Lemon Capitalism

What a “level playing field” for health insurance really means.

Ronald Williams

In a March 26 press conference, House Speaker Nancy Pelosi said that health care reform “should have a public option in it for it to really be substantial.” This statement puts her more strongly behind creating a new government health insurance program than President Obama, who proposed such a program during the campaign but mostly avoided discussing it and has lately been cagey about how hard he’ll fight for it. Five Senate Republicans, including Minority Leader Mitch McConnell and Charles Grassley, ranking member of the Senate finance committee, have put Obama on notice that they will oppose any health care reform that includes a public option because, they fear, private health insurers will not be able to compete with a government health insurance program. They’re probably right about that. It might be worth losing sleep over if private health insurers were today doing a halfway decent job of keeping costs down and/or providing an acceptable level of coverage to policyholders. But they aren’t. Even as Republicans scream their heads off about government bailouts for Wall Street banks and Detroit automakers, they’re maneuvering to shore up the severely dysfunctional market for private health insurance.

One of the oddest aspects of the debate over health care reform is that at the moment conservatives are finally willing to concede that government health insurance programs like Medicare and the State Children’s Health Insurance Program are superior to their private counterparts both in delivering benefits and in keeping costs down, they’re turning that into an argument against them rather than for them. Eschewing any pretense that their primary concern is for medical consumers and taxpayers, they focus on the harm health care reform might bring to private health insurers. Testifying March 24 before the Senate health, education, labor, and pensions committee, Ronald Williams, chairman of Aetna, explained how terribly unfair it is for private health insurers to compete with government programs:

A public plan would most likely employ the payments rates used in Medicare, which are far lower than the rates paid by private payers. In fact, the average family of four with private insurance spends an additional $1,778 on health care each year because of Medicare and Medicaid underpayments to providers. On an aggregate level, commercial payers incur approximately $89 billion more in costs than they would if public and private payers all paid equivalent rates.

Williams is referring here to a phenomenon known as cost-shifting. Government health care programs today represent about 45 percent of the overall health care market in the United States. (Medicare alone represents about 20 percent.) That gives the government greater leverage than private health insurers in negotiating what they will pay hospitals and doctors. The correct term for describing what results is volume discount, not underpayment. Hospitals and doctors respond to the government’s bargaining power mostly by economizing but partly by shifting some of these costs onto private insurers. They can cost-shift only so much, because private insurers are themselves no slouches when it comes to market concentration. According to a 2007 study by the American Medical Association, in 96 percent of the country’s metropolitan statistical areas, there exists at least one private insurer with at least a 30 percent share of the commercial market. By one estimate, Medicare and Medicaid cost-shifting accounted for only 12 percent of the increase in private health insurance costs between 1993 and 2001.

Conservatives have managed to persuade health care reform advocates to expend a great deal of mental energy fretting over how to create a public option while maintaining a level playing field for private insurers. The result has been papers like this one, by Len Nichols and John Bertko for the New America Foundation, which argues that any new government program should be forbidden to achieve cost savings by exercising its market power. Instead, health care reform should pursue cost savings through alternative strategies that “admittedly could take some time to materialize.” Given that a key argument for health care reform is that it will curb galloping medical inflation—and given that to whatever extent it fails to do so, reformers will be forced to ration care, which could prove programmatically difficult and politically explosive—any attempt to diminish savings from reform merely to put a smile back on Ronald Williams’ face strikes me as perverse. We’ve been here before. When Congress extended drug benefits to Medicare recipients, it prohibited, at the insistence of the Bush administration, any negotiation over drug prices. Republicans continued to block legislation reversing this prohibition even after it was demonstrated that, for the top 20 drugs prescribed to senior citizens, the median price difference between what Medicare paid and what the Veterans Administration paid (the latter being free to negotiate volume discounts) was 58 percent. The reasoning was (and remains) that holding the line on government spending is socialism. Letting the government pay in excess of the market price is capitalism. Surrendering to such Alice in Wonderland reasoning is insanity.