Here's the thing. I don't trust private interests at this point based on what we've learned during this debate about health care in our country.

So while I prefer a single payer health care system because I believe it is best overall for our economy and our people and I will continue to support moving to a single payer system, the public option is much more likely to pass.

At this point my main sticking point is that if congress cannot actually give us a public option for whatever reason, 'do not' include a mandate that I must purchase health care insurance in the bill. To me that would be the biggest failure and worst insult.

The right gets reassured that they can keep their 'private insurance' and I want reassurance that I can choose a public option. That seems fair enough to me.

Why isn't there a mandate that BIG insurance can't screw their policy holders? I could go into detail about a co-worker, mother of 3 school age kids, horrific family history, a physician who ordered a test, and a BIG insurance company that denies it. Want to turn a productive employee into a complete basket case? Have them make an insurance claim, terrified that they are going to die and have BIG insurance tell them to go to hell, the more efficiently the better.

Fred is a big guy on costs, but not so much on the human side of the cost cuts.

Hi Fred,

Outstanding post and outstanding questions. Here are my preliminary reactions, with my chief argument for the public option saved up until the end:

I agree that the chief sources of escalating costs in the US system are the providers and their suppliers, not the insurers. But the fact that insurance is only one source, but not the primary source, of runaway costs does not entail that applying competitive pressures to insurance companies is not the best way to achieve system-wide cost reductions. In our system, based as it is on employer-provided insurance and Medicare, end use consumers are not doing much of the shopping, comparing and decision-making in the health care market – they interact with the market for health through their insurers. The insurance industry is the primary node in the system where end-user demand meets the system. So that’s where we need to apply the competitive pressure.

While insurers do try to demand better and more cost-effective performance from the providers, it strikes me that the insurer-provider relationship right now is, if not actually collusion, at least overly comfortable. The market is in an equilibrium in which insurers and providers have a joint interest in maintaining dependent, low-information end customers, milking their cash cow together, and sticking the policy holder and her employer with the bill.

If we create an environment in which insurers begin to have significant trouble competing for customers because of the availability of a low-overhead, non-profit public alternative, more insurers will begin to see margins evaporate, and will face sink-or-swim pressures to start to push much more aggressively than they have been for cost reductions from the health care providers, who will in turn pass that pressure onto their suppliers.

I don’t believe that the other components of reform will be able to achieve significant cost reductions without the public option pressure. Even more importantly, the cost savings that are achieved might all end up going to fund the subsidies, the universality provisions and the high risk and pre-existing condition policy-holders that the insurers are now going to be required to insure. As you point out, items 1 through 8 on your list, though greatly needed and socially progressive, will all tend to make health care more expensive for those who are already covered. If we don’t want a political disaster on our hands, we need to start making headway on cost reduction.

I agree wholeheartedly with your claim that, “to reverse the unsustainable trajectory of high and rising costs within healthcare itself requires major restructuring to incentivize elimination of unnecessary services, and to reward quality rather than quantity of the services delivered.” You give an excellent summary of the potential impact of ACCs and minimum limits on insurer medical loss ratios. I would like to see more discussion of other reforms at the provider end of the industry: doctors’ compensation and the number of doctors available; diversification of treatment options, smaller-scale, lower-skill alternatives for smaller-scale medical problems, etc.

I would point out that if you are setting caps on profits and administrative costs, you are in effect requiring private firms to behave more like public firms. The same is true of non-profit co-ops with added regulations on how co-ops must be treated by providers. A step in the right direction, yes. But I still think we need the public option, for reasons I will come back to momentarily.

My sense is that the insurance companies are counting on mandates and subsidies to make them even richer as a result of this reform. They seem entirely too comfortable with the centrist options, which should make us all suspicious of those options. The exchange will provide a more effective competitive marketplace, but I doubt it will not be enough to achieve the deep savings we need. Unless we really start to put the squeeze on the insurers, costs will continue to climb, and health reform – while it will help meet the goal of universal and non-discriminatory coverage - will do nothing significant to arrest the broad social-economic problem of runaway health expenditures.

