Arnold Kling  

The Purpose of the Public Health Insurance Plan

Justin Fox, Fischer Black, Tyl... More on the Fischer Black Mode...

Ezra Klein writes,

The inclusion of a strong public insurance option has become, for most observers I know, the single most recognizable marker for victory. If the public plan exists, liberals have won. If it's eliminated, or neutered, then conservatives have triumphed.

Of course, as an economic issue, this is totally irrelevant. The economic issue is that some people need subsidies to get health insurance. especially to get the sort of insulation that we call health insurance. Some people need subsidies because they are poor. Others need subsidies because they are obviously high risk. You can give subsidies in the form of vouchers. You could subsidize poor people with vouchers based on income. You could subsidize high-risk people with vouchers for pre-existing conditions. A public plan is one vehicle for providing a subsidy, but it is by no means the only vehicle.

The purpose of the public health insurance plan is political. The idea is to drive away Republican support by threatening the private health insurance industry. As I explain in the beginning of my Cato talk (short video excerpt, whole thing), the real issue is health care costs, driven by over-use of services with high costs and low benefits.

Getting people to reduce their use of medical services is the spinach of health care reform. Expanding insurance coverage is the dessert. The Democrats want to enact dessert now, and worry about spinach later. For the dessert part, they want no Republicans involved. Down the road, when they are ready to tackle the spinach part, they will press for bipartisan cooperation and statesmanship from Republicans.

My suggestion in the talk is that the Republicans not fall on their swords to defend private health insurance. Yes, many people like their insurance. But many of us hate the claims process. In our household, the phrase "going postal" has been replaced by "going health insurance." My guess is that sticking up for private health insurance is a political loser. Moreover, real health care reform would require radical innovation in health insurance, so it is counterproductive to try to entrench for the existing system.

If I were a Republican, I would support a public health insurance plan that provides real health insurance. That is, it would have low premiums, but extremely high deductibles and co-payments--beyond anything we see today. People on the plan would, on average, pay more than 50 percent of their health expenses out of pocket. Only people at the very high end of expenses would get insurance payments. Even their co-oayments would not drop to zero.

There are various reasons why such plans do not exist today. Many of these reasons are regulatory. I am not sure how such a plan would fare in a free market. But that is the kind of public plan I could get behind.

Comments and Sharing

COMMENTS (23 to date)
Eli writes:

Arnold, I've had the same train of thought. However, even a Klingian public plan won't stay Klingian for long. The same political forces that created the regulations that make high-deductible policies rare will chisel away at the high deductible and generate anti-Klingian public health insurance. Insulation is better for providers because it gives them a rent, and it is favored by voters because high deductibles are necessarily painful.

Robin Hanson writes:

Yes, cutting costs is the key, and a public catastrophic plan is an acceptable attempt to achieve that. But since that would be spinach now, we don't expect that to be proposed by Democrats pushing away Republications; that would have to wait for those statesmen Republicans willing to share the pain of blame.

Robb Lutton writes:

You need to get out more. You state that;

" would have low premiums, but extremely high deductibles and co-payments... People on the plan would, on average, pay more than 50 percent of their health expenses out of pocket. Only people at the very high end of expenses would get insurance payments. Even their co-oayments would not drop to zero.

There are various reasons why such plans do not exist today."

That sounds exactly like my company provided Kaiser Permanente insurance. It costs me $40 every two weeks. It pays me nothing ($0) when I get sick and go to the doctor. All that is covered are "preventative exams". After I have paid 2500 dollars a year, it starts to kick in.

The really crappy thing is that many of my coworkers cannot even afford this crappy coverage.

John Booke writes:

The "spinach" is lowering excessively high Medicare fees paid to doctors. Why are both sides of the American political spectrum so reluctant to confront extravagant doctor incomes? Why are fees paid to doctors in other countries for the same services less than 1/2 to one-third of those paid to American doctors?

