition Health Care for America Now. “But what killed the public option was the hospitals, not the insurance industry.”

The public option would have been a marginal pressure to reduce prices.  There were several flavors on how providers would be paid in a  public option.  The two most common were Medicare plus X where X was some percentage between 5% and 15%, and negotiated rates.

Under Medicare plus 5% or Medicare plus 15%, the public option would be a non-differentiated product in competitive insurance markets and a narrow network product in non-competitive markets. Mayhew Insurance is in a competitive market region for the Exchanges.  The lowest priced Silver plans offered by all of the insurers in this region are narrow network HMOs where the providers get paid Medicare rates plus 5% to Medicare plus 10%.  The public option would be just another plan that is in the cluster for the 2nd Silver subsidy point.  If the network is a broad network like the rest of Medicare, the public option would probably be overpriced compared to similar products because the public option network would include a lot more high cost providers than the targeted narrow networks.

In noncompetitive payer and provider markets, the public option at Medicare plus 5% or Medicare plus 15% would be a fairly narrow network.  Medicare can get away with offering fairly low rates in non-competitive markets and still have most hospitals and providers sign up for traditional Medicare because Medicare can promise volume.  The Exchanges can’t promise volume.  The Exchanges for this year are projected to insure 4% of the US population, and it is a fairly low utilizing population when compared to Medicare.  That means providers don’t need the Exchange volume to cover their fixed costs.  Under a Medicare plus X regime, quite a few providers would not sign the contract.  They would not want to set a precedent of taking Medicare based rates.  So the public option in provider dominated markets would keep the dominant insurer honest but the pricing differential after a year or two would not be tremendous.

If the public option was a negotiated rate product, it would be similar to the 2nd Silver chasing products in competetive markets.  In minimally competitive insurance markets, it would probably have a broader network than it would under a Medicare plus X scheme but the pricing difference between it and the lowest priced Silver from the dominant carrier would be smaller.

I think the public option is something that should always be presented by progressives as a budget pay-for as it will produce significant savings to the federal government through lower subsidy levels but it is not a panacea.  The Exchanges are not big enough pools of patients and dollars to drive hospitals and other providers to completely change their pricing models.