OurFuture.org Blogs: Phillip Cryan

Health Care Reform Now at a “Which Side?” Moment for Progressives

Phillip Cryan — Mon, 16 Nov 2009 08:06:20 -0800

After a year’s arduous work on health care reform, some progressives are throwing up their hands in exasperation: what did we really get for all the struggle and strife? Will it make a real difference? Should we even support it?

The answers to those questions are ‘little’, ‘no’, and ‘no’, if you ask Robert Kuttner, Norman Solomon (who calls the bill “the next phase of healthcare apartheid”), Dr. Marcia Angell (“Is the House bill better than nothing? I don’t think so”), or a number of other prominent progressive commentators. According to them, Democratic legislators have compromised too often and conceded too much. The bundle of policies we’re left with is deeply flawed – imperfect half-measures unable to deliver on any of our major goals. Why bother fighting, in the end, to secure passage of a reform that’s so weak?

Voices of progressive critics like these have been a recurring feature of U.S. healthcare debate for decades. They tend to forget – improbably enough, for people who genuinely want to transform our screwed-up health care system – that only a political victory can change that system.

Again and again, over more than seven decades of this debate, progressives have focused their energies on arguing for the best (smartest, most humane, most efficient, etc.) policy, rather than on putting together a political strategy to get a real reform bill signed into law.

Are there real weaknesses and imperfections in the reform bill the House passed? Without a doubt. And they are not trivial matters. Anyone who cares about the health of our nation’s people and economy should take a good hard look at those weaknesses, and think seriously about what we can do to overcome them. (More on this below.) But to conclude that the bill should be opposed because of those weaknesses – or, perhaps more commonly among progressives, to conclude that the reform is nothing to get too excited about, derive hope from, fight for – is downright foolish. If President Obama signs a version of this bill into law, it will be a huge moment in our nation’s history. Such a moment has eluded would-be reformers for more than 70 years. From Truman to Johnson, from Nixon to Carter to Clinton, U.S. presidents have fought hard for policies that would overhaul our health care system. Countless progressive activists and organizations have led the push for systemic reform and universal coverage. They have been joined in these efforts at times by prominent centrists and Republicans. Innumerable economists, analysts, public health officials, and medical professionals have lent forceful support. Yet other than the 1965 creation of Medicare and Medicaid, these efforts have led only to defeat after bloody defeat.

In short: what is so extraordinary about this moment is not the policy contours of the bill but the prospect of actual legislative victory on a broad reform that dramatically expands coverage.

Formidable obstacles

The peculiar development of our health care system has produced powerful interest groups hell-bent on maintaining an obviously flawed status quo. They fight hard, and often dirty, to defend their revenue streams. This creates a fundamental paradox. As formulated by Jonathan Oberlander, “rising health costs put health care reform on the agenda, but the more likely a reform proposal is to control costs, the less likely it is to be politically viable.” The interest groups have a concentrated self-interest and an established political power that, decade after decade, have easily overwhelmed the diffuse concerns of the general public and the interests of the uninsured. In addition, many people are attached to the health care they receive through employer-based insurance and fear any change to that coverage. As was seen clearly in the last attempt at health care reform (during the Clinton administration), opponents can mobilize that fear of change among the already-insured with relative ease.

And yet the House has voted for a broad reform, and the Senate stands more than a fighting chance of doing the same. Politically, the Democratic Party is on the verge of fulfilling a longstanding nightmare of intelligent leaders on the right. As Bill Kristol famously warned (when marshalling opposition to the Clintons’ attempted reform), Democrats could cement their majority if they ever deliver another vast, popular benefit on a near-universal basis, like Social Security and Medicare. If Obama’s health care reform passes and proves successful, it will be a colossal political victory for the Democratic Party.

How were the obstacles overcome this time around? Sizable majorities in the House and Senate certainly help, as does a popular new president who decided to make health care reform his top priority. Swiftness matters too: it took the Clinton administration more than a year to put together a proposal, whereas health care reform headlined the legislative agenda this year as soon as the stimulus bill got through. By the time the Clintons’ bill was ready for public debate, his honeymoon was already over; the administration had even alienated much of its base by pushing NAFTA’s passage.