I suspect that shortly after the plan passes, with a minimal public plan included, it will become clear that more cost savings need to be achieved, and fairly rapidly. This will lead in a relatively short time to political pressure to expand eligibility for the public plan, and for the public plan to take a more active and coercive role in negotiating and establishing industry-wide costs and payment standards.

This leads to what is for me the central argument for the public option: its ability to bring increasing pressure on the private market from the public sector over time. Once the public option is in place, even if relatively few are eligible initially and the competitive pressure is minimal, the option can be adjusted and tweaked through only modest and lower-profile legislative action. This is an opportunity progressives should not pass up. It will be orders of magnitude easier to improve or expand a public option that already exists than to create one later should it prove necessary, and if a public option has been defeated in this session. We can’t count on the large congressional majorities Democrats now possess lasting for a long time. We need to get our foot in the door now. Establishing a public option puts a foundational mechanism in place that we can build on.

This need not lead to single payer down the road. But it will send an increasingly strong market signal to the private sector component of the industry: do better; provide more quality at lower prices; continually prove to the public satisfaction the much-ballyhood worth of the private sector – or else be driven out of the market by more assertive government intervention. The public option will provide the big stick we need, lying permanently at hand, to push and prod on behalf of the common good and public interest in the health care marketplace.

Some questions I would have about the public option are:
1. What services will be included in the public option plans?
2. How will the public option plans negotiate payment prices with the providers?
3. How will secondary insurance plans interact with the public option plans to pay for services or amounts not covered by the public option plan?
4. What will be left for the patient to pay for out of pocket?
5. What will be the premiums for the public option plan?
6. What will be the reduction in premiums charged for secondary private plans?

Therefore, it is difficult to say whether the public option plans are a desirable addition to reform or not.

Really good post Fred. I haven't read the bulk of the other comments, so forgive me if I'm covering ground that's all ready been covered. I may approach this in discreet packets rather than try to reply to your extensive post in one comment. The first thing that hit me was the Low profit margins of the private insurers. I've seen these figures, and don't dispute them. What I do dispute is that there aren't accounting 'tricks' being employed to keep those profit margins looking as low as they are. As in any business, this is a major function of any accounting department to reduce the companies tax liability. These are the kind of hidden wastes that presumably wouldn't factor into a public option that was operated as a non-profit. So that's my number one concern about not having a public option alongside which we can compare the for profit private sector, and I think this is probably the primary reason the insurance cos are interested in squelching the private option.

Without that measurement stick to compare to the private insurers, there's a kind of black box, inside which lies a considerable part of our healthcare costs to which we will be dependent on the honesty of these corporations. I do not hold them in particularly high regard in this area.

It looks like any public option that is created will be largely stillborn with regard to actively reducing our underlying healthcare costs. I say that because it looks like the legislature is not prepared to allow any public option to pay at or near medicare rates, upon which rests any economic analysis which I've seen's projection of the PO's ability to control underlying healthcare costs.

I agree with much of the rest of your blogs suppositions and assertions as to alternative methods of reigning in those underlying costs. I still believe that a public option can help set a meaningful baseline as to operating costs as described above, and hope that it is created as such. I also hope that such a public option is open to anyone who cares to participate in it, for if policyholders are held hostage to their existing coverage through their employment, any advantages the plan realizes will not place any competitive pressure on the private companies to control costs and rates with their captive pool of subscribers.

Great blog Fred! Thanks for getting this discussion back on track. I agree up to a point: it is more about health CARE costs rather than health INSURANCE costs. Many of the reforms in the bill are great at reducing insurance costs by clearing out the administrative costs that are unproductive and due to abusive practices that will be eliminated going forward. That said, of course a PO would help in having those new regulations enforced by providing a product in line with the intentions of the new rules, forcing private competitors to follow suit.