Dr. T writes:

Medicare fees are not excessively high. Most doctors cannot get wealthy off Medicare, though it is possible for proceduralists (surgeons, endoscopists, interventional cardiologists) to do so. Most doctors have to 'game' Medicare just to come out ahead. They do a more extensive exam and upcode a visit from level 1 to level 2. They schedule two brief level 1 followup visits when a single level 2 visit would work. They require prescription refill visits monthly when visits every two months would do. Doctors would not go through all this trouble if Medicare fees covered office visit costs. Medicare pays nothing when patients call doctors for advice or prescription refills.

Why should "extravagant" doctor incomes be confronted? Why not extravagent incomes of lawyers, professional sport players, top actors, supermodels, stockbrokers, fund managers, or CEOs? Medicine requires more education and training than any other profession. Medical education costs are enormous, and doctors do not earn decent pay (residents are paid less than lab techs) until their late twenties (4 years college, 4 years medical school, 3-7 years residency). The average doctor starts out with $120,000 in education debt and typically goes into a group practice. But, that new doctor has no patients and has to acquire them over a period of years. Some group practices have buy-in costs that must be repaid. And commenters like John Booke complain because the average family practice doctor earns around $160,000, which is less than the average chiropracter.

Doctors in other countries are paid less because they have socialized medicine with low reimbursement or salaried physicians. Hundreds of Canadian and British physicians come to the US each year so they can earn a decent living. Our Veterans Health Administration uses salaried physicians (I was one until 2008.) who get paid substantially less than private practice physicians in the same specialty. Because of the low pay, the VA has shortages of most specialists: surgeons, oncologists, neurologists, radiologists, etc. The VA gets many new physicians, quite a few mediocre physicians, and some who don't want to run a practice and are willing to tolerate a bureaucratic employer. This is not a great model for our nation's health care.

Joe Marier writes:

Would you be able to keep your current health insurance as a primary plan to pay the additional out-of-pocket costs? That would certainly lead to lower premiums.

R Allan Jensen writes:

In all this above discussion there no mention of underlying reasons for high medical costs. Without addressing these realities, there will be no solutions and the same decay we have in Medicaid, Medicare will continue and accelerate with more people on a public plan.

Yes, there is overutilization and there are 3 or 4 major reasons for that.

Significantly government mandates, including things like EMTALA, hamstring providers into cost-shifting. Under-reimbursement is also a big part of this.

I do concur that defending the private system as it is currently formed is a non-started. Defending choice and promoting individual responsibility is critically important.

the article has clearly explained the facts on the health insurance and referring to the same will be a great support for the society as it is fully loaded with all the necessary information with regard to health insurance.

Isn't it truly amazing how the health care insurance corps., despite being able to send brokers on elaborate all-expense-paid vacations as bonuses for sales (AIG, et. al.) paid for by health care insurance premiums in part, are on "fight" to keep those perks? And as a published author with part of my book on this topic, it is abhorent that this is done at the expense of their own customers! While at the same time spending more $$$, donating large sums to Congressional campaign funds ("lobbying") in order to convince Congress to stop Obama's and/or Kennedy's proposals! I have put forth several reforrm ideas on my blog, FYI and reading "pleasure"...or ire! Thanks for the time! Dr. David Robinson

Dan Weber writes:
That sounds exactly like my company provided Kaiser Permanente insurance. It costs me $40 every two weeks
What happens if you need emergency service at a location other that Kaiser?

I like KP-systems, but here's what I posted a week or so ago:

...I had the good fortune to talk to someone employed in medical billing about these systems. ... She was trying to get Kaiser Permanente to pay for emergency care performed at another clinic. Unlike other insurance companies, they paid no more than Medicare, and responded with a letter saying that California law protected them from any further action.

I hope the savings in these systems aren't from short-changing outside providers who provide care on the good faith that the insurance company will pay.

gnat writes:

The problem does not appear to be excess demand that needs to be price rationed:
Rather it appears to be inefficiences on the supply side. The demand side is dominated by individual premiums/co-pays and business costs.Why hasn't cost pressure on the demand side led to a better outcome and how would making co-pays 50% solve that problem? I can see a properly structured public option based on health performance/outcomes an important force toward rationalizing the supply side. VA and other countries have solved this problem with a public option.

