Public Option Wiki

Medicare buy-in, RIP.

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Senate Majority Leader Harry Reid 

Senate Majority Leader Harry Reid announced Dec. 8 that a 10-person working group had arrived at a tentative consensus “that includes a public option.” He wouldn’t elaborate until the Congressional Budget Office calculated its cost, but details leaked out here and there. I therefore treated this column as a one-man Wiki, updating it as often as necessary. Fine-grained detail was added as it became available. With Sen. Olympia Snowe, R.-Me., and Joe Lieberman, a Connecticut independent, both concluding during the past few days that they couldn’t support the compromise’s central component—a Medicare buy-in—the tentative deal now appears to be dead. I hereby declare this Wiki closed.

The components to the compromise were: 1) two new national nonprofit policies regulated by the Office of Personnel Management; 2) a new national public option to be created only if health insurers failed to create these new national nonprofit policies; 3) a Medicare buy-in available to people ages 55-64; 4) an expansion of the Children’s Health Insurance Program; 5) a new regulatory requirement that insurers spend 90 percent of what they collect in premiums on health care.

A Medicaid expansion was considered and rejected, though Ryan Grim reported  on The Huffington Post that CBO would score that, too, along with an expansion of Democratic Sen. Maria Cantwell’s plan giving states the option of redirecting some federal money that would otherwise go to premium subsidies to negotiate with private health insurers a plan for those whose annual incomes were between 133 percent and 200 percent of the federal poverty level (that is, between about $29,000 and about $44,000 for a family of four). The Cantwell proposal was aleady included in the bill, but the expansion that was under (at least tentative) consideration would have opened eligibility to people whose annual incomes were between 200 percent and 300 percent of the federal poverty level (that is, between $44,000 and $66,000).

National nonprofit policies. These two policies would, in theory, be modeled on the Federal Employees Health Benefit Program—i.e., the health insurance available to members of Congress and other federal employees—and would be managed by the same agency, the U.S. Office of Personnel Management. But the new plans would be sufficiently different from the plans made available to federal employees that the whole construct looked like a stupid gimmick.

For one thing, the new insurance policies would be nonprofit.   The plans available through the FEHBP are both nonprofit and for-profit. * (Please note that I am not complaining that the policies would be nonprofit; all other things being equal, nonprofit health insurance gives consumers better value.)

For another, the new plans would almost certainly have a lower “actuarial value” (i.e., they’d require more out-of-pocket spending). The most popular health plan available through FEHBP has an actuarial value of 85 to 87 percent, which is a little higher  than what’s typically offered in employer-based plans. Indeed, the Wall Street Journal’s Janet Adamy recently reportedthat federal workers were ticked off to discover that as many as half of the nonfamily policies offered through FEHPB may be subject to the 40 percent tax on high-value “Cadillac” health plans. (It should be noted that this calculation was made by the insurance industry, which is trying to kill health reform, so take it with a grain of salt.) Buyers of the new nonprofit policies to be offered by the Office of Personnel Management wouldn’t likely face this problem, because their policies would be stingier. Their actuarial value would likely be closer to 70 percent.

The idea of taking the FEHBP national has long had bipartisan appeal; according to James Ridgeway, it was introduced in the Reagan years by the conservative Heritage Foundation, whose Stuart Butler is an enthusiastic advocate. (Now, of course, Heritage’s health reform blog is dumping all over the idea.) But the FEHBP is no great model for cost containment, according to  the Yale political scientist (and public-option advocate) Jacob Hacker. While Medicare’s administrative costs average 2 percent of expenditures, the FEHBP’s average 7 percent for Preferred Provider Organizations and 10 to 12 percent for Health Maintenance Organizations.

The Office of Personnel Management is, as the name suggests, the federal government’s human resources shop. It doesn’t make obvious sense that it should be given vast new responsibilities to manage health care for the great many Americans who don’t work for the federal government. The Federal Times, a trade publication forfederal workers, shared my skepticism.

Public-option trigger. If the Office of Personnel Management’s invitation to private insurers to create national nonprofit plans failed to produce any such plans (or perhaps the requisite two), then the federal government would fill the void with a public-option plan. But Sen. Joe Lieberman, who was not part of the 10-person working group, said any kind of trigger, no matter how weak, was a deal-killer  for him. The Washington Post’s Ezra Klein speculated, plausibly, that the public option was only in there so Lieberman could “take it out and justify his eventual vote.” I would add only that it always remained unclear that Lieberman would vote even for health reform that lacks a public option. Remember that he opposed the Senate finance committee version, which didn’t have one.

Maybe the plan was to lose Lieberman but pick up Republican Sen. Olympia Snowe, R-Maine, who first injected the “trigger” idea into the debate over a public option. But Snowe posed difficulties of her own (see “Medicare buy-in,” below). Compared with earlier trigger proposals, this one boasted an attractive lack of ambiguity; OPM analysists wouldn’t have to crunch any numbers to figure out whether a private nonprofit has been created for them to regulate. But I remain skeptical  that a public-option trigger would ever get pulled.

