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Should We Finesse One Of Reform's Thorniest Issues?

Harold Pollack is a public health policy researcher at the University of Chicago's School of Social Service Administration, where he is faculty chair of the Center for Health Administration Studies. He is a regular contributor to The Treatment. 

As the 2009 health reform debate heats up, the proposed public healthcare plan has become the main fault-line among center-left policy wonks, all of whom favor health reform but who don't always agree about about what reform really should be. Among the many components of candidate Obama's proposed healthcare plan, the public plan is the one most likely to be thrown under the bus in negotiations seeking a final bill. Many centrists are tepid about the costs and the complexity of the public plan; while many progressives see the public plan as a centerpiece of health reform.

Some economists view the public plan as too costly. They believe the plan would become the payer of choice for high-cost patients--and that its political economy would encourage expansive benefits and excessive cost growth. Insurers and providers contend that the public plan would enjoy unfair advantages over private plans, in its influence on public regulators, and most importantly, in its ability to wield excessive bargaining power over providers through its connection with the Medicare program. Some simply worry that the public plan provides an overly comfortable path to a single-payer system.

On the merits, I'm not convinced by centrist critiques of the public plan. On the politics, though, I'm tempted to take a more transactional view. Progressives just may not have the votes to push this through, however much we might wish we did. Thus two questions: Should we be prepared to compromise, and what should we be prepared to give up?

Len Nichols and John Bertko present one compromise position, in a recent New America Foundation paper, aptly titled "A Modest Proposal for a Competing Public Health Plan." Nichols is Director of the New America Foundation's Health Policy Program and one of the leading center-left experts on health reform. So this paper deserves careful attention--both on its substantive merits and as a measure of what some policy wonks are thinking inside and outside the Obama administration.

Nichols and Bertko accept many key provisions of the Administration's approach. In reforming insurance markets, these include: protections for individuals with preexisting conditions, a minimum benefit package, coverage subsidies for low-income consumers, risk-adjustment and reinsurance, having some form of National Insurance Exchange to supervise the whole thing, and perhaps a requirement that individuals purchase coverage.

They further suggest: "Some analysts, including the authors, think that a market comprised exclusively of private plans can achieve satisfactory performance with these reforms." This is a familiar vision to those who have followed the Massachusetts reforms. Although I greatly admire the Massachusetts efforts, a national program should do more. For reasons enumerated by Jacob Hacker and then debated by Jonathan and Diane, a public plan remains essential.

Be that as it may, Nichols and Bertko present a useful blueprint of what a public plan might look like that genuinely "levels the playing field" in competing with private plans. Many of their points would be accepted by even strong advocates of a public plan. The public plan should not enjoy special regulatory advantages. It must be actuarially sound (presumably in some risk-adjusted sense if it attracts the sickest consumers) and not receive special public subsidies for the same classes of patients. It should depart from key specifics of the Medicare program. Nichols and Bertko usefully summarize the experience of state employee health plans that include coexisting public and private plans.

The key point of contention is the following: "The public plan cannot leverage Medicare (or any other public program) to force providers to participate. For example, the public plan cannot require providers to serve public plan patients as a condition of participating in the Medicare program."

They describe their differences with others--say, for example, me--with admirable concision: "The disagreement over the potential uses of the public plan to rein in system costs could not be more profound. Our vision would not use the public plan's potential market power over provider payment."

In my view, the public plan's bargaining power over providers is a feature rather than a bug. If insurers can't match that, that's a strike against private coverage rather than an argument against the public plan. Sure, cost control through government monopsony raises genuine concerns. So does every other cost control measure in the real world. Per dollar of reduced spending, I wager that the resulting distortions would be less burdensome, less intrusive, and more inefficient than those likely to result from private actors cutting costs in other ways.

Yet the ultimate merits may be beside the point. Nichols and Bertko's constrained public plan would have weaker tools to control costs, but it would still provide many important benefits to patients and to the entire healthcare system. It would provide a backstop for chronically-ill people who feel badly-served by private coverage. It would provide a benchmark competitor for private plans. It would provide an organizational structure for key health system innovations.

Most important, it might actually exist, which makes it far superior to some excellent alternative that dies in Congress for lack of a half-dozen critical votes. Moreover, health reform won't end with the passage of any single bill. Congress could always step in and fix the program later. They will probably have to, if as I fully expect, this self-constrained public plan structure proves too weak for effective cost control.

Medicare Part D provides a useful guide. On the technical merits, the legislation which created the Medicare prescription drug benefit was terrible. In a blatant giveaway to big Pharma, Medicare was barred from negotiating reasonable deals for itself and its covered population. The program spent huge sums while failing to protect individuals against catastrophic medical expenses. Provisions such as the "donut hole" made no sense in terms of established insurance principles. In a longer view, however, this benefit was sorely needed. Its defects can be remedied. Indeed the policy itself created strong pressures to do exactly that, for instance to cut public expenditures through harder bargains with drug makers.

A similar process would likely take hold were Congress to enact a public plan. If medical costs continue to rise, every public payer will bargain more aggressively on services and on price. Political bargains struck today can buy time for providers and private insurers. They cannot halt this basic process or bind a fiscally-desperate future Congress from unpacking the most powerful tools close at-hand.

Nichols and Bertko's "Modest proposal" is not my favorite policy. And it's not without its political and policy dangers. Their preferred public plan will cost more than it otherwise would, and may thus attract scorn from the Congressional Budget Office. Absent hard bargaining over price, the public sector may turn to more annoying, less powerful cost containment measures that could undermine public support. Of more immediate relevance, there is no guarantee that insurers or others who oppose an expansive public plan would sign on to anything less. They understand the logic of incrementalism as well as I do.

Still, if that's what it takes to get this deal done, I guess I am for it. 

--Harold Pollack