John Fembup writes:

"If I were a Republican, I would support a public health insurance plan that provides real health insurance. That is, it would have low premiums, but extremely high deductibles and co-payments"

I would support it, too. This is an obvious strategy for the private insurers, but it's equally apparent to the government planners as well. The legislation and regs will be written so that this can't happen. Wouldn't be "fair" you see to permit some Americans to have anything less than "comprehensive" coverage - even if they would choose to do so.

(In fact, the difference in cost will be much greater than the actuarial value of the plans. People who are healthier tend to enroll in lesser-benefit options when they can. People who are less-healthy tend to enroll in the best available benefits they can afford. The cost difference between the private and public plan options would therefore be driven not only by the benefit differences, but also by demographic differences that affect utilization. Guess which plan always wins? You are correct.)

So don't get excited. In the interest of what will be called "fairness," in consideration to the necessity for so-called "comprehensive" insurance, and because there is need to create what is already being called a "competitive" insurance market, the government will mandate that private plans must offer the same, or substantially the same, benefits as the public plan. Significant benefit differences won't be permitted, the enrollment selection differences won't materialize, and the cost of the private and public plans will converge.

Yeah, I know, having meaningful "choices" got lost somewhere between point A and point B, but the public can be soothed by other means. The legislation will be entitled something like the "American Health Choices Act" so everyone can believe there is choice because the law says so.

And won't we all love Big Brother for it?

gnat writes:

Health care is a type of multi-provider supply distribution network. Multi-provider networks require the development of mechanisms for the coordination of services of many providers as well as mechanisms for cost allocation and settlement arrangements. In most private markets the coordination problem is solved by one provider acting as the "prime" contractor and other providers acting as subcontractors. This has not occurred in healthcare which instead has adopted a sum-of-services bill-and-keep settlement arrangement. Under bill and keep, each provider is responsible for the delivery and billing of its own services.

The public option is attractive not because it will drive down costs--insurance and willingness-to-pay already accomplishes this on the demand side. What the public option can accomplish is fix the coodination problem.

celticdragon writes:

That sounds exactly like my company provided Kaiser Permanente insurance. It costs me $40 every two weeks. It pays me nothing ($0) when I get sick and go to the doctor. All that is covered are "preventative exams". After I have paid 2500 dollars a year, it starts to kick in.
The really crappy thing is that many of my coworkers cannot even afford this crappy coverage.

Exactly. My wife and I had to declare bankruptcy over thousands of dollars of medical bills that insurance didn't cover. If you have to use medical services to the tune of several thousand dollars a year and your insurance is junk...but that is what the employer provides, then you are stuck. You end up sticking the bill on everybody else anyway in the bankruptcy court.

Jess Riedel writes:

What are the regulations which discourage catastrophic, high-deductible insurance in the private insurance market? Is it just the tax deduction for employer-based health insurance (which means that all medical costs covered by insurance are effectively tex free, thereby encouraging greater coverage)?

otto writes:

You are a Republican least as far as reforming healthcare is concerned. As for your suggestions concerning deductibles and co pays perhaps you would explain how this would expand coverage to the roughly 46 million who have no coverage. Being unable to afford private options they wouldn't be able to afford the public one either. And don't you have to love comments like that from John Fembup. We don't want any of this fairness nonsense. If you can afford it you have insurance if you can't afford it, tough sh%$. Of course he brings in Big Brother....whoever he is. Banality doesn't start to describe it.

Jeff writes:

So let me see if I understand this...

If someone who is jobless and has no money discovers they have cancer, they get no help and are left to die?

Lest you think this example is simply a "thought-experiment," this exact situation occurred to a very good friend of mine in France last summer.

She was jobless, with no money, and discovered she had breast cancer (thanks to a physical provided to her by the French government at no cost to her). The French government then provided, again at no cost to her, surgery to remove the tumor (during which they found, and removed, an additional tumor under her armpit), as well as chemo and radiation therapy after the operation.

What would happen to her, if she were a citizen living here, under the plan proposed above?