But along with all these factors making success more possible this time around, clearly the Obama administration made a strategic judgment from the outset that, in order to weaken opposition, they would have to make policy concessions to some of the major interest groups. The American Medical Association, for example, has endorsed Obama’s reform – after leading a successful effort to kill Truman’s and playing an ambivalent role during Clinton’s. The pharmaceutical companies have been pretty quiet. Many hospital and clinic systems are on board. Naturally, some of the concessions made to weaken opposition in turn significantly weaken the bill.

Even more importantly, the Obama administration made a strategic judgment that, in order to not frighten many of the insured with disruption of their coverage, the reform should build around the existing, obviously flawed employer-based system. It should not seek to remake the whole of our health care system – such wholesale transformation being a necessary goal if the vast inefficiencies in our health care system are to be done away with, yet a demonstrably impossible dream in the arena of U.S. politics.

Exaggerated judgments

Some proponents of the bill tend to overstate its virtues as policy, as though it would bring a definitive end to the injustices and inefficiency of our health care system. It will not.

On the other side, critics – meaning not the opposition-at-all-costs Republicans, whose arguments and counterproposals now lack all credibility, but thoughtful principled people who want something better than what the Democrats have on offer – tend to either a) decry or b) remain oblivious about the political calculations that have shaped the policy.

Progressive critics tend to focus exclusively on questions of policy design and principle. Often they regard politics as simply a corrupting influence or dirty intrusion. In the health care debate, more than any other arena of U.S. policy-making, radical activists and “neutral” policy analysts appear to be gripped by the same mystical faith in the triumph of principle over politics. “Speak Truth to Power,” both groups say, apparently believing that people who wield power are somehow incapable of withstanding their “Truth”. In health care policy the surprising affinities are especially clear because the two groups (radical activists and microeconomics-loving policy analysts) are often found advocating the same sorts of policy solutions: the demonstrably more efficient and humane health care policies already well established in other developed countries.

Oberlander nicely sums up what is wrong with such an approach: “The search for a technical solution to what is fundamentally a political problem is not likely to succeed.” As Jacob Hacker – on whose reform proposals the Obama administration’s approach is based – argued when presenting his “Health Care for America” plan in 2007: “Limits on public budgets, resistance to measures that might be seen as taking away what Americans already have, and the embedded realities of the present system all stand squarely in the path of grand policy redesigns.” As a result, political success requires “build[ing] around,” instead of dismantling, “the most popular elements of the present structure” like employer-based coverage and Medicare. But, as we see in the current debate, such concessions to political reality threaten to alienate progressives, whose vigorous efforts are needed to pass the reform.

The weaknessesWhile it is important to call out this unhelpful idealism among many activists and analysts, it is also important not to turn a blind eye to the deep imperfections of the reform. To stand any chance of improving on this package of policies, we must attend very carefully to its weaknesses. And we must be ready to continue the fight long after the bill’s passage into law, to strengthen and improve it.

A brief catalogue, then, of some of the principle areas where the reform needs improvement, needs continued attention and political efforts well beyond its passage into law:

