How The CBO Is Likely Very Wrong About Number Of People Who Would Use The Public Option

The traditional media has really latched onto CBO prediction that only 6 million people would use the public option. It is important to remember that the CBO is not a health insurance market expert and is known these days for being highly conservative. For example, the CBO's analysis made several assumptions about the public option in the House bill that are very conservative:

Under the proposal, certain employers could allow all of their workers to choose among the plans available in the exchanges, but those enrollees would not be eligible to receive subsidies via the exchanges. [...] CBO and JCT expect that approximately 9 million people would obtain coverage in that way in 2019, bringing the total number of people enrolled in exchange plans to about 30 million in that year. Roughly one-fifth of the people purchasing coverage through the exchanges would enroll in the public plan, meaning that total enrollment in that plan would be about 6 million.

One of the biggest “assumptions” the CBO was forced to make is that the exchange, the only place where you can select the public option, would be restricted to only businesses with 100 or fewer employees. They had to assume this because that is the letter of the law, but that is not necessarily how the law will be enforced. Starting in year three, the Secretary of HHS can, in theory, make all employers, regardless of size, eligible for the exchange. I don't think the Secretary will go that far that quickly, but I do think access to the exchange would be noticeably broader than the CBO analysis was forced to assume.

Instead of 9 million people getting access to the exchange through their employer by 2019, I think 20-50 million is more reasonable. According the US Census Bureau, roughly 42 million individuals (not counting dependents) work for businesses with 99 or fewer employees, and another 17 million work for businesses with between 100 and 499 employees. While a lot depends on how well received the new exchange is, only 9 million employees being given insurance on the exchange seems extremely low. When it becomes very easy to provide your employees with a large number of health insurance options through a simple voucher system, I imagine that many business owners will quickly jump on the opportunity.

The other assumption made by the CBO is that only 20% of people using the exchange would choose the public option. The CBO has a history of underestimating the potential popularity of a public option. For example the CBO concluded that only 33% of people would have signed up for the robust (Medicare rates plus 5%) public option, while the CMS believed that number would be roughly 40%, but they said there is a high level of uncertainty in their estimation.

Both the CMS and CBO are assuming people would select a plan based purely on economic reasons, but do not take ideology into account. I suspect in at least the first few years there would be a strong effort by self-identified liberals, progressives, and/or Democrats to support the public option by signing up for it.

Quinnipiac polling on the subject done during the most heated part of the debate in August found that 25% of people would rather buy insurance from a public option, instead of a private company. Keep in mind the poll asked the question of all Americans. People who get employer-provided insurance through their large companies are the most likely to be happy with their private insurer. They also the people least likely to have the opportunity to use the new exchange. I assume if the question were asked of only the uninsured and people in the individual insurance market, desire to sign up for the public option would have been much higher.

For a variety for reasons, the estimate that only 20% of people in the exchange will use the public option is probably low. I think the public option would get at least 25-35% of the business on the exchange, and I would not be surprised if it got well over 50% of the customers in some markets.

The cumulative effect of these assumptions by the CBO is very important. My assumption, based on the legislation, is that at least 40-70 million Americans will be selecting coverage on the new exchange, and at least a third of them will choose the public option. I suspect the public option would have closer to 20 million customers by 2019, instead of the CBO projection of 6 million.

Of course, my estimates and the CBO estimates could both be way off. It is possible that the exchange will be a big success. By roughly year 4 or 5 (2016-2017), a large number of businesses (if not all) would start providing their employees with vouchers to purchase plans on the exchange. The low-hassle nature of the public option and larger provider network could make it very popular. It would not be surprising if it were selected by half the people using the exchange. In this scenario, the public option would have closer to 60 million customers, instead of 6 to 20 million.

This is what really scares the for-profit insurance companies, not the relatively worthless CBO estimatition of 6 million. The CBO uses very conservative modeling, and most importantly are not experts on health insurance marketplaces. Their numbers are likely way off, and I don't doubt some of the private analysis done by Humana or Aetna shows the possiblity of a very different senerio playing out. This is a real chance that even this weaker "negoitated rates" public option could grow to become serious competition, and one of the largest insurers in the country.

