Princeton health economist Uwe Reinhardt criticized most of the substance in President Barack Obama’s health care speech last week, particularly on the public plan and on insurance, while giving the speech overall a high grade.
Let’s start with the obvious.
To be sure, if a new public plan simply piggybacked on Medicare payment rates, it might help lower health spending ? I say, ?might? ? other things being equal. There is market power in monopsony (the economist?s word for a single buyer), at least insofar as prices are concerned.
But as the sorry role of the sustainable growth rate (SGR) mechanism for physician payments under Medicare shows, without better control over the volume of care paid for, the ability to control prices has its limits, too. And if members of Congress believe that a new public plan would experiment with smart ways to control that volume so as to increase the value received for the dollar, one may ask why Congress has not allowed the already existing public plan, Medicare, to show the way. Why wait to delegate the whole task to an as yet nonexistent new public plan?
This is the question President Obama has ducked even when asked directly, as at his August townhall in Raleigh.
While supporters of the president might even agree that we should fix Medicare first, as they said in 2005 when President Bush tackled Social Security, but we still need to rein in those greedy insurance companies who keep raising our rates.
Reinhardt has that covered, too.
Let us note at the outset that the huge profits many critics of the private insurance industry imagine in their railing against the industry actually are not that huge. Fortune magazine lists ?Insurance and Managed Care? at number 35 among the 50 most profitably industries in 2008, with an average profit margin (net after-tax profits as a percentage of revenue) of 2.2%. I find that margin on the low side. In normal times, the margin ranges between 3% and 5%. [Walmart has a 3.4% margin] Even so, lowering that margin some through more competition would not yield much of a harvest in cost control.
The non-profit Blues are often the largest insurer in a state, a point that Reinhardt skips, but which further undermines the argument against profit in the president’s plan. Reinhardt does comment, however, on the negotiations between insurance companies and large providers (often with employers and employees siding with the providers). Employers and employees miss the connection between higher payments and higher premiums. Smaller insurers, Reinhardt argues, including co-ops or a public plan competing on a “level playing field” would be in no stronger position to negotiate rates than existing insurers, and they could all end up weaker.
