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Flash back to the dog days in the run up to the Iraq war, when it felt like we were plunging into a dark age. We were fed dubious rationales for invasion from a Know-Nothing, faith-based president. Hyperbolic, paranoid conjectures were presented as though they were the shrewd conclusions of deliberate people. When I discovered Howard Dean in May 2003, I devoted 9 months of my life full-time to try to elect him and to help give Democrats back their backbone, and so that I wouldn't have to say "I did nothing."

Flash forward: The "debate" over the public option today is depressingly similar, but this time both the Left and the Right are working themselves into a self-righteous fervor using discredited premises. Anti-government paranoia and bigoted hatred from the Right need no introduction here, nor am I going to improve on what has been written already on dKos. Instead, this time I have to speak up against misinformation from the Left.

I am an old-timer on Daily Kos and I expect this diary will flop. This is not red meat. This is vegetables. If you want to eat your vegetables, follow me below the fold.

I don't pretend to know whether the public option will be included in a final bill, or if it does whether it will pass or will mean universal health care fails to become law. I'm happy to use the public option to draw fire away from other critical aspects of reform. If it is included in a final bill and passes, and the public option hasn't been eviscerated in the process, that will be some brilliant maneuvering and a great accomplishment.

But if it passes, it almost certainly will be weakened to the point of irrelevance in the short term because, at this stage of the game, nothing that cuts deeply into the bloat in our $3 trillion health care system will pass. The entire industry, and not just insurers, will see to that. So it would be a tragedy, if it comes down to it, to refuse to compromise on the public option, leaving millions uninsured for the next 4, 8 or more years.

Our first order of business, and the only major goal we can achieve legislatively in 2009, is to cover everyone. No one should go broke from having to pay for health care, and no one should have to forego needed healthcare in order to stop from going broke. And as I hope to make really, really clear below, we don't have to compromise on core principles if we compromise on the public option. This was exactly the point of Obama's address on healthcare to the joint session of Congress. We can have the same long term goals about access to quality, affordable care for all, and the same short term achievement on access to care.

But most of what I want to say isn't about tactics in an ongoing war to reform health care. It's about where the dollars actually are that can save us money, and whether the public option as it currently stands makes any difference in saving them. So to make sure we are all starting from the same relevant facts, here are six essential ones:

  1. The total cost of health care per person in the United States is at least twice that of any other nation (a, b, c)
  1. The high cost has spread to every single part of our health care sector: physician fees, insurance overhead, hospital costs, drug costs, device expenditures, long-term care expenses, etc. It is NOT isolated to private health insurance profit or administration, in fact only a small fraction of our excess cost can be attributed to this. (a, b, c)
  1. For all we pay, the care we receive is no better than dozens of other nations on the whole. (a, b)
  1. It follows from the above that we could cut our costs by 30-50% without any loss of quality (though we can't do it quickly without the loss of millions of jobs across all segments of the industry and massive disruption.)
  1. To achieve these savings while providing universal coverage and keeping quality as high or higher, we know that many approaches could work. Single-payer (Canada, Taiwan). Socialized medicine (United Kingdom). A largely public insurance arrangement with private insurance playing a secondary role (France, Austria, New Zealand, also the UK again). A largely or entirely private insurance system, tightly regulated (The Netherlands, Germany, Israel). (a, b, c)

The examples around the world prove that each of these types of systems can be far, far better than what we have now at delivering universal, low-cost care at roughly the same quality we have in the United States. There is nothing necessary about crowding out private insurance to get successful reform. This isn't conjecture. It isn't bias or spin. You can no more argue away the success of the Swiss, Dutch or Israeli systems than you can argue away the successes of the French, Canadian or Swedish systems. They are there in the WHO data and dozens of other studies and analyses. Here's an accessible overview.

Denial of the Facts
Despite the international evidence, most Daily Kos readers and the American left generally thinks that the public option is indispensible, as the bare minimum of meaningful reform. When Keith Olbermann says that the public option is the "entirety" of health care reform and the rest is "window dressing" he is oblivious to what distinguishes our system from all others. When Atrios--who I agree with 99% of the time--says that there is "no point" to health reform unless there is a public option (or better, single payer) he also is ignoring where our higher costs come from and the full range of reforms that can achieve a system that is the equal of other nations over time. When Howard Dean, who has done perhaps more than anyone to rescue a meaningful Democratic party, says that the public option is non-negotiable and that we don't have true health care reform without it, he throws away volumes of data and the experience of entire nations. Kos himself said in an interview on MSNBC that the public option is our "Waterloo" where we stand and fight.

