Should the Public Plan Option Use Medicare Rates?

by Tim Foley

categories: Doctors and Nurses, Obama and Congress, Public Plan

Published April 15, 2009 @ 09:41PM PT

“You have to sort of get on the same page of what a pubic plan is when you’re talking about it. It’s been interesting to talk to people who say, ‘Oh, I don’t like the idea of a public plan’ —when you actually start talking to them about what it might look like, you realize you’re talking about two different things.”   And if anyone would be familiar with this experience, it would be White House Office of Health Reform chief Nancy-Ann DeParle, who said these words at a roundtable this morning.  For example, there’s much consternation from opponents of the public plan that it would have an unfair advantage by using the government-set rates for Medicare.  But Jacob Hacker, the originator of the idea, never said it should use Medicare rates.  Nor did President Obama.  Nor did Sen. Baucus.  Nor did Ms. DeParle.  Know why?  Because it’s not a great idea to begin with.

You hear this objection to the public plan all the time – that because the government sets prices for Medicare and can change them at any time unilaterally and private insurance cannot, insurers won’t be able to compete, and physicians, health care providers and hospitals will be stuck with lower reimbursement rates, causing them financial grief.  We also hear that because Medicare and Medicaid reimburse lower than what a hospital or doctor really needs for the service, there’s a hidden “cost shift” in which they charge private insurance more to make up for what they're not being compensated by the government.  The flip side of this poverty argument is that since private insurance is trying to market itself as having a robust network of providers, it drives their rates of compensation up in order to get more providers to sign up – which all works out because the larger their network, the more marketable plans are to customers.  Nevertheless, there’s much snide commentary from the Wall Street Journal editorial board about how government always gets the price wrong compared to the private industry, and how government will cut sky-rocketing costs by arbitrarily cutting reimbursement and rationing care (even if they promise they won't), and the seas will fill with blood, and fire will rain down from the heavens, and Glen Beck will cry again, etc. etc.

Except this is has nothing to do with the public plan option as it’s been discussed by those in a position to make it happen.  Jacob Hacker’s conception of the public plan is that it would negotiate rates with providers, like any other plan and unlike Medicare, creating dynamic competitive tension in which the public option and private insurance are checks against each other and keep each other honest.  During the campaign, Obama said not one word about how the public option would set rates – just that people without insurance should have the choice of a public plan or a choice of affordable, comprehensive private plans.  Sen. Baucus’ description of the public plan reimbursement rates reads like stereo instructions:  “Rates paid to health care providers by this option would be determined by balancing the goals of increasing competition and ensuring access for patients to high-quality health care.”  Buh?  Ms. DeParle this morning went out of her way to suggest there are many options available:  “So [these objections have] to do with how you price the providers if there’s a public plan. Well if that’s an issue, there are various ways of doing that. You don’t have to use Medicare prices, you can use something else.”

There are actually several progressive reasons not to use Medicare reimbursement rates.   First of all, as we’ve discussed here at length, the fee-for-service payment model that Medicare and most U.S. medicine operates on is itself in need of reform, particularly to better compensate primary and preventative care.  To improve quality, we’ll need flexibility to incorporate better payment systems including coordinated care, chronic disease management, the medical home and possibly even some type of extra payment based on outcomes – all programs that can be implemented through negotiations with various provider groups, but aren’t already part of Medicare pricing.  To improve quality as well as save costs long-term, we need to correct the long-term Medicare bias towards hospitalization, institutionalization and long-term care, and against primary care, preventative care and long-term home care.  These are reforms that need to happen in Medicare to help improve its already solid delivery of care.  It’s going to be hard enough with 45 million people in Medicare (good luck, Gov. Sebelius!)  It’s going to be nearly impossible if you add on top of that 100 million Americans in the public plan.  And let’s not forget that some of the payment biases in Medicare is based on its patient population – older Americans who are more likely to use care, significantly more likely to already have one or more chronic diseases, and much less likely to be able to take full advantage of wellness programs, screenings and prevention.  That won’t be the patient base for the public plan, which will instead include Americans of all ages.  What we value by means of payment will necessarily be different between the two systems.

Forget the politics of the public option – on a policy basis, it just doesn’t make much sense to import the Medicare rates.  As conceived by Hacker, the public plan doesn’t need Medicare rates to control costs – it’ll do that through having a fraction of the administrative costs of private insurance, a much larger customer base to negotiate solid purchasing power, and smart investments in cost-saving prevention, Health IT, and nimbly experimenting with newer, smarter models of compensating providers.  The same Lewin Group analysis that said a public plan with Medicare rates and expanded eligibility would lead to substantial losses of revenue for doctors and hospitals also says that a public plan without those rates would yield a barely-perceptible 1% loss of revenue for physicians and actually slightly increase compensation for hospitals.  On so many levels, it makes good policy sense for the public plan to determine its own rates through negotiation.

The fact that it steals the thunder from the main political objection of the forces of the status quo is just the icing on the cake.

(Photo credit:  Congressman George Miller on Flickr.)