JAMAForum:HowtoGetPublicOptionBenefitsWithouta

PublicOption
BYAUSTINFRAKT,PHDonOCTOBER5,2016

Thepublicoptiondebate,inhibernationsinceapublic
optionwasremovedfromhealthreformlegislationin
2009,hasreawakened.InJuly,HillaryClintonand
theDemocraticpartyendorsedtheideaofalaunching
agovernmentrunplantoexertcompetitivepressure
onprivateplansofferedinAffordableCareAct(ACA)
marketplaces.Anearlyidenticalarrangementexistsin
Medicarewithalittleknowntwistthatmightbethe
keytogettingmostofthepublicoptionsbenefits,with
fewerofitspoliticalrisks.

CompetitioninsomeACAmarketplacesisweak.Health
economistRichardHirth,PhD,andphysicianJohn
Ayanian,MD,MPP,bothoftheUniversityofMichigan,
reportthatthisyear,15%ofenrolleesinACA
marketplaceplansliveincountieswithonly1or2
AustinB.Frakt,PhD(Image:DougLevy)
options.Evenlesscompetitionisexpectednextyear
becauseofthedepartureofseveralmajorinsurers
frommanymarkets.

Toincreasecompetitionanditsbenefits,MedicareisthemoldinwhichformerSecretaryClintonwouldlikely
reshapeObamacareifshebecomespresident.IntheprogramsMedicareAdvantageplans,privateinsurers
oftenwithcircumscribedprovidernetworksoffercomprehensivehealthplansthatcompetewithone
anotherinanonlinemarket,justliketheACA.ButunlikeACAmarketplaceplans,MedicareAdvantage
plansalsocompeteagainsttraditionalMedicareagovernmentrunpublicoptionwithanopennetworkthat
payshospitalsanddoctorsdirectly.AlthoughinrecentyearstraditionalMedicarehasbeensteadilylosing
marketsharetoMedicareAdvantageplans,itremainsoverwhelminglypopular,withnearly70%of
beneficiariesoptingintoit.

Consequently,traditionalMedicareisaformidablecompetitor.Privateinsurerswouldhavelittlesuccessin
attractingenrolleesintotheirnarrowernetworkplansiftheydidnotoffercoverageatleastcomparablein
qualityandprice,ifnotbetter.Perhaps,then,itisthecompetitivepressurefromapublicoptionthatpartly
explainswhyMedicareAdvantageplansoffer,bymanyaccounts,superiorquality.Theyalsooffermore
generousbenefits,financedbygovernmentsubsidiesthatexceedwhatitcoststheplanstoprovidethe
basicMedicarebenefit.
ButwhataboutthepricesMedicareAdvantageplansnegotiatewithhealthcareproviders?Doescompetition
fromtraditionalMedicarewhichsetspaymentstohospitalsandphysiciansaccordingtogovernment
formulas,notnegotiationsalsoexertdownwardpressureonthepricesofprivateplans?Untilrecently,we
hadonlylimitedandanecdotalevidencethattheydoso.ButanewstudybyhealtheconomistLaurence
Baker,PhD,andhisStanfordUniversitycolleaguesdirectlycomparedpricespaidtohospitalsbyMedicare
Advantage,traditionalMedicare,andcommercialmarketplans.

ThestudyfoundthatMedicareAdvantageplanspayhospitalpricesbelowthatoftraditionalMedicare,but
commercialmarketplans(thoseforworkingageindividuals)paypricesfarexceedingtraditionalMedicare.
Forexample,in2012,MedicareAdvantagepriceswereabout8%belowthoseoftraditionalMedicare.
MedicareAdvantagepatientsaretypicallyhealthierthantraditionalMedicarepatients,andMedicare
Advantageplanssteertheirpatientstoselected,innetworkhospitals.These2factorsexplainaboutonethird
ofthe8%pricedifferencebetweenthe2plantypes.

Echoingotherwork,Bakerandcolleaguesalsofoundthatin2012,commercialmarketplanspaidprices
about65%higherthantraditionalMedicare,withwhichtheydonotcompete.Almostnoneofthisprice
gapcanbeexplainedbydifferencesintypesofpatientsorhospitals.BecausepricesoftheMedicare
Advantageplansarerelativelylow(andtheycompetewithtraditionalMedicare)andthepricesof
commercialmarketplansarerelativelyhigh(andtheydonotcompetewithtraditionalMedicare),itseemsas
ifcompetitionfromapublicplanmakesthedifference.Apublicoptionexertsdownwardpressureonprices
maybe.