The Achilles Heel Of Reform: Risk Adjustment Mechanisms

The Dutch government, who have a history of “managed competition” among for-profit health insurance companies, called the lack of well-designed risk adjustment mechanisms the Achilles Heel of a health care system. In their system, over half of all money spent on health insurance is redistributed as part of risk adjustment. Without it, insurance companies would compete primarily by trying to drive away unhealthy customers, instead of by trying to provide higher quality plans, better consumer service, or lower prices. Without robust risk adjustment and regulations, it is impossible for an insurer to provide high quality, low cost coverage. It would soon be overwhelmed with unprofitable, less healthy customers.

The CBO and CMS conclusions about what the lack of sufficient risk adjustment mechanisms in the House bill would do to the public option should be a wake up call. They concluded that the new public option would be forced to charge higher premiums because of the serious problem of adverse selection. But the public option can be a stand in for any insurer that tried to be socially responsible, be it a private company, public entity, non-profit, or new insurance co-op. Any “well behaved” insurance company would soon be flooded with less healthy individuals.

Are the risk adjustment mechanisms in either of the Senate bills better? Unfortunately, the answer is basically no. In both the Senate HELP committee bill and the Senate Finance Committee bill, language dealing with risk adjustment is nearly identical to the House legislation. Both leave the risk adjustment issue completely up to the Secretary of HHS to work out. The Senate Finance Committee bill does establish an additional transitional reinsurance program for the individual market. This reinsurance fund would only stay in place for the first three years. Risk adjustments mechanisms would get worse not better as reform progresses.

On probably the single most important issue determining the success or failure of reform, all three bills are practically silence. It will be the job of the Secretary of HHS to make sure reform does not fail do to adverse selection.

The Swiss health care system has taken several steps beyond what any of the US bills have proposed to reduce discrimination and gaming of the system. It has a highly standardized, mandatory, basic benefits package, and all health insurance companies that sell the basic benefit packages must be non-profits. All insurers, except managed care plans, must pay uniform reimbursement rates to providers. Still, in a given area of Switzerland, there can be a dramatic difference in the cost of premiums. The Commonwealth Fund concluded:

For the year 2005, for example, the difference between the lowest and highest premium for coverage in Zurich with a 300 CHF ($255) deductible is 89 percent (BAG 2007). This situation can only persist over time because, despite periodic open enrollment, relatively few individuals change insurer from year to year. Nearly all the difference in premiums appears to be attributable to risk selection not adequately compensated for in the risk equalization system.

Despite some risk adjustment mechanisms, standardized benefit packages, regulation against discrimination, uniform provider reimbursement, being non-profits, etc., the Swiss health insurance companies have not stopped trying to game the system. Timothy Stoltzfus Jost, Professor at Washington and Lee University wrote,

Swiss insurers have become exquisitely adept at risk selection, even though it is technically illegal and to some extent disincentivized by a risk pooling program. Insurers, for example, offer multiple policies and steer high cost insureds to higher cost policies and low cost insureds to lower-cost policies. Insurers commonly offer attractive deals on supplemental health coverage, life insurance, or other forms of insurance which they can risk underwrite to attract lower risk insureds. Insurers use high deductible policies and policies for which no-claims rebates are available to woo low risk insureds. There are reports of insurers closing offices in high-claims areas and of using software to identify unprofitable insureds or applicants so that they can ignore inquiries and contacts from them. There is considerable evidence that virtually all of the competition among Swiss health insurers to date has been based on risk selection. Premiums in the Switzerland vary dramatically from one policy to another, yet switching of insurers is relatively uncommon, often because insureds have other forms of insurance with insurers and are reluctant to switch.

I'm truly frightened by the possible ramifications that potentially insufficient (and currently completely undefined) risk adjustment mechanisms will have on our health care system after reform. Our system will rely heavily on for-profit insurance corporations, and they would be given much greater flexibility in tailoring insurance plans to discourage enrollment by less healthy (unprofitable) customers compared to Switzerland. It will be a system much easier to game, dominated by entities with huge incentives to skirt regulation. Obama current refusal to truly take on the health insurance industry does not fill me with hope that his Secretary of HHS will design and/or strongly enforce the regulations and robust risk adjustment programs necessary to make a “managed competition” health insurance system work.

Making Public Option Less Robust Is A Double Slap In The Face To Working Class Americans

Nancy Pelosi may not have enough votes for the "robust" public option tied to Medicare rates plus 5%. The Hill has published the official whip count of those House Democrats who oppose the robust public option.