The most obvious area of concern for progressives, in these first days after the House vote, is the abortion provision (the “Stupak amendment”) that was pushed through on the morning of the vote in order to appease conservative Democrats. This provision would significantly expand restrictions on women’s ability to have abortions covered as part of their health insurance. The New York Times editorial page provides a quick, useful summary of the reasons why the Stupak amendment is such a problem. Unlike the other weaknesses of the bill listed here, this is one that stands a decent chance of being corrected (either in the Senate or in conference committee) before President Obama signs a reform into law.
The switch, in the final weeks of debate in the House, to having the public plan negotiate rates with providers instead of having rates pegged to Medicare means less progress in “bending the cost curve.” Pegging public plan reimbursement rates to Medicare (the so-called “robust” public option) would have imposed more serious restraints on cost growth, generating more competition among private insurers (which in turn would have further restrained cost growth). The negotiation of rates does not by any means ensure the public plan’s failure to help bend the cost curve, but it makes success or failure in achieving that goal largely a product of implementation decisions and regulatory toughness rather than an established fact set in place by the policy.
The reform does not take definitive steps away from the “fee-for-service” payment system, which rewards medical professionals for the volume of services they provide rather than the quality of their care and patients’ health outcomes. Fee-for-service payment is, in many economists’ view, one of the most important factors accounting for the great inefficiencies of the U.S. health care system. While the House bill makes no immediate challenges to fee-for-service, it calls for the creation of a commission to study regional variations in health care costs and quality and possible policy solutions for improving the payment system. Under the House bill, policy recommendations from this commission would automatically become law unless Congress votes to overrule them (making it unnecessary for members of Congress to make a politically sensitive vote on payment reform that might have obvious virtues for the country as a whole yet bring significant cuts in payments to many districts’ health care providers). The Senate is expected to include a similar payment reform process in its version of the bill. It would be hard to overstate the importance, for the long-run goal of restraining health care cost growth (and thus keeping our economy from ruin), of the strength of this commission’s mandate. It can be safely assumed that most hospitals and insurers will fight hard to have the commission removed from the final bill, or to have its mandate so weakened that it becomes a procedural bauble rather than a serious policy-making body. The fight to get a commission with a strong mandate into the final bill, then to get good people appointed to the commission, then to push the appointees toward real departures from fee-for-service in favor of quality and outcome measures, will play a central role in determining whether this health care reform ultimately delivers on President Obama’s goal of reducing the rate of health care cost growth.
The House bill does not aim for truly universal coverage. The Senate is not likely to change this. To reach universal coverage, progressives will have to continue to fight hard to extend the reach of this historic expansion of coverage until it encompasses everyone. In particular, it will only be through tremendous efforts by progressives – not just on health care reform, but on other policy issues and in other political arenas – that all immigrants to this country will one day have access to the same quality, affordable health care as everyone else.
The implementation timeline for the House bill – as well as the likely Senate bill – is dramatically longer than it ought to be. Why should full implementation of the new health insurance exchange and public plan wait until 2013? Beyond the obvious policy and moral virtues of moving in a direction known to be better sooner instead of later, there is the political side of this unfortunate timeline: how are the Democrats going to reap benefits from this reform if voters do not see its full effects until three elections from now? Republicans can continue to run on anti-government animus, forecasting economic and spiritual calamity once the public plan gets implemented, instead of being confronted with the established fact of an efficient, popular public plan. Shortening the implementation timeline should be a top priority, out of pure self-interest, for any Democrat in elected office. For progressive activists, it should be a priority for reasons of principle as well as politics. Why should people have to wait four years for access to a public plan option, if they need it now?
Under the House bill – and likely even more so under the Senate bill, which is expected to have an “opt-out” provision for states – the Exchange, and the public plan option within the Exchange, will not initially have enough people enrolled in them to make a serious dent in the pace of health care cost growth. To help “bend the curve” of cost growth, the public plan needs to amass significant bargaining power (like Medicare does). Projections of major savings from an Exchange with a public plan option have assumed that a much larger number of people would access health insurance through the Exchange than the House bill promises. If, upon implementation, this health care reform resembles the state-level reform in Massachusetts – if in expanding coverage it simply generates more business for highly uncompetitive private insurers, failing to introduce competition through the efficiency of public provision of coverage – cost growth will continue apace. “Our country’s financial health will … be determined primarily by the growth rate of per capita health care costs,” as the current Office of Management and Budget director Peter Orszag summed it up in a New England Journal of Medicine piece he cowrote with Phillip Ellis two years ago. Without more people in the Exchange, the Obama reform will fail to deliver on the promise of reining in that growth rate.

Those are some of the principal weaknesses of the House bill. Another matter entirely is the Senate Finance Committee bill, some elements of which may end up in the bill the full Senate considers. If they do, this list of weaknesses could grow longer. If, on the other hand, Joe Lieberman and conservative Democrats have their way and the full Senate ends up voting on a package that differs little from the Senate Finance bill, the reform would, in my opinion, no longer be worthy of progressives’ support. In other words, we have our work cut out for us in the coming weeks just to make sure the Senate votes on a reform closer to the House’s bill than the Senate Finance Committee’s bill, so that the final version after conference will be worth fighting for.