ButIthinksomethingelseisgoingon.ProvisionsoftheSocialSecurityActrequirethathospitalsand
physiciansexcludedfromthenetworkofaMedicareAdvantageplanaccepttraditionalMedicarepriceswhen
itservesthatplansenrollees.Andiftheydprefertochargemore,theymaynotmakeupthedifferenceby
raisingpatientcostsharing.Inotherwords,thepricesofaMedicareAdvantageplanareeffectivelycappedat
traditionalMedicarelevels.Bymovingahospital,forexample,frominnetworktooutofnetworkstatus,the
plancangettraditionalMedicarerates.Thus,togetaccesstoitsnetwork,andtherebyreceivealarger
volumeofbusinessfromaplansenrollees,hospitalsandphysiciansmustacceptpricesfromaMedicare
AdvantageplanthatarebelowthoseoftraditionalMedicare.

Thisraisesthepossibilityofanapproachtotamingcommercialmarkethealthcarepricesthatissimplerthan
apublicoption.Instead,policymakerscouldimposealimitonhowmuchproviderscouldchargeforoutof
networkservices.Imnottheonlyonewiththisidea.ItsendorsedbyJonKingsdale,PhD,
formerexecutivedirectoroftheMassachusettshealthinsurancemarketplace.AndJonathanSkinner,PhD,
ElliottFisher,MD,MPH,andJamesWeinstein,DO,MSc,suggestcappingpricesat125%ofthoseof
traditionalMedicare.Indeed,anewCalifornialawwoulddoexactlythis,requiringoutofnetwork
providerstoaccept125%ofMedicaresratesandcappingpatientsliabilitytothenormalinnetwork
costsharinglevelsoftheirplans.

Underthisapproach,tobecomepartofaplansnetwork,providerswouldhavetochargelessthanthecap.In
turn,thiswouldhelpaddressoneofthemoretroublingpracticesinmodernhealthcaresocalleddriveby
doctoring.Thisphenomenonoccurswhenpatientsunknowinglyreceivesomeservicesduringanin
networkhospitalstayfromoutofnetworkphysicians.Someofthosephysicianschargewellabovein
networkpricesthatinsurersarentobligatedtopay,butthepatientsarerequiredtomakeupthedifference,a
practicecalledbalancebilling.Asaresult,patientsmaybesaddledwithmassivebills.

AsevidencedbytherunuptothepassageoftheACA,apublicoptionishighlycontroversial.Someworry
thatitistoobigasteptowardasinglepayersystem.Butlimitingtheharmbalancebillingposesto
unsuspectingpatientswithrealvictimswithsympatheticstoriesislikelyalotlesscontroversial.Somuch
sothat,althoughnostatehasenactedapublicoption,somehavepassedlawsthatprotectconsumers
frombalancebilling,atleastinsomecircumstances(ie,emergencycare)others,likeCalifornia,havegone
muchfurther.

IfformerSecretaryClintonsefforttobringapublicoptiontoACAmarketplacesfails(asIandothersthink
likely),shemightlooktowhatreallyexertsdisciplineonMedicareAdvantageplanprices.Cappingoutof
networkrateshasalotofpracticalandpoliticaladvantages.

***

Abouttheauthor:AustinB.Frakt,PhD,isahealtheconomistwiththeDepartmentofVeteransAffairs,an
AssociateProfessoratBostonUniversitysSchoolofMedicineandSchoolofPublicHealth,andaVisiting
AssociateProfessorwiththeDepartmentofHealthPolicyandManagementattheHarvardT.H.ChanSchool
ofPublicHealth.HeblogsabouthealtheconomicsandpolicyatTheIncidentalEconomistandtweets
at@afrakt.Theviewsexpressedinthispostarethatoftheauthoranddonotnecessarilyreflecttheposition
oftheDepartmentofVeteransAffairs,BostonUniversity,orHarvardUniversity.

AbouttheJAMAForum:JAMAhasassembledateamofleadingscholars,includinghealtheconomists,
healthpolicyexperts,andlegalscholars,toprovideexpertcommentaryandinsightintonewsthatinvolves
theintersectionofhealthpolicyandpolitics,economics,andthelaw.EachJAMAForumentryexpressesthe
opinionsoftheauthorbutdoesnotnecessarilyreflecttheviewsoropinionsofJAMA,theeditorialstaff,or
theAmericanMedicalAssociation.Moreinformationisavailablehereandhere.