Ironically, what set off Kos's statement was Ed Schultz's question about what would happen if Obama didn't ensure that "pre-existing conditions were gone" as a grounds to deny health insurance. But no one of any political significance is lobbying to keep pre-existing conditions. AHIP supports their removal as a grounds to reject applicants. Removing pre-existing conditions has nothing to do with the public option.

It's not just me saying that there is a lot more to meaningful reform than a new public payer. President Obama agrees, Paul Krugman agrees, Ezra Klein agrees, and policy heavyweights like Alain Enthoven, Michael Fuchs and Uwe Reinhardt agree as well.

What blocks acceptance of the fact that there is more to meaningful reform than the public option (or single payer) is pretty clear: the scapegoating of private insurance. Somehow, this became about punishing the health insurers more than it became about helping people get access to affordable care (or rather, those two goals became blended and confused). A while back I wrote about how regulated non-government payers provide universal health care in other nations. But the demonization and desire to punish is blinding, and creates zombie ideas that can't be killed by the facts. When zombie ideas roam the earth, they eat brains. In this case, the brains of progressives. And so I must continue my feeble attempt at zombie killing.

Rethinking What It Takes
Successful reform has three parts: access reform, cost control and quality improvement.

Access reform means that everyone who needs care that improves their health is able to get it without suffering financial hardship as a result. The public option isn't necessary for successful access reform because insurers can be regulated to require guaranteed issue (no rejecting those with pre-existing conditions, no rescission), removing differential premium payments by health status and strictly limiting those by age, and using evidence-based guidelines determined by a third party to establish which treatments are covered. This, and more, is what happens in the nations that have universal healthcare and use private insurers, and it is what the private insurance industry in the US has endorsed. AHIP (like AHA, AMA, PHARMA, etc.) has not fully endorsed everything we need to control costs, but it has fully endorsed everything we need to ensure universal access to care, version 1.0.

Cost control: Right now we pay 17% of GDP while the rest of the world pays on average 10-11%. If we can get to around 12-13% we can consider the mission accomplished, and even 15% would be a huge achievement. At 15% of GDP, the savings would be enough in a single year to pay for 3-5 years of universal coverage. We know lower costs can be achieved with heavily regulated private payers. We know that it can be done because it is done.

How can savings be achieved? No credible analysis of the US system shows that the savings can all come from one place. Instead, they have to come from dozens of different places from all parts of the health care industry. The excellent CBO analysis from last year goes into great detail and explains why there are no "silver bullets."(warning big PDF). A good rule of thumb is that if you take any part of our system, it costs twice as much per person or per service as the equivalent part of a European, Japanese, Canadian or Australian system. To get our costs in line, you have to go after each of these higher costs.

But I'm sure this isn't satisfying to those who are convinced that most of the problem is in the high overhead and profit of health insurers, or that health insurers are somehow inherently malign and cannot be regulated effectively, and that so long as they exist costs cannot be contained and care will be denied when it is needed. The idea that health insurers in the US are inherently malign but cannot be reformed is hard to make sense of. Perhaps I am more impressed than most with the mutability of human institutions. When I've pointed out in past debates that insurers are team players in other nations, the response is that America is different and here the national and/or business culture will not allow it. If that is true and we are incorrigible, then isn't the game over? How is single payer, or the public option, or real reform of any kind to reduce the money sloshing around the system possible?  

Putting aside the "culture" argument, as far as I can tell there are two key arguments in support of the necessity of the public option for successful reform that need to be considered at greater length: A public competitor is necessary to keep insurers honest and to keep their big profits and overhead in check.

Honesty: If by "honesty" one means removing rescission, or insisting a higher percentage of premium goes to pay for medical care, or forbidding "crap" insurance that has lifetime maximums that can bankrupt people with catastrophic events, again, insurers are already on board in principle. Those things can pass Congress overwhelmingly, though in some cases, like minimum medical cost ratios, they will fight to have the bar set relatively low, and the for-profit insurers among them will likely argue against raising the bar over time (non-profits will be more open to it). But the public option is neither necessary nor sufficient to end rescission or gain automatic coverage for all. It doesn't get us universal community rating, reasonable minimum benefits, or subsidies for the poor to obtain coverage. All of those essential things can come with or without a new public payer. FamiliesUSA has a list of 10 major features in the House bill, only 1 of which is the public option. When Obama talks about "insurance" reform, these things are the heart of what he's talking about. And this is the heart of what will give people security and access to care.

