A Small Act of Genius

Earlier this week, Rep. Jan Schakowsky quietly made one of the most substantive attempts to rein in healthcare costs and reduce the deficit, all in one fell swoop.

House Democrats on Tuesday introduced the “Public Option Deficit Reduction Act,” which would provide consumers the choice to opt into a government-run health insurance plan in the Obamacare exchanges. 

The bill, which almost certainly cannot pass in the Republican-controlled House, is a mostly symbolic effort meant to keep the public option alive as a policy prescription. It is sponsored by Rep. Jan Schakowsky (D-IL), who is on the Energy & Commerce health subcommittee, along with Energy & Commerce Ranking Member Henry Waxman (D-CA) and 43 other lawmakers. 

“The Public Option Deficit Reduction Act will give health care consumers more choice and lower their premiums,” said Schakowsky. “And, by providing a lower-cost alternative to private insurance, it would put pressure on all insurers to lower their premiums in order to compete.” 

Citing an earlier estimate by the nonpartisan Congressional Budget Office, Schakowsky expects it to reduce the deficit by some $100 billion over 10 years by boosting competition among insurers and paying providers at Medicare rates. The 2010 version of the public option was expected to reduce the debt by $68 billion over 10 years.

The magic comes in the form of reduced administrative costs. Paul Krugman points to a research paper by Jacob Hacker, which says:

The public Medicare plan’s administrative overhead costs (in the range of 3 percent) are well below the overhead costs of large companies that are self-insured (5 to 10 percent of premiums), companies in the small group market (25 to 27 percent of premiums), and individual insurance (40 percent of premiums). 

These administrative spending numbers have been challenged on the grounds that they exclude some aspects of Medicare’s administrative costs, such as the expenses of collecting Medicare premiums and payroll taxes, and because Medicare’s larger average claims because of its older enrollees make its administrative costs look smaller relative to private plan costs than they really are. However, the Congressional Budget Office (CBO) has found that administrative costs under the public Medicare plan are less than 2 percent of expenditures, compared with approximately 11 percent of spending by private plans under MedicareAdvantage. [See page 12.] 

This is a near-perfect “apples to apples”comparison of administrative costs, because the public Medicare plan and Medicare Advantage plans are operating under similar rules and treating the same population. 

(And even these numbers may unduly favor private plans: A recent General Accounting Office report found that in 2006 Medicare Advantage plans spent 83.3 percent of their revenue on medical expenses, with 10.1 percent going to non-medical expenses and 6.6 percent to profits—a 16.7 percent administrative share.) 

The CBO study suggests that even in the context of basic insurance reforms, such as guaranteed issue and renewability, private plans’ administrative costs are higher than the administrative costs of public insurance. The experience of private plans within FEHBP carries the same conclusion. Under FEHBP, the administrative costs of Preferred Provider Organizations (PPOs) average 7 percent, not counting the costs of federal agencies to administer enrollment of employees. Health Maintenance Organizations (HMOs) participating in FEHBP have administrative costs of 10 to 12 percent. 

In international perspective, the United States spends nearly six times as much per capita on health care administration as the average for Organization for Economic Cooperation and Development (OECD) nations. Nearly all of this discrepancy is due to the sales, marketing, and underwriting activities of our highly fragmented framework of private insurance, with its diverse billing and review practices. Indeed, according to research by the Commonwealth Fund, the United States could save up to $46 billion a year if it spent what other countries with mixed public-private insurance systems, such as Germany, spend on insurers’ administrative costs. [Footnotes omitted.]

The beauty of this is that entry into the government program is completely voluntary. If you find the whole thing to smack of socialized medicine and death panels, you're free to continue with your regular plan. If you want to save a bunch of money through reduced administrative costs, you can do that too. It's up to you.

What would be screwed up, however, is if Republicans, in the name of liberty, used the tyrannical power of the government to prevent its citizens from participating in this program by voting this down. Which they most certainly will do.