Medicare buy-in. This was the most intriguing part of the deal, and therefore became the deal-killer. Initially the conservative Democratic Sen. Ben Nelson, D-Neb., who rejected the public option as too left-wing, warmed to this alternative, which was more left-wing. (One of its most ardent proponents was Howard Dean, and Ted Kennedy explicitly proposed it  as a stepping stone to “Medicare for All.”) But alas, I was not the only person to notice this, with the result that initial wariness by Lieberman and the swing-voting Republican Sen. Olympia Snowe later hardened. Snowe eventually said any kind of Medicare buy-in was a deal-killer  for her, Nelson started to back away, too. “I think it is going to be the lesser of the popular things,” he told Politico, “but I am keeping an open mind.” The final nail in the coffin was when Lieberman said on CBS News’ Face the Nation, “I certainly would have a hard time voting for it,” a stance that became a promise to filibuster against it in a subsequent meeting  with Reid. Never mind that Lieberman advocated  a Medicare buy-in as Al Gore’s running mate in 2000.

The buy-in, which would be available only as an individual policy, and only to people who lack employment-based health insurance, would start in 2011. Initially it would be unsubsidized. Since people ages 55-64 get sick a fair amount, unsubsidized health insurance for this group would likely be substantially more expensive than the insurance available on the private market, in which risk is spread among a broader age group. Within the individual (nonfamily) market, the average health insurance premium for a person age 55-64 is currently $5,325. Matthew Holt of the Health Care Blog estimated the Medicare buy-in would cost $10,000 a year; Towers Perrin, a benefits consulting company, estimated it would cost $9,000.

At these prices, the buy-in would appeal only to very sick people who have trouble getting health insurance elsewhere (a problem that would be greatly alleviated but not eliminated entirely under health reform’s new insurance regulations). This, in turn, would cause premiums to rise still further. Starting in 2014, though, the buy-in would operate through the new health insurance exchanges, and recipients would be eligible for subsidies. These, presumably, would make the Medicare buy-in a plausible alternative for healthier customers.

Because Medicare pays doctors and hospitals less than private insurers do, the American Medical Association and especially the Federation of American Hospitals were quickly on the warpath to kill the buy-in idea. America’s Health Insurance Plans  was also unhappy, though it appeared to have less at stake, at least until the subsidies kicked in. Its opposition almost certainly weighed heavily in Lieberman’s decision to oppose it.

One key question for CBO was whether a Medicare buy-in would raise or lower health reform’s cost to the government. To the extent it meant lower payments to doctors and hospitals, it would lower costs. But to the extent its premiums exceeded those for private insurance policies available on the exchange, the government would have to pay out higher subsidies. On the other hand, to the extent 55- to 64-year-olds passed up private plans offered through the exchange for the buy-in, that would lower the cost of those private plans, thereby lowering what the government would have to pay out in subsidies to their purchasers. The buy-in would encourage early retirement, thereby boosting Social Security payments. But a Congressional Budget Office analysis last year pointed out that since taking the early-retirement option reduces your annual Social Security benefits, over the long term this additional cost would be largely eliminated. Jonathan Gruber, a health economist at MIT, told the Wall Street Journal that he thought the net effect would be to reduce the bill’s cost, but at this point no one really knows.

Children’s Health Insurance Program expansion. The House bill ends this program for low-income children in 2013, moving its beneficiaries into the exchanges. That would increase out-of-pocket expenditures for participating families. Sen. Jay Rockefeller, D-W.Va., persuaded the Senate finance committee to maintain CHIP for at least another decade, and Reid kept that in the blended bill. But Reid didn’t authorize funds for the program past 2013, when current funding ends. The working group alleviated this problem by authorizing funds through 2015.

Insurers’$2 90 percent rule. The House bill requires health insurersto achieve a “medical loss ratio” of at least 85 percent. In plain English, that means insurers have to spend 85 cents out of every premium dollar on health care.States regulate medical loss ratios, but typically they require only a pathetic 55 percent to 65 percent. The industry claims a medical loss ratio of 87 percent, but in November an investigation of major health insurers by Sen. Rockefeller found many companies’ medical loss ratios to be significantly lower. According to  insurance industry whistleblower Wendell Potter, they’re typically about 81 percent.

Sen. Rockefeller (who, I’ve mentioned more than once, is the conscience of health reform) tried in the finance committee to impose the House’s 85 percent requirement. He failed. Then Reid included  in the blended bill (at the behest of Rockefeller and Democratic Sen. Al Franken) a requirement for a medical loss ratio of 80 percent for family plans and 75 cents for individual plans. The working group upped that to 90 percent. (Medicare’s is about 97 percent.)

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Correction, Dec. 9, 2009: An earlier version of this column stated, erroneously, that all FEHBP plans are for-profit. (Return  to the corrected sentence.)