Paul writes:

It is clear Mr. King prefers to keep the status quo with regard to health insurance. By that I mean, medical rationing based on the thickness of the patients wallet.

I admit that Mr. King's proposal would work great for a young and healthy person. The fact of matter is, insurance is not about an individual, it is about the shared risk of the whole. The foundation for insurance is that the premiums of the healthy in part subsidize the health care cost of the sick.

I am sure people are going to say that is unfair. I should remind them, health is a very transient commodity. Those that are young and healthy and as yet have not had to contemplate their own demise, are tomorrows sick and dying. Their future medical care will in part be subsidized by the next generation of young and healthy.

Having access to medical care should not require financial ruin.

Floccina writes:

Dr T asked:

Why should "extravagant" doctor incomes be confronted?

A better question is why do that squeeze doctors income in the socialized medicine countries. The answer I think is because they can. Being a doctor is so high status that even with low income there are plenty of candidates (like teachers BTW). An alternative way to lower doctor incomes would be to reduce licensing requirements.


I like Arnold's plan but even better IMO would be to make the deductible equal to one's last year's adjusted income minus the poverty rate income level. You could then tax any supplemental heath insurance. You would then have one program and the rich have an intensive to push for cheaper care.

Arthur_500 writes:

The problem with subsidies is how it raises the floor. High-risk individuals are in this category because they make poor life choices such as alchohol and/ or cigarettes, or, because they have an inherrent problem such as diabetes.
Our society would not deny care to those who have inherited some problem.
Why should I care about those who don't make the same life choices that I make? After all, I choose to spend my resources for my UTILS and no one can tell me what will give me satisfaction.
When we subsidize we are telling prople how to act (Just as we do in the tax system).
Many poor people make poor life choices and then have compounded problems. A poor diet may least to high blood pressure, obesity, the onset of diabetes, vericose veins and a host of other things I've never heard of. At what point does someone say, "You need to loose weight."
The Taiwanese plan has people looking at trends to spot problems. If an individual starts getting perscriptions from multiple sources they can expect an government visit to determine why. Likewise, at some point an individual with multiple problems will trigger oversight to determine if there is an underlying cause. For all the Big Brother aspect of this it actually decreases medical expenses and encourages improved health.
So at the end of the day we get back to the same question, "Is everything we want in health care going to be free all the time?" The logical answer is no. We are back to the 'spinach.'

Paul writes:

France and Germany have public health care systems that match the medical care provided in the US at about half the cost as measured by percentage of GDP.

I see four streams of resource leakage that need to be addressed to bring health care costs in line. Listed in order of greatest to least leakage.

1. Private Health Insurance Administrative costs.
(a)Service Providers administrative overhead to
comply with insurance company rules.
2. Health care providers cost shifting to pay for
services they provided but were not paid for.
3. Records management, which includes paper record storage, film X-ray storage and the cost to give service providers access.
4. Malpractice insurance/tort reform

Insurance companies take between 20 and 30% of premiums for administrative cost. For example that is much higher than the single digit Medicare administrative cost. Some of that administrative cost is spent looking for ways to deny treatment.

Most doctors and hospitals will admit the administrative cost to apply for insurance is very high.

Single payer would help alleviate those costs. Even a public option would force private insurance companies to be more efficient. I mean really, the CEO of Aetna receives 24 million dollars in annual compensation. Insurance premiums rise by leaps and bounds every year to pay for that compensation.

The cost of shifting would be greatly helped by having everyone insured. If the bills are paid there would be no need to cost shift.

Recently I had to get some hospital records that were several years old. I discovered that they had been sent away to a distant warehouse. It took me a week to obtain those records. Having the records electronically stored and instantly accessible would not only save cost, it would provide better health care. X-rays can now be done digitally and electronically stored. That process should be accelerated.

The least savings is in tort reform. The Congressional Budget Office calculated that less than 2% of medical cost can be attributed malpractice cost. That does not mean that savings should not be wrung out of the tort process. There just will not be big dollar reward. Capping malpractice awards most likely is not where the savings will be. The largest savings would be in a lower cost administrative judicial system that would address more common minor grievances.

