The Public Option Contradiction

Published October 1, 2009

Kaiser Health News

President Barack Obama continues to send conflicting signals on standing up a new, government-run insurance option for working age Americans. The president has said repeatedly that he would prefer to see the so-called “public option” included in the health-care bills under consideration in the House and Senate — but he also said it is not a deal breaker if the public option is left on the cutting room floor. Not exactly a statement of firm conviction.

Still, even this lukewarm endorsement of another government-run insurance plan is hard to square with the president's other statements and positions on health care reform.

From the moment he took office in January, the president has stressed the urgent need to tackle rapid health care cost growth. He has promised to “bend the cost curve” with better information, data, and research. He has praised the kind of organized systems of care pioneered by the Mayo and Cleveland Clinics as well as other, heavily integrated models around the country. And he has bemoaned the regional differences in Medicare spending that were highlighted in Atul Gawande's New Yorker article, “The Cost Conundrum.”

In other words, the president has joined the chorus of those who say the solution to rapidly rising costs is “delivery system reform.” That is, real change in how hospitals and physicians are organized and the processes they employ when taking care of patients.

But pursuing sensible change requires a clear understanding of what's driving the status quo. What explains today's health care arrangements?

There are a number of factors. Medical practice has developed differently in different communities based on local cultural considerations. In some markets, certain large employers have played outsized roles in shaping the medical landscape. And certainly societal trends regarding chronic diseases have forced physicians and hospitals to adapt to the growing numbers of patients who need ongoing treatment and care.

But the most important explanation for hospital and physician organizational behavior is Medicare — more specifically the financial incentives embedded in Medicare's traditional fee-for-service program.

In most markets, Medicare is the largest single payer for medical services. Few hospitals could survive without the program's revenue, and even most physician offices are dependent on a steady stream of government payments for claims filed on behalf of elderly patients.

Gawande's New Yorker article zeroed in on the problem of excessive use of diagnostic tests and surgical procedures in McAllen, Texas. But who paid for all of these services? Medicare is the largest, unmanaged fee-for-service insurance arrangement in the country. If a beneficiary sees a licensed health-care practitioner and a legitimate medical service is provided, payment is made by Medicare, with virtually no questions asked. The vast majority of Medicare fee-for-service enrollees pay nothing more when they use more services because they also have secondary insurance, and the only way physicians and others can boost their incomes is by billing for more care.

It is therefore entirely predictable that the volume of services used by Medicare enrollees will increase rapidly every year, which is exactly what has occurred for four decades.

Moreover, Medicare's payment systems push against the kind of organized systems of care that the president says he wants to see in every community. With fee-for-service, hospitals, physician offices, labs, home health agencies, nursing homes and many others get paid directly by the program. There is no need to form explicit, organizational partnerships with anyone else to boost revenue or garner greater market share. In effect, the nation's largest existing “public option” is underwriting the fragmented, disorganized, and costly status quo that Obama says he wants to change.

It is in this context that many Democrats are now pushing for the creation of a “public option” for working age Americans, with some members, especially in the House, pushing to explicitly reference Medicare's payment regulations as a basis for the new program's promised coverage.

If they were to succeed in this effort, an even larger segment of the medical marketplace would be subject to the incentives embedded in current Medicare, which means more emphasis on volume, instead of quality and value, and the proliferation of independent, disconnected suppliers of medical services.

Senate Finance Committee Chairman Max Baucus believes his bill lays the foundation for running Medicare fee-for-service differently in the future than in the past. Among other things, the Baucus plan would establish accountable care organizations which are aimed at rewarding physicians and hospitals for holding spending below certain targets, much like a capitation payment would. Baucus also wants to create a Medicare Commission with authority to continuously re-write provider payment rules. And his version of the “public option” — not-for-profit health-care cooperatives — wouldn't rely on Medicare's current fee-for-service payment structure, at least initially.

But it's hard to have much confidence in this supposed new direction when the Baucus bill also relies heavily on the usual assortment of across-the-board payment rate reductions to hit budget targets. Despite all of the talk of delivery system reform and paying for value, the Baucus bill would implement arbitrary cuts without regard to what they will mean for patient care. It is simply much easier for politicians to support these kinds of price controls than to sustain a hypothetical Medicare “preferred network” which steers patients away from some hospitals and physician groups.

A fundamental question in the health care debate is this: what process has the best chance of producing continuous improvement in the efficiency and value of patient care?

Obama and many Democrats believe new and improved versions of governmental control can do the job, despite nearly a half century of history that indicates otherwise. A better bet is a functioning marketplace in which cost-conscious consumers drive the allocation of resources. The government, as with the Medicare prescription drug benefit, must provide important oversight. But the innovation and cost-cutting ideas needs to come from those supplying the services, not bureaucrats.

James C. Capretta is a Fellow at the Ethics and Public Policy Center. He served as an associate director at the White House Office of Management and Budget from 2001 to 2004.

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