Thursday, June 25, 2009

Beware the Eviscerated Public Plan

From GoozNews here. (Emphasis added.)

Princeton University's Paul Starr, author of the Pulitzer Prize-winning "The Social Transformation of American Medicine,"in recent weeks has been warning fellow progressives that a poorly designed public plan could backfire by becoming a costly dumping ground for the uninsurable near poor and chronically ill. He's now developed those themes in a new article on The American Prospect website. "Private insurers make money today in large part by avoiding people with high medical costs, and in a reformed system they'd love a public plan where they could dump the sick," he writes.

Starr's critique hinges on the use of insurance exchanges, established in every state, to broker access to all health insurance plans including the public option. He warns:

  • What if firms with a young, healthy workforce could buy insurance outside the exchange? That would force any insurer in the exchange, including the public plan, to cover an older and sicker workforce and their families.
  • Since the public plan wouldn't market the way private insurers do, a second level of adverse selection would then take place within the exchange. The public plan would become, in essence, a dumping ground.

"This double jeopardy of adverse selection could then more than nullify the advantage the public plan derives from its lower overhead (as a result of less money going for salaries, profits, and marketing)," he wrote.

Starr repeats what I've said many times in this space. For the public plan to work, Congress will have to regulate the exchanges to mitigate adverse selection. At the least, that requires insurers of high-risk patients to receive risk adjustment payments. Another option is to establish an aggressive government overseer for private insurers to prevent them from avoiding high cost patients. A third way is to tax insurers who cherry-pick healthy customers from the risk pool.

If Congress follows the Senate HELP committee bill and establishes 50 exchanges, how many states would be willing to follow any of those approaches? What would happen to the public plan in those states that allow it to become a dumping ground for the near-poor sick without employer paid health care? "There are a lot of ways to defeat reform, not just by blocking it entirely, but by setting it up for failure," Starr concludes. "Those who think a public plan is a good idea no matter how badly designed are not thinking ahead."

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