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How to Get Public Option Benefits Without a Public Option

The public option debate, in hibernation since a public option was removed from health reform legislation in 2009, has reawakened. In July, Hillary Clinton and the Democratic party endorsed the idea of a launching a government-run plan to exert competitive pressure on private plans offered in Affordable Care Act (ACA) marketplaces. A nearly identical arrangement exists in Medicare—with a little-known twist that might be the key to getting most of the public option’s benefits, with fewer of its political risks.

Austin B. Frakt, PhD

(Image: Doug Levy)

Competition in some ACA marketplaces is weak. Health economist Richard Hirth, PhD, and physician John Ayanian, MD, MPP, both of the University of Michigan, report that this year, 15% of enrollees in ACA marketplace plans live in counties with only 1 or 2 options. Even less competition is expected next year because of the departure of several major insurers from many markets.

To increase competition and its benefits, Medicare is the mold in which former Secretary Clinton would likely reshape Obamacare if she becomes president. In the program’s Medicare Advantage plans, private insurers—often with circumscribed provider networks—offer comprehensive health plans that compete with one another in an online market, just like the ACA. But unlike ACA marketplace plans, Medicare Advantage plans also compete against traditional Medicare—a government-run public option with an open network that pays hospitals and doctors directly. Although in recent years traditional Medicare has been steadily losing market share to Medicare Advantage plans, it remains overwhelmingly popular, with nearly 70% of beneficiaries opting into it.

Consequently, traditional Medicare is a formidable competitor. Private insurers would have little success in attracting enrollees into their narrower network plans if they did not offer coverage at least comparable in quality and price, if not better. Perhaps, then, it is the competitive pressure from a public option that partly explains why Medicare Advantage plans offer, by many accounts, superior quality. They also offer more generous benefits, financed by government subsidies that exceed what it costs the plans to provide the basic Medicare benefit.

But what about the prices Medicare Advantage plans negotiate with health care providers? Does competition from traditional Medicare—which sets payments to hospitals and physicians according to government formulas, not negotiations—also exert downward pressure on the prices of private plans? Until recently, we had only limited and anecdotal evidence that they do so. But a new study by health economist Laurence Baker, PhD, and his Stanford University colleagues directly compared prices paid to hospitals by Medicare Advantage, traditional Medicare, and commercial market plans.

The study found that Medicare Advantage plans pay hospital prices below that of traditional Medicare, but commercial market plans (those for working-age individuals) pay prices far exceeding traditional Medicare. For example, in 2012, Medicare Advantage prices were about 8% below those of traditional Medicare. Medicare Advantage patients are typically healthier than traditional Medicare patients, and Medicare Advantage plans steer their patients to selected, in-network hospitals. These 2 factors explain about one-third of the 8% price difference between the 2 plan types.

Echoing other work, Baker and colleagues also found that in 2012, commercial market plans paid prices about 65% higher than traditional Medicare, with which they do not compete. Almost none of this price gap can be explained by differences in types of patients or hospitals. Because prices of the Medicare Advantage plans are relatively low (and they compete with traditional Medicare) and the prices of commercial market plans are relatively high (and they do not compete with traditional Medicare), it seems as if competition from a public plan makes the difference. A public option exerts downward pressure on prices—maybe.

But I think something else is going on. Provisions of the Social Security Act require that hospitals and physicians excluded from the network of a Medicare Advantage plan accept traditional Medicare prices when it serves that plan’s enrollees. And if they’d prefer to charge more, they may not make up the difference by raising patient cost-sharing. In other words, the prices of a Medicare Advantage plan are effectively capped at traditional Medicare levels. By moving a hospital, for example, from in-network to out-of-network status, the plan can get traditional Medicare rates. Thus, to get access to its network, and thereby receive a larger volume of business from a plan’s enrollees, hospitals and physicians must accept prices from a Medicare Advantage plan that are below those of traditional Medicare.

This raises the possibility of an approach to taming commercial market health care prices that is simpler than a public option. Instead, policy makers could impose a limit on how much providers could charge for out-of-network services. I’m not the only one with this idea. It’s endorsed by Jon Kingsdale, PhD, former executive director of the Massachusetts health insurance marketplace. And Jonathan Skinner, PhD, Elliott Fisher, MD, MPH, and James Weinstein, DO, MSc, suggest capping prices at 125% of those of traditional Medicare. Indeed, a new California law would do exactly this, requiring out-of-network providers to accept 125% of Medicare’s rates and capping patients’ liability to the normal in-network cost-sharing levels of their plans.

Under this approach, to become part of a plan’s network, providers would have to charge less than the cap. In turn, this would help address one of the more troubling practices in modern health care—so-called drive-by doctoring. This phenomenon occurs when patients unknowingly receive some services during an in-network hospital stay from out-of-network physicians. Some of those physicians charge well above in-network prices that insurers aren’t obligated to pay, but the patients are required to make up the difference, a practice called balance billing. As a result, patients may be saddled with massive bills.

As evidenced by the run-up to the passage of the ACA, a public option is highly controversial. Some worry that it is too big a step toward a single-payer system. But limiting the harm balance billing poses to unsuspecting patients—with real victims with sympathetic stories—is likely a lot less controversial. So much so that, although no state has enacted a public option, some have passed laws that protect consumers from balance billing, at least in some circumstances (ie, emergency care); others, like California, have gone much further.

If former Secretary Clinton’s effort to bring a public option to ACA marketplaces fails (as I and others think likely), she might look to what really exerts discipline on Medicare Advantage plan prices. Capping out-of-network rates has a lot of practical and political advantages.

About the author: Austin B. Frakt, PhD, is a health economist with the Department of Veterans Affairs, an Associate Professor at Boston University’s School of Medicine and School of Public Health, and a Visiting Associate Professor with the Department of Health Policy and Management at the Harvard T.H. Chan School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs, Boston University, or Harvard University.
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