Magazine article The American Prospect

Perils of the Public Plan

Magazine article The American Prospect

Perils of the Public Plan

Article excerpt

IN THE CURRENT BATTLE OVER HEALTH REFORM, progressives may have set themselves up for trouble by pinning all their hopes on the creation of a government-run insurance plan. A public plan is not a bad idea--indeed, it could be a critical element in successful reform--but it could also easily turn out to serve the opposite purposes from the ones progressives intend.

All the proposals receiving serious consideration in Congress allow employers to continue to insure their workers and dependents directly. They also call for new "insurance exchanges" as an alternative means for individuals and employee groups to purchase coverage. If there is a new government-run plan, it would be one of the options in those exchanges.

The great danger is that the public plan could end up with a high-cost population in a system that fails to compensate adequately for those risks. Private insurers make money today in large part by avoiding people with high medical costs, and in a reformed system they'd love a public plan where they could dump the sick. Although the proposals before Congress aim to limit insurers' incentives to skim off the best risks, the measures are unlikely to eliminate those incentives entirely.

Entry into the public plan for the eligible employed would be a two-stage process. First, employers would choose between paying into the exchange and buying insurance directly to cover their workers. Unless the exchange is such a good deal that nearly all employers take it, firms with a young, healthy work force would tend to buy insurance on their own, while those with higher-cost employees would go into the exchange's pool. As a result, the pool would suffer "adverse selection"--it would get stuck with a higher-risk population.

Second, within the exchange, the government-run plan would compete against private insurers, yet it would likely abstain from the marketing strategies used by private plans to avoid high-risk enrollees. This double jeopardy of adverse selection could then more than nullify the advantage the public plan derives from its lower overhead (as a result of less money going for salaries, profits, and marketing).

How should a public plan work? According to one model, the public plan would resemble traditional Medicare and have lower costs than private insurers by dint of its lower overhead and greater purchasing leverage, which would enable it to pay doctors and hospitals less. …

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