A couple of points on the provider cost issue:
1. I'd like to see you address Hacker's arguments about a strong PO's ability to reduce costs - not through delivery-systems reform as you discuss above - rather through a stronger Medicare-backed negotiating position. How much lower are the rates charged to Medicare? 20-30% lower than private plans? That's a lot of savings right there, even before the market starts innovating new delivery-systems.
2. Like you suggest, I don't see a comparable means of incentivizing such DS innovation without the competitive pressure of the PO. If the PO experiments with ACO-like structures, others will be forced to follow suit because otherwise they will not be able to compete on price. Without the PO, these ACO's will get scuttled just like the HMO's of the 90's through profit-incentivized abuses and/or bad Public Relations.
3. My main problem with not including the PO now - as a quid pro quo for the vastly increased subsidies and mandates - is that it will get harder, not easier, to introduce it later against hard industry opposition. Right now they are getting a lot of new money and new clients in exchange for pretty much no concessions on profits, pricing power or cost-controls (just abusive practices). Concentrated markets will stay concentrated - both on the insurer and the provider levels. The idea that we can make improvements down the road wielding only a stick and no carrot is unrealistic given the rising power of the industry's lobby in Washington.

BJ - thanks for your thoughtful comments, which I've copied here. I've responded to a few of them below in italics

I agree the Public Option (PO) does not address the abuses currently found in the insurance system which are independent of overall costs as well as the huge excesses in healthcare outside of the insurance system. People want the PO simply because they have some control over the government - elections. Whereas they have no control over private insurance industry if they have a dispute with services and payment for services. One can say the PO gives the public access to the board of directors instead of an unidentified customer service representative. In other words, the public has a say in matters related to their health insurance, coverage and payments for services received - peace of mind.

You're right, but proposed legislation would regulate the above - e.g., mandate basic services, prohibit recissions, and set a minimum percentage of premiums that must be spent on healthcare rather than overhead or profits.

In your section titled, OTHER PROPOSED REFORMS WITH SIGNICANT POTENTIAL IMPACT, I have a few items of interest to point out:

option 2. There can be no discriminatory rates for illness or pre-existing conditions, and only small differences for age.
Can you define small? When I turned 50, my private insurance rose from $300 a month to over $900 all because of age and nothing else.

HR3200 sets it at 2/1, but the Senate Finance Committee is said to be proposing 5/1 - too high in my view.

option 3. No insurer can withdraw coverage from an individual who pays the premiums.
Not everyone is floating in wealth,especially these days. Sometimes it's difficult to make ends meet and there's virtually no money - unemployed etc. Perhaps there needs to be a sliding window approach for people who fall behind in their payments. A method by which the insurer and inssuree work out a solutiom to forgo payments for a set period of time and when the insuree is able to restart making preimum payment, the arrears payments can be gradually added in for a 12 month period.

Good idea

option 7. All individuals will be insured (with waivers in exceptional circumstances or with tax penalties for refusing insurance).
This contradicts option 3. If everyone have to be insured, then insurance companies can't withdraw coverage.

No individuals can be refused coverage, but employers can drop group coverage. In that circumstance, individuals will then purchase insurance on the individual market.

I will agree that the PO doesn't address cost containment...it addresses public needs.

Here's the real meat of your discussion - how does one reverse the unsustainable trajectory of high and rising costs within healthcare and what major restructuring is necessary to incentivize elimination of unnecessary services, and to reward quality rather than quantity of the services delivered.

I do like the alternative delivery mechanisms you describe. The accountable care organizations (ACOs) set up to receive payments in exchange for providing necessary care as an integrated package rather than uncoordinated services from providers acting without reference to each other. This mechanism rewards good outcomes but penalizes unnecessary expenditures, and can thus reduce costs. But as you point out, long as the ACO is too small to attract many patients away from the established institutions, it benefits the insurers to cover patients these institutions serve rather than ACO patients, simply passing the extra costs on to subscribers. That's a keypoint!

While as you say, a growing ACO would provide formidable competition to the establishment and a major attraction to insurers, private insurers tend to respond to short term demands from investors and tht's nothing more than shoving a stick through the spokes of invention. So as hard as we try to minimize the insurance industry board of directors and shareholder from our private and personal medical care, they still have access. Starting to see why the PO is so important to many of the public? The legislation needs to be written so as to minimize an insurers ability to steer patients towards services that increases their bottom line at the expanse of the insuree. Let's say an individual has a sports injury and their doctor prescribes 30 days of physical therapy (PT). The patient should be given the option, given to them by their doctor, to select which PT clinic they would prefer to attend.That means there needs to be a list of all PT clincs, including the cost for the therapy. That also means there needs to be strict enforcement over these clincs to ensure the therapy services they offer meet specific medical standards - one isn't any better than another in the service provided. The only way there could be a price diferential would be for the facility and equipment - the better equipment and pleasant surrounds would have a greater cost. So it becomes a patient's exercise in selecting where to get the therapy - the doctor's role is minimized to providing the option as to where the patient will go for therapy.