If by "honesty" on the other hand one means that insurers will be forced to be more efficient in order to compete, that is partly wrong and partly, probably, right. It's partly wrong because all the lobbies of the health care industry, but especially providers (doctors and hospitals) will ensure in the short term that a public option can't save much if any money when it comes to paying claims. So if the medical costs are going to stay pretty much the same, all the savings will have to come from the administration and profit, and if the public payer has to pay its own way in premiums (which seems assured) and needs to deal with things Medicare doesn't have to deal with--like negotiating with providers and having people come in and out like commercial insurers do rather than automatically enter and stay for life like Medicare--it will have only minimal advantages compared to private plans competing for the same customers in the same markets. Since it participates only in the exchange, it would have lower advertising costs and low or no broker fees. Executive salaries would be lower, but only by a fraction of a percent measured against total premium. In fact, the public payer is going to have a hard time being significantly more efficient than the non-profit Blue Cross Blue Shield plans at paying claims and other basic functions. (Blue Cross Blue Shield plans, by the way, already pay the vast majority of of Medicare claims, because the Federal government outsourced this to them since the start of the program. So much of the efficiency of Medicare IS the efficiency of private payers.)

On the other hand, there may be real benefits over time from the public option for our system as a whole--coming from medical cost control--described below. The public payer is not a bad idea at all. But we can achieve all the same good things for people without it.

Profits: The second main argument is that a public payer will remove those huge private insurer profits. The problem is that health insurers don't have huge profits. Not compared to other industries. Last year it was ranked #86, though often it ranks a bit higher. Whenever you hear people talk about how big insurer profits are, they almost always give a number without context (X billion dollars!). What you don't see is someone say what percent of premium or what percent of overall healthcare expenditures goes to insurer profit. The reason is that these numbers are about 3% and 1%, respectively. Not the kind of numbers that trigger outrage. In the vacuum of information, people think that insurers have a profit margin of 20%, 50% or even more. See page 4of this study from WellPoint. But no need to take an insurer's word for it. We can take Kossacks' word for it: I did a survey on dKos a while back and got almost exactly the same results.)

Over the last 40 years, the health insurance industry has had average annual profits of 3-5%. These days, it's about 3%. That's slightly lower than the hospital industry. Compare that to Big Pharma, which consistently has profits around 17-20%. Here's what a "down" year for big pharma looked like in the last recession, from an excellent article by Marcia Angell in the New York Review of Books:

The most startling fact about 2002 is that the combined profits for the ten drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses put together ($33.7 billion).[12] In 2003 profits of the Fortune 500 drug companies dropped to 14.3 percent of sales, still well above the median for all industries of 4.6 percent for that year. When I say this is a profitable industry, I mean really profitable. It is difficult to conceive of how awash in money big pharma is.

Most people--left, right, and center--think that health insurers have been living the high life like big Pharma. Not for the first time, most people are wrong. And the real "profits" that insurers make in close to half of the cases actually don't go to pay shareholders because the insurers are non-profits, so they get funneled back into the enterprise.

Removing insurer profits (by itself) makes almost no impact on costs. All told, since private insurance only pays about 1/3 of all health care bills (the rest is government or out-of-pocket), that 3% insurer profit rate translates into 1% of total health care costs, or $30 billion out of $3 trillion. That's how much removing the profit from insurers will lower your health care bill.  You can remove more than that by getting rid of hospital profits. Pharma profits are way higher, at around 18% of $315 billion in 2007, or nearly $60 billion. You can also remove more than the amount of insurer profit ($32 billion) by getting rid of underwriting and standardizing how claims are paid and what benefits are permitted (which, again, AHIP and the insurance industry is now endorsing, though pressure still needs to be put on AHIP with regard to standardizing benefits if we're going to make much progress on that in 2009).

Back to Savings on Administration
So then, maybe (lack of) profit isn't the key benefit of the public payer, but administrative savings is. I can't count the number of times on dKos I've seen someone claim that administrative cost in the US for private insurance is around 30% while for Medicare (and by extension a single payer system) it is 2-3%. The problem is, these are not apples-to-apples comparisons, in two important ways. The Medicare 2-3% figure is incomplete. There are administrative costs that aren't counted, and the true figure is around 5%. That's still far lower than current private insurance, which runs around 12% of premium. But it is not lower than administrative costs in multi-payer systems in Europe. The Swiss and Dutch rates for insurance administration and profit combined, for example, is estimated by the progressive-leaning Commonwealth Fund to be 5%. And don't forget that in the US, Blue Cross plans and other private companies known as Carriers and Fiscal Intermediaries pay Medicare's claims and handle customer service, not Federal employees.