The crucial pieces of the Finance Committee bill to be fighting against – to insist do not make their way into the bill the full Senate considers – include:

most obviously and most importantly, the Finance Committee’s abandonment of the public plan option (in favor of insurance “cooperatives”);
their decision to maintain state-level regulation of the private insurance industry (instead of empowering federal regulators to oversee this powerful national industry, as the House bill calls for); and
their failure to level the playing field by ensuring that all employers contribute to the provision of health care (abandonment of the so-called “play-or-pay” employer mandate).

The argument put forward in the rest of this essay assumes that progressives are successful in preventing the incorporation of these three components of the Finance Committee bill in the final reform. To achieve that, however, progressives will have to fight hard over the next few weeks.

Still worth fighting for?

Even if we assumes success in blocking the worst parts of the Senate Finance Committee’s bill, the list of policy deficiencies in the House reform is long. After contemplating that list, many progressives may be tempted to throw their hands up, dismiss it as a “sell-out,” or simply move on to other issues. That would be a grave mistake.

First, if the Democrats fail to pass a broad health care reform bill in the next couple months, it is unlikely that there will be any opportunity for them to pass other progressive policies in this Congress. The too-small stimulus package, enacted in a moment or real national panic and openness to new thinking about economics (an opening that closed very quickly), would prove the only real legislative accomplishment of Obama’s first two years in office. After a retributive landslide against Democrats in 2010, President Obama would either be rendered irrelevant or tack hard to the right. In either case, little or none of the progressive agenda for which Obama was elected would be passed into law.

Thankfully, that’s an unlikely scenario. More likely than not, enough Democrats will coalesce around a compromise health care reform bill that includes a public plan option for President Obama to sign it into law and then move on to other pieces of his legislative agenda. The Democrats will still lose seats in the House and Senate in 2010 – a party controlling the White House, Senate, and House almost always has, in U.S. history – but they will continue to advance a relatively progressive agenda in 2011 and 2012, and with luck for four more years after that.

But beyond such practical political considerations, the House bill would mark a watershed in U.S. social and economic policy. It vastly expands coverage. It bars exclusion from insurance based on preexisting conditions. Sick people won’t get dropped from coverage. Women will no longer be charged more than men for insurance. Employers who choose to not provide coverage will no longer gain an economic advantage from it. Regulation of the powerful, national insurance industry will take place at the correct scale: the country, not individual states. Finally and crucially, the reform will create a new institution (the Exchange, with a public plan option in it) capable of enhancing competition and reining in the pace of cost growth. Once created, the Exchange can be improved upon and expanded.

After the political debate of August and September, few would have expected both the House and Senate bills to include a public plan option. Most people thought the public plan would be, or already had been, dropped in the Senate. Then Democratic leaders resuscitated it, after the Senate Finance Committee concluded its molasses-paced efforts at “bipartisanship” (yielded a single Republican vote, already gone now that the public option with opt-out is on the table). Pressure from progressive activists – and in particular a turn toward direct confrontation with private insurers – gave Democratic leaders the opportunity to perform this unexpected retrenchment around the public plan option, without which the reform bill would stand little chance of reining in cost growth. (See my earlier post here for a summary of why the public option is so critical for cost control.)

In this moment of extraordinary political opportunity we can create a new institution to restrain cost growth, improve quality, enhance equity, and expand coverage. If we do not seize this moment, it is unclear when and how we could expect to begin a real overhaul of our deeply inefficient and unjust health care system. Unless one holds a mystical conviction in the inevitable triumph of Truth over all, it is hard to see why we should expect to ever get a better chance than this one.

Each individual policy compromise in this reform package can be subjected to useful scrutiny. But in the end a reform package that includes many concessions and weaknesses must come up for a vote on which there are only two options.

The concessions and weaknesses are products of strategic judgments that a) we must build around a peculiar, inefficient employer-based health care system in order to prevent serious public opposition to reform, and b) we must reduce interest-group opposition by inviting some groups into the fold and partially appeasing others. Whether those strategic judgments justify any one particular policy component of the ultimate reform package can be endlessly debated – and surely in some cases the proper judgment will be that too many or too deep concessions were made, that it was not necessary to give away so much policy substance in order to improve the political odds of passage. Yet in the end a bill comes to a vote – as it already has in the House, and hopefully will soon in the Senate – and at that moment the policy options are reduced to two.

