The Progressive Budget and The Public Option

May 6, 2011 § 1 Comment

Over the last few weeks I have weighed the advantages and disadvantages of the health care proposals contained in the budget proposals of Rep. Paul Ryan (R-WI) and President Obama. I concluded that President Obama’s health care proposal was superior, not only because it provided a more realistic target for health care spending growth, but because it provided concrete proposals to reach these targets. In contrast, the Ryan plan provides no credible mechanism to reduce health care spending, instead reducing government spending by pushing increasing costs onto Medicare and Medicaid beneficiaries.

Lost amid this debate however, is the fact that the President’s budget is, at best, a center-left plan, and that many Democrats would prefer a more robust proposal. The Progressive Caucus’ budget is such a proposal – with its more equitable mix of tax increases and spending cuts – and it seeks to restrain health care spending in many of the same ways as Obama’s budget, with one important difference: the creation of a public option.

The progressive plan envisions the creation of a government run health insurance plan which could compete with private plans on the individual market in order to hold down costs. Their proposal would utilize the health insurance exchanges created under last year’s health care reform bill to allow consumers buying insurance on the individual market to compare the benefits and cost of the government run plan side by side with private plans. This approach would not only reduce costs, it would create a route for health care delivery innovation and provide a benchmark against which private plans could be measured.

The public option reduces costs in a number of ways. First, it can drastically reduce administrative overhead. Medicare’s overheard costs are about 3% of total expenses – drastically lower than the 40% share consumed by administrative costs on the individual insurance market. While other sectors of the insurance market do better on administrative costs – the small group market spends around 25% – none approach the efficiency of the government plan. Of course, there is no guarantee that a newly created public plan will do as well as Medicare, but proposals to create a public plan by allowing those under 65 to buy into Medicare could ameliorate this concern and, in any case, reducing administrative costs to 5 or 10 percent in the individual insurance market would provide significant cost gains.

The other major route available to the government to hold down costs is the utilization of its bargaining power to negotiate lower prices for drugs and services. Medicare currently utilizes this leverage to negotiate compensation rates for physicians that are 81% of those paid by private insurance companies. These cost savings could be passed on to consumers, making the public plan more competitive . However, Medicare cannot currently negotiate for drug prices in the same way that private insurance companies can, but the Progressive budget, as well as Obama’s plan, would do away with this restriction. Presumably, any newly created public plan would also be free of this restriction.

The creation of a public plan could also result in benefits not related to cost. The Veterans Health Administration has pioneered the use of new quality measures, increased information technology usage and research-based coverage decisions among them. Medicare, too, has led the way in quality improvements – medicare patients report greater access to physicians for routine care, for example – and innovations in both programs have filtered into the private market.

By doing all of these things, the public option will act as a standard against which we can measure private insurance. By holding down costs and competing in an open market, the public option will force private insurers to follow suit. Similarly, improvements in the delivery system and in quality of care will force private insurers to provide the same level of care or else lose customers. Thus, the public option will not only help to reduce the amount of money the government spends on health care, it will reduce costs in the market as a whole. When combined with the provisions in last year’s health care reform bill, and the additional reforms in President Obama’s budget, the Progressive plan for reducing the nation’s health care burden is a credible path forward – one that would go above and beyond any other proposals in reducing costs, increasing quality, and expanding access.

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§ One Response to The Progressive Budget and The Public Option

  • George Newell, Sr. says:

    After reading your comments on health care, I can only say that I agree entirely. But I also realize that the public option seems doomed, at least in the near future as the country moves toward presidential elections. But I have been wondering just why the U.S. seems so reluctant to support the public option. Why do so many American seem so afraid of ideas grounded in the notion of sharing the “common wealth?” One bit of insight is offered by Bellah et al. (1985) in HABITS OF THE HEART: Individualism and Commitment. in American Life. Bellah’s group interviewed Americans from various social classes about what values are best for the country–their findings are reflected in teh book title.

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