See this table from CMS for where all the money comes from and where it goes. When you combine public and private insurance administration, the total cost is only 7% of health care expenditures.

As the CMS table indicates, the more important reason that the "2-3% vs 30%" comparison doesn't work is that the 30% admin figure for the US isn't for health insurance administration alone. We do have an admin number of 30%, but it includes administrative costs for providers, such as hospitals and physician offices. When you look at a similar all-in admin number for Canada, it comes out to 17%. So Canada has about a 13% structural advantage on cost from more efficient administration: 30% vs 17%.

It follows that we are not going to be able to save 25% of our total costs from admin, not even if we go to single payer; more like 10-15% at best. And as the cases of Switzerland and the Netherlands show, pretty much all of those savings can be gained with multiple payers if you remove underwriting, do guaranteed issue, have standardized benefits and make other changes like they do in European multi-payer systems.


Reducing cost is not all about insurance: the role of providers and their interests

The public payer won't materially lower costs in the short term compared to other options on the table. The reason is that providers (hospitals, physicians, nurses and long-term care facilities) are together by far the most influential lobbies in healthcare. Bigger than Pharma and bigger than AHIP in dollars of campaign contributions, in public sympathy, and in the number of jobs at stake. In almost every congressperson's district, one of the biggest employers is a hospital or hospital system. Health care has been by far the biggest, and almost the only, industry to grow in jobs since 2001. You better believe Congressfolk listen to the AHA, AMA and other provider lobbies closely.

The biggest provider lobbies have made it clear that they do not want the public option to have any greater bargaining power than private insurers have. This is not conjecture, it is the stated policy of the AHA and AMA and even more progressive physician organizations like the ACP and hospital systems like the Catholic Ascension Health and others. They want the public payer to keep reserves, to be unable to require providers participating in Medicare to also participate in the new public plan, to be required to maintain a large network and thus increase rates in order to get a large number of physicians to voluntarily participate, etc.

Providers, at least at first, will win those battles. Any significant cuts will be met with howls of protest and they will claim that they are being bankrupted and forced to turn away needy patients. In a few cases this will be true, but in the vast majority of cases it will be crocodile tears from people who are in the top 5% of income earners. Our providers on the whole are paid twice what they are in England, Germany, Japan, etc. The fact that alternatives that reduce provider pay aren't even on the table, except in the nebulous form of a new independent panel to assess Medicare fee schedules, and aren't even pushed much by progressives these days, shows just how effective the provider lobbies are. Because you better believe that in the health wonk policy world, it is well-known that provider costs are the biggest single part of the problem.

For the moment, that problem is essentially untouchable, but in the long run there is no way to solve our health care cost crisis without fixing how, and how much, we pay for health care. Not just the administration of health care and health insurance, but the provision of care itself.

Now here is where the public option could end up being quite effective down the road. The two biggest failures of private insurance are that it has created and allowed to persist a totally disfunctional market for individual insurance, and that it hasn't controlled medical costs. Not because it keeps siphoning off more and more for profit and fatcat paychecks, but because with the exception of the managed care revolution of roughly 1992-1997 it hasn't been effective at keeping fees and utilization in line. From 92-97 insurers made a huge effort to control costs and for the first time in the post-war era succeeded. (See the table on page 3). But they earned the hatred of providers whose incomes they froze or cut, and whose hands they tied for the first time (hell hath no fury like a doctor's ego bruised). Doctors and patients resisted the attempt (sometimes clumsy and without sufficient attention to quality of care) to manage utilization. Insurers' reputations went into the toilet, and after a few years of being beaten up they surrendered and cut way back on utilization controls, which opened the gates for physicians and patients to pursue all the unnecessary high cost care that has made our costs skyrocket in the last 10 years. See also Ezra's similar take and this well-written piece.

If a public payer actually does have the political ability to keep rates low, AND if it has basic fraud and utilization protections so that doctors don't increase the volume of services to the point that it cancels out the cost advantage per service AND if it attracts sufficient providers to make it appealing to members THEN it will force private insurers to get serious once again about cutting costs. And what that means is war. Yes, a competitive war between the public payer and private payers, but far more important is the war that will be waged between insurers and providers. Providers will turn to their old tactic: if you cut my rates, it means I can't provide an essential service to people in need (never mind that our primary care physicians get paid up to twice as much as they do in other peer nations, our hospitals get paid 2-3 times as much for similar services, and specialists typically get paid 3-4 times as much). But if the public payer is engaged in that war too, then private payers will be able to run for cover in a way they cannot now. In that circumstance, it is possible that this public-private 1-2 punch could break the back of medical cost inflation for our lifetime.