As I've pointed out countless times before, a robust public option would have premiums roughly 10%-11% less (according to the CBO and CMS) than typical private insurance. That would be around a $1,400 reduction in premiums for the average family that could choose the robust public option. Forcing Americans to pay roughly $1,400 more a year on health insurance premiums, by denying them the choice of a robust public option, is the first slap in the face.

The second big slap in the face is that robust public option would save the government $85 billion more than a weaker public option (with negotiated rates instead of those based on Medicare). Since Obama set an absurd $900 billion ceiling on the cost of health care reform, most of that $85 billion will need to be made up by reducing affordability tax credits to low- and middle-income families. As Ryan Grim at Huffington Post reports:

The public option tied to Medicare rates saves $110 billion over ten years. Requiring it to negotiate rates only saves $25 billion.

If leadership goes with the negotiated-rate plan, that $85 billion difference will have to come from somewhere to meet President Obama's ten-year, $900 billion price ceiling. The fattest target is the subsidies to help people afford insurance.

Going with negotiated rates instead of a robust public option will deny American families a choice that would save them roughly $1,400 a year on their health care premiums. But making the public option less robust might also cause the government to reduce the amount of tax credits it can give to low-income and middle-income Americans to help them afford health insurance by roughly 20%. So, not only will American families be denied a much cheaper insurance option, but they will also be given less financial assistance to help them afford health insurance from a selection of more expensive options.

Making the public option less robust will end up costing working class families thousands more each year on health care. That is what the 47 Democrats who are "Nays" on the robust public option are desperately fighting for. They are fighting for a position that they know will make health care dramatically more expensive for millions of Americans.

Update - The Hill is reporting that Majority Whip James Clyburn is disputing the accuracy of the previous published whip count.

Ezra Klein Supports Exchanges On Faith Alone, It Is Time To Walk The Road To Damascus

Ezra Klein really thinks health care exchanges will work at driving down cost despite there being little to no evidence to back up his theory. In fact, today, he just admitted that there is strong evidence to the contrary:

For people, like, well, me, who think that the health insurance exchanges have a real shot at lowering health-care costs throughout the system, the graph above is difficult. For conservatives who believe that the key to constraining health-care costs is to encourage competition between insurers and give individuals the opportunity to choose, the graph above is difficult. Because what the graph above shows is that neither of those strategies has worked terribly well, at least as of yet.

To believe something in spite of evidence to the contrary is what we call blind faith. This is not the first time evidence has been published showing that exchanges will not work at reducing cost. If this new piece of evidence does not convince Ezra Klein that his theory about health care exchanges without a public option reducing cost is wrong, I don't know what will.

It seems his support for them is based on faith, and faith can't be changed with logic. I suspect the only hope there is that he will convert to acknowledging a robust public option is what is most important to controlling costs, will only come from a moment of pure blinding revelation. Someone should book him a ticket to Damascus.

On the other hand, I've never put much stock in the health care exchanges as being able to drive down cost on their own. There has never really been the evidence to support that. Whether it is the Federal Employee Health Benefits Programs, the California Public Employees' Retirement System, or state-base purchasing co-ops, health care exchanges just do not have a strong track record. When looking at the matter, exchanges just did not seem like the answer to the issue of cost.

What does have a strong record of cost control? Medicare. Medicare rates have raisen much slower than the cost of insurance or the FEHB program or for employer-provided insurance. That is the main argument for a strong public option.

The CBO stated a robust public option would have premiums roughly 10% cheaper than typical private insurance companies. The CMS concluded a robust public option could provide health insurance for 18% less than private insurance companies. It is for these reasons that I and others have concluded a robust public option similar to Medicare is critical for reducing health care costs.

There is an argument based on facts that a robust public option would bring down cost for average Americans. There is another argument based on a general faith in the markets, and contradicted by facts, that competition among private insurance companies on an exchange without a public option would bring down cost. I don't support a public option based on Medicare (and oppose creating an exchange without a public option) for ideological reasons--I support it because there is strong evidence that it would work to extend coverage to more Americans and succeed in "bending the cost curve" in a way that these other proposals would not.

Why You Might Never Get Quality Affordable Health Insurance: The Dangerous Lack Of Robust Risk Adjustment

Yesterday, I drew attention to the CMS's findings about the House's robust public option tied to Medicare rates. There were two important findings: The first was that it would be 18% cheaper to insure someone with a robust public option. The second was that premiums for people who chose the public option would only be about 11% cheaper. The problem: the lack of strong enough risk adjustment mechanisms or reinsurance program on the new exchange. People with serious medical issues are the ones most likely to be diligent shoppers on the new exchange. A good health insurance plan with lower overhead and a large provider network (like a robust public option) will attract these less healthy individuals. This shift of sicker people to better, well-run health insurance plans will drive up their premiums. The House bill does contain risk adjustment mechanisms for the exchange to protect against adverse selection, but the CMS determined that would be insufficient.