I believe that enough cost saving can be wrung out of the system, that the doctors and hospitals, which are the real heroes, can be very well compensated.

John Fembup writes:

Let’s compare my health insurance with my sister’s:

My insurance:

1. My deductible = 1,750 per year
2. After deductible, my plan pays 80% of allowed expenses
3. My residual max (the 20% expenses) = 2,000 per year
4. My plan pays 100% for the rest of the year, after I meet my deductible and my residual max
5. My employer funds a reimbursement account for me = $600 per year. (I have these funds automatically applied to my claims)
6. My maximum share of my own medical costs in any year, no matter what, is $3,150 (1) + (3) –(5).
7. My plan pays 100% of preventive care expenses
8. My plan covers retail Rx – all prescriptions - $15 copay then 80%. The copays are paid by the reimbursement account.
9. My plan covers the full range of dental care, subject to the above cost sharing
10. My plan has no lifetime maximum
11. My covers me anywhere in the world
12. My premium (net of my employer's contribution) is $43 per month or $516 per year.

I know I will pay $516 every year — that’s my premium. The maximum I can possibly be charged for my own expenses in any year is $3,150. So my medical care costs will vary between $516 minimum and $3,666 maximum per year. This includes full catastrophic medical care protection for the rest of my life.

My sister’s insurance

1. Her plan has many deductibles,
a. Her plan’s inpatient expenses deductible = $1,068 per confinement
·Inpatient benefits are limited to 150 days per confinement.
·Her plan pays inpatient benefits at 100% up to 60 days per confinement
·Her plan requires a $267 per day deductible from 61-90 days
·Her plan requires a $534 per day deductible from 90-150 days.
·After 150 days – no coverage
b. Her plan’s deductible for all other types of expenses = $135 per year
2. For these other types, her plan pays 80% of allowed expenses after the deductible
3. Her plan does not limit her residual expenses (the 20% expenses)
4. Her plan would continue to reimburse 80% regardless how large her expenses may grow - and she would continue to pay her 20%.
5. Her plan does not have a health reimbursement or health savings account.
6. Her maximum share of her own medical costs in any year cannot be known in advance.
7. Preventive care is subject to the same deductible and 80% reimbursement
8. Her plan does not cover retail Rx – no prescriptions
9. Her plan does not cover dental
10. Her plan’s benefits are limited as defined by the coverage terms
11. My sister's plan will not reimburse any expenses outside the U.S.
12. Her net premium is $96 per month, or $1,152 per year.

Her premium is double my premium. However, her coverage is clearly inferior to mine. For her much higher premium, she does not have better coverage than I have for routine expenses - and she has not nearly the same lifetime catastrophic medical care protection. In fact, she cannot know her maximum possible yearly cost – because there really is no such maximum in her insurance.

FWIW, I think keeping the lifetime catastrophic protection in exchange for a maximum - maximum - yearly cost of around 3,000 is a fair deal. You may not think so. And wouldn't our difference of opinion at least suggest that both types of insurance should be available to people?

Oh yeah, I have private insurance. My sister has Medicare.

I will be eligible for Medicare in 2010. I can hardly contain my enthusiasm.

Timothy Underwood writes:

Universal coverage is not the dessert. It is the point of the whole exercise. Reducing costs will be nice, and it is very important in the long run. But the point of the exercise is to make it so that everyone knows that they will have medical care available when they need it, at a cost that they can 'afford' (even if the affording is difficult). The point is to make sure nobody dies because they did not receive a cost effective treatment, and that someone facing a severe health problem is not forced to spend a substantial portion of their (possibly extremely limited since they may soon be dead)time dealing with an insurance bureaucracy, or planning their (cost effective) treatment around the policies of a company or the government.

Also, while of course costs will continue to go up as health care costs go up, adding 1 trillion to the government books over 10 years (is that number discounted to present value by the CBO or not?) is maybe 1-2% of GDP, and obviously a good value if it removes 15-20% of the population from being uninsured.

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