I don't really disagree. However, as mentioned above, basic services that must be offered will be in the legislation. Beyond that, the idea is that competition, particularly on the proposed Insurance Exchange, will permit subscribers to choose which insurance plan provides the best service and the most choice after meeting the basic standards. It will be important for a feedback mechanism to emerge that lets patients report back on their experience as a guide to others. The PO would certainly help, but experience in other countries indicates that competition among private insurers, if the rules are strict, can do a reasonable job - e.g., The Netherlands, France, Switzerland.

Here' some food for thought. Here's a copy of a post to a blog at TPM on the subject.

What's lacking in all the discussion is compromise - each side willing to give a little ground to the other so that a meaningful legislative package can be created that services the needs of each without overstepping too much into territory the other side will not support. Take for example the ruckus over single payer/public option (SP/PO).
Many on the right side of the isle object to SP/PO simply because of the enormous costs it is thought to contain - who's going to pay for it is a common question asked by many. Well, there is a recent essay one can find in The Atlantic, How American Health Care Killed My Father by David Goldhill, that opens a door that many are not aware of.

Mr. Gold hill points out a simple fact people choose to ignore in this debate. Simply stated, employer-based health insurance, on average, costs more than $12,000 per family to a company providing health insurance benefits to its employees. Mr. Goldhill has experience running several companies and company divisions of various sizes during career, so he knows that employee raises, as well as entry-level hiring salaries, are tightly limited by what it costs companies to provide health-care benefits. And this is the hidden jewel ... the employer isn't paying for employee health care - you are. It comes out of your potential wage increase. So technically, employee health benefits are equilivant to a intangible, hidden salary that one cannot leverage.

If you're with me so far, then you should see the "were's the money going to come from" aspect of the debate ... you've already earned it. The problem now is how to get the best bang for the buck. Remember, that $12,000 benefit is a "packaged deal" between your company and the insurance company providing the benefit for a large group. If you were to contact the same insurer for a personal policy, the costs would be far greater than $12,000. So here's where the real debate should be. How does single individual/family get affordable health insurance that is reasonable in both cost and benefits.
The single payer/public option should be considered the same as Medicare. In fact, Josh Marshall at Talking Ponts Memo as suggested the government open Medicare to all. And if you think about it, it makes a lot of sense because the infrastructure necessary to startup a single payer/public option is already in place and fully accepted by the medical community.

As for the conservative community who has fears of runaway federal budgets and deficits if such a program were to be forced on everyone, perhaps a second option could be offered to ease their concerns. Here, Mr. Goldhill suggests health savings account—a vehicle where people would contribute a minimum percentage of income (think that $12,000 the company pays for your health benefits) as a pre-tax, subject to a floor and a cap in total dollar contributions. The income percentage required should rise over a working life, as wages and wealth typically do. His concept for these accounts would allow participants to withdraw money for any purpose, without penalty, once the funds exceed a ceiling established for each age, and at death any remaining money should be disbursed through inheritance. Our current methods of health-care funding create a “use it or lose it” imperative. This new approach would ensure that families put aside funds for future expenses, but would not force them to spend the funds only on health care. Unfortuntely, he doesn't go into much detail as to whom would be responsible for administering such an option ( it'll have to be worked out in Congress), but at the very least, it should satisfy the conservatives to a tee.

Now one must keep in mind neither plan would be enough to cover tramatic accident injuries and those complications as a result of old age. Again, Mr Goldhill suggest we consider catastrophic insurance with a threshold of $50,000 or more would be better. The real key in the use of this type of insurance would be to restrict the coverage to true catastrophes, where only a minority of us should ever be beneficiaries. Here's the life line to the insurance companies to keep them afloat. They could provide the additional insurance for activities where injuries can tax either health care option - skiing, bicycling, water sports, outdoors recreation and so forth.

