A supporter of health care reform holds a sign outside during a town hall forum held by Rep. Adam Schiff (D-California) in Alhambra, California. (Photo: waynewhuang / flickr)
The insurance industry trade association put out a study last week that emphasized the need for a strong Medicare-type public plan if insurance is to be affordable. The study predicted that the plans being debated by Congress would lead insurers to raise their prices by an additional 18 percent over the next decade. This would put the cost of an average family plan at $25,900 in 2019.
There were several important flaws in the industry's study. For example, it assumed that a tax on more expensive insurance plans would not affect the number of people taking out these plans; they would just see the tax reflected in higher premiums. This led the study to substantially overstate costs since many employers would obviously shift to less expensive plans in order to avoid the tax.
The study also didn't take account of the government subsidies that are included in all the plans currently being considered by Congress. Depending on the final version, the subsidies could pick up a substantial portion of costs for families with incomes that are three or even four times the poverty level.
But we can take the basic point of the industry's study as accurate. If we don't have the option of a good public plan, then we can expect to pay lots of money to buy insurance.
A strong public plan will have lower costs for two reasons. First, administrative costs in the public sector are far lower than for private insurers. We know this from the experience of Medicare. The administrative costs for the Medicare program are 2-3 percent of what is paid out to providers each year. By contrast, administrative costs for private insurers average more than 15 percent of payments to providers. Even when adjustments are made for the fact that Medicare patients have higher costs on average (and, therefore, raise the denominator) there is still a gap of more than 7 percentage points.
There are several reasons why public plans have lower costs. They don't spend as much money marketing themselves, they don't have to pay dividends to shareholders and they don't have executives that earns tens of millions of dollars a year. The high pay for the top executives in the health insurance industry comes directly out of the premiums paid by the rest of us. No one in the public sector earns even $300,000 a year. By contrast, this sum would be just a few days pay for some of the top executives in the insurance industry.
The difference in administrative costs implies substantial savings - close to $1,500 a year on an average family policy in 2019. But this is just one of the sources of savings with a public plan.
The other reason that a public plan would have lower costs is that it could use its size to secure lower prices from providers. If the plan paid rates that were tied to Medicare reimbursement rates, it could shave 5-10 percent off the price of care. This would further reduce the cost of insurance to patients.
The industry obviously hates the idea of giving the public the option of getting lower cost care. This would provide a direct threat to their profit margins. As it stands now, most states have highly concentrated insurance markets with two or three insurers having the bulk of the market. A strong public plan would provide real competition. It would reduce the market share of private insurers and cut their profit margins. This would be a true disaster for the industry.
But the insurance industry has helped to put the stark choices directly in front of us. We can either allow the industry to keep operating along its current lines, adding layers of needless bureaucracy to the health care system coupled with the bloated salaries that characterize the financial sector more generally, or we can give people the option of buying into a lower cost public alternative. As the insurance industry study reminds us, the choices are unaffordable health care or a public insurance option.