Will Government Give Public Health Insurance an Unfair Advantage? Experience Tells Us No.

It's quite amusing to hear insurance company supporters assert that private health plans will go out of business if they have to compete against a public health insurance plan option. The same people who have always claimed government cannot do anything right and private enterprise is always more efficient and innovative, are now turning their ideology on its head and bemoaning how private insurance companies will not be able to compete with a public health insurance plan.

They claim that the government will set the rules to favor the public health insurance plan, creating an unlevel playing field that will eventually eliminate private health plans.

Is it a realistic fear? Let's look at real world experience.

Medicare—the federal health insurance program for people over the age of 65 and those with severe disabilities—contracts with private health insurance plans that compete with the public Medicare program for membership.

In Medicare, the government has bent over backwards to favor the private plans.

The Kaiser Family Foundation gives the following quick overview of the history of private plans in Medicare (PDF):

"As the private market for health insurance has evolved, Medicare has been modified so that beneficiaries can elect to get their Medicare benefits through a qualified private plan rather than the traditional fee-for-service Medicare program. Authorized in 1982, the Medicare risk-contracting program provided for enrollment in health maintenance organizations (HMOs). In 1997, Congress expanded private plan authority to include preferred provider organizations (PPOs), provider-sponsored organizations (PSOs), and private fee-for-service (PFFS) plans as the Medicare risk-contracting program was absorbed into Medicare+Choice (M+C). The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) replaced M+C with the Medicare Advantage (MA) program in 2004, raising payment rates and making other changes in anticipation of the Medicare drug benefit in 2006."

Notice the change in names for the private health plans that contracted with Medicare? "Medicare risk-contracting program"—not very appealing. "Medicare+Choice"—giving me greater choice, that's more appealing. "Medicare Advantage," now that's really appealing—who doesn't want to have an advantage?

But making private plans sound more appealing is not all the government has done to encourage people with Medicare to join private plans, it also gave them a huge raise.

As Families USA reported (PDF) in October 2006:

"Overpayments to Medicare Advantage plans and regional PPOs could easily cost more than $60 billion over the next 10 years...

"As part of the 2003 Medicare Modernization Act, Congress substantially increased payments to Medicare Advantage plans. Medicare Advantage plans are overpaid compared to traditional Medicare.

As the Medicare Rights Center put it:

"Private plans came into the Medicare program with the claim that they could save taxpayers money. Instead, they cost between 12 percent and 19 percent more per person than the public Medicare program, amounting to $5 billion per year in unnecessary cost to taxpayers."

And the government's push to get more people with Medicare to enroll in private plans worked, as Kaiser explains (PDF):

"The number of Medicare beneficiaries in private plans rose modestly in the ten years after the Medicare risk program took effect, increasing from around 0.4 million people in 1985 to 2.3 million in 1994. Enrollment then began to grow more rapidly, a trend consistent with the growth in HMOs in the private market over that period. By the time M+C was established in 1997, there were 5.2 million enrollees in such plans. Enrollment continued to grow through 1999 but at a slower rate, and then began declining. Between 1999 and 2003, the number of enrollees declined from 6.3 million to 4.6 million. Over this period, payment rates to private plans increased much less rapidly than in the past, a function both of legislative changes under M+C in how payments were constructed and a slow-down in spending in the traditional Medicare program (to which plan payments were linked). Many plans withdrew from the market or reduced their service areas; those that remained cut their benefits and increased premiums. MA enrollment declined as fewer beneficiaries had access to private plans and some beneficiaries found the remaining plans less attractive. In total, 17.3 percent of Medicare beneficiaries were enrolled in private plans in 1999. By year end 2003, this had declined to 12.6 percent. With the passage of the MMA, MA enrollment began to grow again in 2004, and by December 2005 14.0 percent of beneficiaries were in such plans."

Predictably, enrollment in private plans has continued to increase, reaching 23 percent of the nearly 45 million people with Medicare in 2008.

The unlevel playing field in Medicare favors the private plans, which can use those overpayments to offer extra benefits to attract membership. In fact, the plans create extra benefits that tend to attract healthier, less costly—meaning more profitable—members. According to (PDF) the Medicare Payment Advisory Commission (MedPAC), a nonpartisan, independent body that advices Congress on Medicare issues, "[Private] plan enrollees, on average, are healthier than beneficiaries in FFS Medicare."

So what do people with Medicare get for billions of dollars extra in taxpayer money? Two studies who that people could end up with higher out-of-pocket costs in a private plan than in Medicare, or in one private plan over an other.

A study (PDF) by MedPAC found that some Medicare private health plans have high cost-sharing for "nondiscretionary" services such as chemotherapy. For example, looking at the cost of a year of care for a 70-year-old male with advanced colon cancer, the study found out-of-pocket charges of $7,100 for one plan, $6,550 for the second plan and $1,990 for the third plan.

Similarly, a study (PDF) by the non-partisan Commonwealth Fund found that out-of-pocket costs for private health plan members vary widely by health status and plan benefit package. The report shows that costs for plan members in poor health would actually have been higher than Original Medicare in 19 of the 88 MA plans examined: "Despite the high payments, relative to fee-for service [Original Medicare] costs, that MA plans receive from Medicare to enrich enrollee benefits, these plans may not always be a good deal for sicker beneficiaries who use more health services."

So should we worry about government setting rules that favor the public health insurance plan option over private plans? I'm much more worried that it will set rules that favor private insurance industry profits over the needs of its citizens.

What is not amusing is that industry lobbyists and supporters are storming the gates of Congress with their donations and their demands and usually win.

We need to be just as persistent if we are to ensure they are as concerned about our health care as they are about the healthy balance sheets of the private insurance industry.

Sign Dr. Howard Dean's petition demanding that a public health insurance option be included in any health care reform package.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future