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Argument: Public insurance delivers same quality insurance at a lower price

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Robert Creamer. "Three Reasons Why a Strong Public Option is Likely to be Part of Health Insurance Reform". Huffington Post. August 18, 2009: "the notion of a public health insurance plan makes private health insurers apoplectic. The reason is simple: public health insurance plans can deliver the same health insurance coverage for our citizens for a lot less money. That fact is implicitly recognized by Republican members of the Senate who charged last week that a public health insurance plan would be 'unfair competition' to private insurers and feared it would ultimately put them out of business."


Jacob Hacker. "The case for public plan". The Institute for America's Future: "COST-CONTROL ADVANTAGES OF PUBLIC INSURANCE It is often assumed that private health plans are much more efficient than public health insurance. Yet a range of studies demonstrate that public insurance is able to provide a given level of benefits for less than they would cost through private insurance. Lower administrative costs and the ability to bargain for lower service and drug prices chiefly explain this advantage, as does the obvious lack of a profit margin in public programs. These features of public insurance not only allow it to offer the same coverage for less than private plans. They also, the evidence suggests, allow it to better restrain the increase in costs over time while preserving inclusive coverage. The remainder of this section focuses on the relative performance of Medicare and private health insurance in controlling costs. The Medicare program is under financial strain and has evident flaws that require correction, but it has performed far better relative to private health insurance than conventional wisdom suggests. And, as the next section of this brief discusses, a new public plan modeled on Medicare could do even better."

[...] Long-Term Cost Control: The evidence strongly indicates that a public plan can provide coverage less expensively than private insurance without impairing access or quality. Yet the greatest potential cost-control advantage of a public plan is its ability to restrain the rate of increase of costs over time—the key to maintaining good coverage without excessively burdening public and private budgets.

Although you would not know it from the debate over Medicare’s finances, Medicare has become increasingly effective at restraining the “excess growth” of spending—that is, per capita cost growth in excess of overall economic growth (accounting for population aging).45 Excess cost growth is a critical measure of the sustainability of any health plan, because it shows how quickly spending will rise as a share of personal and business budgets over time. A recent study that examined excess growth in spending on Medicare services between 1975 and 2005 found that the annual rate of excess growth fell from 5.6 percent during 1975-1983, to 2.1 percent during 1983-1997, to 0.5 percent during 1997-2005.46 Put another way, since Medicare payment controls were put in place in the early 1980s, Medicare spending has grown much more slowly than in the past—and in the most recent period (1997 to 2005), it grew only slightly faster than the economy overall, adjusting for population aging.

It is not possible using these data to compare Medicare excess growth directly with private insurance excess growth. However, a rough comparison is provided by contrasting excess spending growth among the nonelderly, most of whom are covered by private insurance, with excess cost growth among the elderly, 97 percent of whom are covered by Medicare. As Figure 1 shows, excess cost growth for the nonelderly was 3.4 percent between 1996 and 2004. That is, spending grew 3.4 percentage points faster than the economy. The comparable figure for the elderly—again, virtually all of whom are covered by Medicare—was 0.3 percent.47

A more direct comparison is provided by examining Medicare and private insurance spending for comparable benefits in recent decades.48 As Figure 2 shows, private plans’ spending per enrollee has grown substantially faster than Medicare spending per enrollee, especially in the last decade or so. Private insurance outlays per enrollee grew an average of 7.6 percent a year between 1983 and 2006, compared with 5.9 percent growth in per enrollee spending under Medicare—a 22 percent difference. (1983 was the year in which Medicare’s prospective payment system for hospitals was implemented; 2006 is the last currently available data year.) The gap is even bigger in recent years. Between 1997 (when the Balanced Budget Act of 1997 further constrained Medicare spending) and 2006, private health insurance spending per enrollee grew at an annual rate of 7.3 percent, compared with an annual growth rate of 4.6 percent under Medicare—a full 37 percent difference. As these comparisons indicate, not only has Medicare more successfully restrained the rate of increase of per enrollee spending, the rate of growth is also on a steeper downward trajectory under Medicare than under private insurance.

