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Argument: Public option is needed because regulating insurers is insufficient

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Jacob Hacker. "The case for public plan". The Institute for America's Future: "Why Regulation of Private Insurance is Not Enough. As this discussion suggests, some of the shortcomings of private plans, such as their strong incentive to select healthier enrollees, can be partially addressed through regulations and new payment policies, including the twin requirements of open enrollment and community rating and measures to risk-adjust payments to plans so their incentive to attract less costly patients is reduced. Nonetheless, even with such regulations and payment reforms, a public plan competing with private plans is essential.

First, as already discussed, the Medicare program outperforms private insurance on costs and access even when compared with private plans that are regulated to ensure broad coverage, such as plans in FEHBP and Medicare Advantage. Medicare Advantage not only exercises substantial regulatory authority over private plans, but also has invested increasing resources in risk adjustment.73 Yet while Medicare Advantage plans have delivered broader services and diversity of plan offerings, they have certainly not delivered lower costs. Instead, they have resulted in the federal government spending more on Medicare than it would have otherwise—excess costs are projected to total nearly $150 billion between 2009 and 2017.74 Although these costs are principally the fault of a flawed method for paying private plans (one that should not be emulated in a new national pool), they suggest that simply regulating or adjusting payments to private plans to reduce risk selection will not guarantee that private plans focus on value.

Second, as emphasized throughout this brief, a competing public plan is needed to set a benchmark for private plans even in the context of private insurance regulations and risk adjustment—neither of which can be expected to fully change the incentives of private plans.75 Just as our nation’s Founders wanted ambition to check ambition to ensure that the “parchment barriers” of the Constitution were adhered to, public plan choice is a source of “checks and balances” designed to ensure that private plans have to uphold high standards of performance."

Frank Pasquale. "Making the Case for the Public Plan, Part I. The Difficulty of Private Health Insurance Regulation." Balinization blog. June 8, 2009: "as the chances for reform increase, leading private insurers are beginning to soften their approach in order to argue that a public plan is not necessary. They are promising to accept "guaranteed issue" coverage, "with no pre-existing condition exclusions." They have even promoted plans for "risk adjustment," which "spreads costs for the highest-risk individuals." Would regulation like that preclude the need for a public option?

I don't think so, because there are so many other ways for insurance companies to drive away the sickest customers. As noted in the chart, subtler selection can include refusal to respond to needs of high cost patients in order to drive them away, and attracting a disproportionate share of low‐risk individuals. For example, a plan might decide to increase coverage of gyms and cosmetic procedures (to attract fit customers) and devise complex forms to be filled out monthly in order for a patient to get oxygen or insulin (to repel customers with congestive heart failure or diabetes). These are not merely hypothetical concerns. The Netherlands is often held up as a model for US reform because of recent moves there to make their traditionally solidaristic system more market-oriented. But risk selection threatens to unravel the Dutch "middle ground:"

Congress or HHS or state insurance commissioners could try to outlaw or restrict risk selection practices one by one. But as Pollitz has noted, as of 1997, the "US Department of Labor had resources to review each employer-sponsored group health plan under its jurisdiction once every 300 years." The Bush years probably did not significantly address that shortage. Moreover, "state insurance department staff levels declined 11% in 2007 while premium volume increased 12%." The personnel simply aren't there, and when they are, they are as likely as not to be outgunned by private sector attorneys, lobbyists, and experts-for-hire. The right way to discipline private insurers is to have competition from a public option--not to allow them to continue a risk-selection race-to-the-bottom by deflecting regulation.

I have taught health care regulation at both Seton Hall and Yale Law Schools, and my students have always been dismayed by the cat-and-mouse games that regulators and insurers play to control (and evade control of) risk selection. I have very little faith that DOL, HHS, or their state equivalents (who are also often tasked with regulating life and auto insurance and banks) can really make private insurers accountable, no matter how ingeniously the insurance exchanges are designed.

So that's a case for the public plan largely based on the problems with private insurance regulation."

John Holahan and Linda Blumberg. "Is the Public Plan Option a Necessary Part of Health Reform?" Urban Institute: "private insurers have denied claims and delayed payments to individuals with high health care needs as a way to control costs. To achieve high rates of voluntary participation in insurance coverage and to create a sense that a mandate to obtain coverage is fair, all individuals, regardless of health status, should have an insurance option with which they feel comfortable. The public plan would play that role for a significant segment of the population. While reformed insurance markets will limit the current ability of private insurers to avoid the sick, in practice, oversight will not be perfect and thus regulations will not be perfectly enforced."

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