So, there are scenarios in which the public option could certainly help. There are also scenarios in which a purely private insurance system could do a similar job. For example, in The Netherlands regulated non-profit insurers have replaced public plans and eliminated a class-based insurance scheme, peg payments to the quality of care, compete in insurance exchanges for members (making people much more price-conscious, and forcing insurers to be more price conscious in turn), and so on. In Switzerland and other countries, the private insurers pay according to rates set by the government, so that cost inflation can be kept in check to meet national budget priorities.

But let's not kid ourselves about something. Our current failure to control costs applies to Medicare and Medicaid as well as private insurance, even if the problem isn't as severe. At its root is the political dominance of provider, drug and device lobbies, with help from the anxious and ill-informed public, which stop attempts to reduce physician fees or impose utilization controls such as comparative effectiveness research coupled with best-practices rewards and penalties for failure to meet quality standards. Medicare has a lower rate of increase in expenses per recipient since 1983 than private insurance, but then Medicare also has a higher rate of cost-sharing than most private insurance today. See here.

Given how out of control our medical costs are, it's bizarre that people keep returning to the idea that health insurers are doing too much denial of care and too much control on the utilization of expensive care. The biggest problem is that they aren't doing enough. Yes, really. Yes, really (subscription needed). Yes, indeed, really.

Quality: Medicare and private insurance are more alike than they are different, and it springs from an inability thus far (due mostly to provider lobbies) to get beyond the fee for service model and the heavy reliance on small physician practices and specialist care rather than primary care. These forces combine to fragment care and create incentives to produce a higher quantity rather than quality of care. Many of the solutions we need would apply and would be successful whether we adopt them for private payers or a public payer. These solutions would be successful at improving the quality of care as well as the cost, quality being the third leg of the health care reform stool. Quality improvement is hard work, but at least here most providers want to do the right thing and the main barrier is inertia, not self-interest. Still, it has received almost no attention in the current round of reform and we will likely take modest steps with the upcoming bill.

Getting universal health care is the easy part when it comes to the industry lobbies (it is the hard part when it comes to partisan politics). I wanted to make it clear that you don't need single payer or expanded public insurance to get that. I focused at greater length on cost largely because the points are more complicated and this is the heart of the argument for expanded public insurance, once you disentangle the simple confusions about access reform. Actually cutting what industries get paid (not just slowing the growth, but cutting it in inflation-adjusted terms) is going to bring out all the lobbies going full guns. No matter what version of universal health care we achieve (if we can pass it!), each part of the industry will ensure that its costs will remain twice what they are in the rest of the world for now, and the bulk of the work reforming the bloat in the system will have to come next. It will be a long, hard-fought campaign. It will take years to succeed, and I hope that the left is just as strong an advocate of those reforms as it is for universal health care. Reform is a marathon, not a sprint.

A few personal notes to conclude: Daily Kos is my original blog home and as I mentioned I've written here on health care before (An analysis of cost drivers and statistics and A look at insurer profits and An overview of what needs to change to make a private payer universal health care system work.) Lately I've become a regular on blogs that specialize in health care like The Health Care Blog, Health Beat and Ezra Klein's blog for the greater depth of debate on the mechanics of health care, and I highly recommend them to people who want to be better informed not just on the horse-race and latest talking points, but on the underlying structure of the system and how it grounds policy.

About 6 years ago I left a career in academia (non-tenured professor of philosophy) and after my stint in the Howard Dean campaign I ended up in health insurance, working for a non-profit in New York. So, I'm an insider. Hopefully it is clear that I'm not a mouthpiece of that industry, even if it seems to some I've got a bit of Stockholm Syndrome.

Coda: I recently saw this recommended diary and I have a glimmer of hope that the left will be able to talk itself down from the public-option-or-bust mentality. I'm not so much relieved that Franken gets it (which he does), as that very few of the commenters eviscerated him for being a sellout or stooge.

And if you get this far and think this long diary is worth being seen by other Kossacks, by all means, recommend it!

Originally posted to jd in nyc on Fri Sep 11, 2009 at 05:01 AM PDT.

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