You can control costs in one of three ways: use less treatment, need less treatment, or pay less for treatment. The theory of the public plan rested on paying less for treatment, as Medicare does (though it's important to note that Medicare's costs are still rising at a totally unsustainable rate, albeit a slightly less unsustainable rate than private insurance). . . .
The strongest public plan . . . is limited to the health insurance exchanges, which are in turn limited to employers with fewer than 20 workers. . . . [with a] likely enrollment of 10 million Americans [or less] . . . [and] the plan has neither Medicare bargaining power nor the sort of customer base that gave Medicare its bargaining power.
Is that an argument against the public plan? Nope. There are real advantages to the presence of a public alternative. Competition matters, for one thing, and there are a lot of states where one or two private insurers essentially control the market. . . . [T]he public plan could be used alongside Medicare to test payment reforms and disease management programs that could pay off in the long run. The public plan could also usher in a fairly radical level of transparency in pricing and behavior, forcing private insurers to follow suit. And lastly, the public plan is something of a corporate accountability measure. Its presence in the market ensures that health-care reform won't simply be a large reward to the insurance companies absent any serious changes in their behavior.
Paul Krugman, in contrast, thinks it is pretty important. His reasoning:
The first is that I suspect that Ezra and others understate the extent to which even a public plan with limited bargaining power will help hold down overall costs. Private insurers do pay providers more than Medicare does — but that’s only part of the reason Medicare has lower costs. There’s also the huge overhead of the private insurers, much of which involves marketing and attempts to cherry-pick clients — and even with community rating, some of that will still go on. A public plan would probably be able to attract clients with much less of that.
Second, a public plan would probably provide the only real competition in many markets.
Third — and this is where I am getting a very bad feeling about the idea of throwing in the towel on the public option — is the politics. Remember, to make reform work we have to have an individual mandate. And everything I see says that there will be a major backlash against the idea of forcing people to buy insurance from the existing companies. That backlash was part of what got Obama the nomination! Having the public option offers a defense against that backlash.
I'm not convinced of Krugman's cost argument, given that we already have non-profit companies out competing with for profit companies in the health insurance market. One of the main reasons that Medicare can control both administrative and provider costs better than other insurers is that it has a near monopoly as the single payer system for elderly patients. It is not at all obvious that a public option can avoid the administrative costs present in a multi-payer market, doing precisely the same job as a private insurance company.
I'm also rather dubious of Ezra Klein's experimentation argument. The government already has massive health care programs like Medicare, Medicaid, the Veteran's Administration, and health care for the military in which to experiment. The last two, in which care is actually provided by government employees, have provided notable innovations and experiments. But, there aren't the same kind of precedents of successful innovations by government run insurance programs. One of the latest inspired experiments by Medicare, which wasn't much of a success, was to transfer their case loads to private insurers. It cost more without doing a better job of providing health care.
The Case of North Dakota
Ezra Klein and Paul Krugman actually agree that a public option would help by providing competition in markets like North Dakota, a state highlighted as a problem state in a recommended diary at Daily Kos today. Blue Cross Blue Shield of North Dakota has a 90% market share in that state and is organized as a non-profit mutual company, in theory owned by customers. Allegedly, BCBSND has a poor record of cost control. It is also in the midst of some executive compensation scandals, something that doesn't directly matter to people who pay health insurance premiums unless it translates into higher health insurance rates.
But, North Dakota, despite the fact that one company has a 90% market share of its private health insurance market, turns out to be a place with a reasonably high rate of insurance coverage, and relatively low private health insurance rates. A single premium for an enrolled employee there is $364 dollars per year less than the national median of $3,706 (about 8% below the national median). North Dakota is the fifth most affordable state in the nation in which to buy health insurance.
North Dakota's Medicare reimbursement costs are also relatively low: $1,304 a year per beneficiary less than the national median of $6,070 per year per beneficiary, more than 20% below the national median, the second lowest in the nation.
If we want to lower health care costs, North Dakota is a better model than it is a cautionary tale.
North Dakota can be seen a couple of ways. One is as proof that non-profit insurance plans are more competitive and drive out for profit insurers given a chance. Ergo, non-profit co-ops without government involvement are good enough, without government ownership or privileges.
Another way to look at North Dakota is as proof that in the absence of competition, even the lack of a need to make profits and little need to do marketing doesn't prevent abuses by insurance company executives. Yes, North Dakota's rates are low, but they would have been lower if the executives of this non-profit were unfairly enriching themselves.
A public option can press a dominant player to be competitive, but so can a new non-profit co-op, or new rules that allow health insurance companies to market themselves across state lines, something that increases competition (at least until the industry shakes out), but also could gut the authority of state insurance regulators. Also, forcing new players into market would force companies like BCBSND to spend more on marketing and less on health care. Is that really a good idea?
The notion that North Dakota's insurance market is seriously broken, due to a lack of competition, compared to states with more health insurance competition, doesn't hold water. As a near single payer states, due to this near monopoly, indeed, North Dakota may be benefitting from the reduced administrative costs and increased leverage with providers that single payer systems create.
Indeed, it is ironic that while North Dakota can't really resolve the argument between Ezra Klein and Paul Krugman over whether a public option will have much of a cost control impact in a state where there is competition, it actually disproves both of them on a point where they agree, that competition reduces costs, even when the monopoly player is already a non-profit company.
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