The Federal Employees Health Benefits Program has frequently been invoked as a model for national reform, and indeed it provides one template for a national insurance exchange offering competing private plans. It is not, however, a model of cost restraint when compared with Medicare. As Figure 3 shows, FEHBP’s annual growth rate of per enrollee spending averaged 7.3 percent from 1985 to 2002 (the most recent currently available data year) compared with 5.8 percent for Medicare.49 Indeed, the growth rate for FEHBP is virtually identical to that for private health insurance over this period (private health insurance grew 0.1 percent faster on an annual basis between 1985 and 2002.) This suggests that simply replicating FEHBP on a broader scale—without public plan choice—would be unlikely to provide the long-term cost restraint essential for successful reform.

A similar story is told by foreign experience. Other rich nations all rely on public or quasi-public insurance more than the United States does. (They do not, however, all rely on a single public insurer, and many have public and private insurance operating side by side.) And taken as a whole these nations not only spend much less on health care as a share of their economy than we do; they have seen their health costs slow dramatically in recent decades, while U.S. costs have continued to grow much faster than the economy.

Looking at the longstanding members of the Organization for Economic Cooperation and Development, the average excess rate of per capita spending growth between 1985 and 2002 was around one half of 1 percent for nations other than the United States—more or less the recent Medicare experience. Over the same period, per capita medical spending in the United States grew more than 2 percentage points faster than the economy.50 If U.S. spending had grown at the rate of spending growth in the rest of the OECD, health care would have consumed 11 percent of our economy in 2002, as opposed to 14.6 percent—a dollar difference of $436 billion greater than what the federal government spent on Medicare and Medicaid that year.5"

An Illustrative Example: Health Care for America. The effect of the administrative and payment savings of public insurance can be seen in the Lewin Group estimates of my “Health Care for America” plan. The Lewin Group estimated that, thanks to public plan choice, the proposal would achieve sufficient one-time savings to cover the expense of the increased utilization caused by broadening coverage for the uninsured and those without adequate coverage. Even more striking, the proposal would result in $1 trillion in national savings over ten years.

The clearest evidence of the savings produced by the public plan is its premiums, which are estimated to be about 23 percent lower than comparable private insurance for the same set of benefits for the same population.52 These savings are principally due to the two unique features of a public plan already highlighted: its simplified administrative structure, and its ability to bargain for better rates. The Lewin Group estimates that the savings would amount to nearly $1,000 per year, with average enrollee costs in the public plan totaling “$3,250 compared to $4,230 under a private insurance product in 2007.”53 Similar results are reported by the Lewin Group in its analysis of the Commonwealth Fund’s “Building Blocks” proposal for reform, which also includes a public plan option. Premiums for the public plan in the Commonwealth proposal “represent significant savings—more than 30 percent below average employer premiums.”54

Again, a new public plan could do much more than Medicare currently does to ensure that bargaining for better prices did not negatively affect access to providers or impair the quality of care. But the need to improve Medicare should not blind us to the progress that the program has made in restraining costs while maintaining provider participation and patient satisfaction. Nor should the necessity of reforms in Medicare be seen as an argument against public plan choice. In fact, a new national public plan available to the nonelderly could spearhead quality-improvement initiatives in both Medicare and the new plan. Such quality enhancements—and the unique role that a new public plan could play in advancing them—is the subject of the next section of this brief."


John Holahan and Linda Blumberg. "Is the Public Plan Option a Necessary Part of Health Reform?" Urban Institute: "There are at least two strong arguments for a competing public plan. The first reason is that there is a strong need for cost containment both to lower the growth in health care costs for all Americans and to lower the cost of providing government subsidies for the purchase of insurance to lower-income people."

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