Now I've robbed a lot from Mr. Goldhill's essay, but I did so in order to get people to sit back and really think about what options are available and how can everyone come out a winner on the issue. There's already money in the system to pay for it and everyone has earned it too so why not use it to the best advantage for everyone? And it may be cheaper for the business community too.There is plenty of room in the debate and both options could be employed simultaneously to satisfy the particular political leaning of the individual. Because if we don't, the cost of health care in America will be completely out of reach in a matter of a few years then the current coverage people are so happy with will be completely useless - you can't expect business to keep providing a benefit that cuts too deeply into their profit

Here's the url for the article : http://www.theatlantic.com/doc/200909/health-care

If you meld your concept of accountable care organizations (ACOs) with Mr. Goldhill's health savings account (HSA) you've got a damn good winning solution. I can see insurance for the critical care, ACO's for therapy, lab tests, MRI's, all dental work to include bridges, braces and implants and so forth, and HSA as a method for the public to put aside money expressly for medical services. Also note where Mr. Goldhill says where the money is for this. It won't cost the government a penny and all you do is redirect the money being spent by business towards a new model of health care that addresses the issues of reducing costs and providing better health care coverage for employees.

Slate has an artile too worth reading ... The Private OptionEmployment-based health insurance is in big trouble, but don't blame Obama. url : http://www.slate.com/id/2227984/

What's interesting is it covers the fact that as current health insurance goes, businesses are faced with paying more money to keep coverage at present levels which they can't afford or having to drop coverage cost to them by pushing more of the cost for the insurance onto the employee and increasing the co-payments for services. In short, the insurance everyone is so happy with is about to get more expansive - it's going to cost a person more out-of-pocket cash to pay for the services they receive. So their take-home pay will drop and they need more cash-on-hand to pay for the same services.

Here's my final point which I made on another blog post at TPM.

What we need is compromise - each side willing to give a little ground to the other so that a meaningful legislative package can be created that services the needs of each without overstepping too much into territory the other side will not support.

In the short run, both options could run simultaneously. However, over time one of the options will have a significant advantage over the other. The option that shows signs of being dysfunctional can be quietly be laid to rest and those remaining participates moved to the ongoing option.

I don't favor HSAs (the Bush Administration answer to reform), because they penalize low income earners and individuals without good information. I see no need for them if other reforms are instituted.

We have already seen conservatives are locked in a battle with themselves and are confusing us with their own internal enemies. So we need to find a method by which we can ease their self-induced anxiety and fears of the unknown that is unknowable. By offering both options that pander to both political ideologies, we take the fight out of the process. And that's the key - remove the anomosity so saner heads an prevail.

In closing, I will say the left is also locked and loaded for a battle too, but they can be persuaded to look beyond their fortifications if they can see something familiar in the pending legislation that closely proximates their position on health care. And as you will note, my rambling doesn't tackle the cost factor of health care. I just try to make rational sense out of what's being argued and look for what flows with little effort but in the end maximized the outcome. Hope this helps.

Fred, per your post on miguelitoh2o post ...Selling X-pensive Insurance to People Who Just Took a 3.6% Pay Cut. I have something about the following statement you made I wish discuss:

To reinforce the conclusion that system reform is central, while a public option or its absence is not, it's worth repeating that these other nations vary from those based almost exclusively on public insurance to those that deliver healthcare almost exclusively via private insurers. What these nations share in common is strong insurance regulation, and an organized healthcare system that avoids the chaos that prevails here.

You're succeeding in turning me away from specific methods of reforms and towards the goal of total health care reform. It's the system that's broken and needs to be fixed. I see your point where the public option is nothing more than the spare tire whose only purpose would be to get us to a gas station to fix the tire - it shouldn't be thought of as a replacement for the tire. Unfortunately, the entire debate seems to be revolving around the many who have health insurance through their employers.

When you implied other nations success in health care was based on strong insurance regulation, and an organized healthcare system a light came on. This is the real debate that everyone is avoiding, including myself. So I have to ask, what regulations do they impose on the industry and how do they develop the healthcare system to accommodate the public's need and the business environment were both receive adequate profit to remain in business and medical care that the public is satisfied with?