Fortunately, the robust public option tied to Medicare rates would be so much better than private insurance. It could absorb this consumer shifting and still provide insurance with substantially lower premiums. It would start with real market clout and could have an important impact.

If the exchange did not have a robust public option (or had only a very weak one), the lack of a sufficient risk adjustment becomes an even more serious concern. The result is that it would be impossible for an insurance company to ever offer high quality, low cost insurance even if they wanted to.

Let's assume some non-profit insurance company (maybe one of the new co-ops Conrad is pushing) really tried to offer a low hassle, low cost, high quality insurance package. Word would soon get around to individuals with costly medical problems. They would flock to this better plan and drive up its premiums. Every attempt to cut waste and pass on savings to consumers would be eaten up by more adverse selection.

Bad insurance companies that treated their sicker customers poorly would be the ones reaping the benefits from the good behavior of socially responsible insurance companies. The bad insurance companies with bureaucratic hassles would try to drive all their unprofitable consumers to socially responsible companies. That would leave the bad insurance companies with just high profit, healthy individuals. It is a vicious cycle that would make it nearly impossible for groups to create a large, well-functioning, socially responsible, private health insurance company, even if they wanted to.

Based on my research, none of the bills currently before Congress have robust enough risk adjustment mechanisms and/or the necessary regulations in place to discourage adverse selection. Other "market based" health care systems (Switzerland, Netherlands, Germany) in the world use a much stronger risk adjustment mechanism and have a much tighter definition of what minimum insurance every company must provide.

My worry is not just that without a public option people are unlikely to have the choice of a quality, low-cost health insurance option. I don't just think it is only improbable that insurance companies will choose to act more socially responsible, my real concern is that the new loosely regulated exchange will be a marketplace where it is simply impossible to offer a high quality, low cost, socially responsible, private insurance plan.

It is not just unlikely that current health care reform bills, without a public option, will fail to provide millions of more people with quality affordable private health insurance--I fear such reform will make it impossible to them to get quality affordable health insurance.

CMS: Public Option Would Be 11% Cheaper And Also Reduce Premiums For Private Insurance

The Centers for Medicare and Medicaid Services (CMS) just released a study of the version of the health care reform bill, H.R. 3200, reported out by the Ways and Means Committee.* The study had some positive news for the robust public option tied to Medicare rates. The public option would on average have premiums 11 percent cheaper than private insurance and the public option would end up also making private insurance cheaper.

Premiums for the public health insurance option are estimated to be 11 percent lower than those for private plans on the Exchange. This result is based on an estimate that (i) the cost of the public insurance option for a standard enrollment group would be 18 percent lower than the average for private health plans, but (ii) public plan enrollees would have costs that were 7 percent greater than average (beyond what can be accounted for through risk adjustment) as a result of antiselection. The estimated 18-percent cost differential between the public option and private plans reflects the combination of 17 percent lower prices, 10 percent lower administrative and margin costs, and 9 percent higher costs due to less strict and/or effective care coordination. The finding of 17-percent lower prices for the public plan is a function of the specification that the public plan payment rates would be Medicare rates plus 5 percent. The assumed higher average cost for public plan enrollees is based on an expectation that individuals with above-average costs would tend to prefer plans with less-restrictive utilization management practices.

What this means is that the premiums charged by the public option would be roughly 11 percent lower than private insurance, but, in reality, it would cost 18 percent less for the public option to provide health insurance. Since the public option is cheaper it would end up attracting a less healthy costumer base. Having people with more medical needs sign up for the public option would end up somewhat increasing the premiums the public option would need to charge. Conversely, because the public option would end up attracting many of the least healthy individuals, it would also drive down premiums for private insurance plans.

If Congress implemented a proper risk equalizer for the new exchange, the public option would have premiums on average 18 percent cheaper. The important point is that a robust public health insurance plan could provide health insurance with a large provider network at 18% less cost than private insurance.

*It should be noted that the current House bill is going through major changes and will be substantially different from the one reported out by Ways and Means.