That is what makes this moment fundamentally different from all the months of debate on health care reform up to this point. Contrary to what many supporters of the Obama administration’s approach have argued, activists calling for more ambitious reforms like single-payer have played a vital, entirely constructive role in the debate. If that contingent of activists had been larger and louder during the debate, the bill would surely be better than it is. The strength of a position more progressive than the administration’s pulls the eventual compromise in a progressive direction. But now we are all faced with something quite different from that process of debate, pressure, agitation and negotiation. We are faced with defined proposals to support or oppose.

If the question is “Is this reform better than nothing?” or “Which side are you on?,” there can be only one reasonable progressive answer. After more than 70 years of political failure, we fight with everything we’ve got for this reform. We celebrate without apology or equivocation, if we win. It will be a historic victory in the realms of both policy and politics. And then once it becomes law, we continue to fight with everything we’ve got to improve and expand it.

As if there weren’t enough reasons already to throw all the energy we can muster into this fight, the radical right provided another this past summer: to deny hateful tactics and ideology an enormous political victory. If their efforts were to succeed, both their techniques and their ludicrous convictions would multiply like wildfire. Denying them this victory serves our long-term societal health and stability at a level far beyond the policy question of health care reform.

Conclusion

As the economist Victor Fuchs has pointed out in regard to health care reform, while it is surely true that – as policy-focused commentators so often say – “the devil is in the details,” the logical implication of such a statement is that “God is in the essentials.” Progressive activists too often join microeconomics-loving policy analysts in worrying that the policy details must be exactly right for a reform to be worthy of their support. In attending to the correctness of policy, they turn away from politics. They also fail to recognize that the establishment of broad new institutional frameworks and principles – “the essentials” – has a much more lasting and decisive effect on policy outcomes than do the details of a reform when it is first enacted (cf. Social Security). There are many flaws in the details of this health care reform package; but the essentials usher in the first fundamental change in our health care system since Medicare and Medicaid, and a change with wider effects. Tens of millions more people will have coverage. And the institutional infrastructure will be in place to start reining in cost growth – if we continue to fight like hell, beyond passage, to strengthen and deepen the reform.

It has taken extraordinary efforts to reach this point. Generations of our predecessors have failed, despite strenuous efforts, to get this far. And Joseph Lieberman and several conservative Democrats still stand in the way of the absolutely critical public plan option. The fight requires the energies and attention of every progressive in the country, to see this reform across the finish line, to enable other policy and political gains under the Obama administration after health care, and to deepen and strengthen the reform once it’s passed into law.

Sitting out such a historic fight is simply not an ethical option. And at the moment of a “Yea” or “Nay” vote, denouncing the compromises in this reform – in the name of some purer policy ideal – is the same as sitting it out.

Phillip Cryan received a Masters degree from UC-Berkeley’s Goldman School of Public Policy in May. His report on the effect on employment of a “play-or-pay” employer mandate for health care was jointly published by the Institute for America’s Future and the Economic Policy Institute. He lives in St. Paul, where he is the Assistant Organizing Director of SEIU Healthcare Minnesota.

No Compromise on the Public Plan!: Why Weakening the Public Option Would Weaken the Party Responsible

Phillip Cryan — Tue, 30 Jun 2009 08:56:17 -0700

Why are all the alternatives to a robust public plan now being floated in the health care reform debate – cooperatives, state or regional plans, a “trigger” for the public plan, a public plan prohibited from bargaining with drug companies – such profoundly bad ideas?

For one simple reason: they would fail to rein in health care costs’ out-of-control growth rate.

And the effects of such a failure would very likely include not just unsustainable public budgets and the eventual collapse of universal health coverage but political calamity for the party that made the reform.

One of the greatest political opportunities in memory could be converted into lasting disaster, if conservative Democrats have their way and we get health care reform without a robust public option. Any concessions made to those Democrats – and to the handful of Republicans still playing nice, just as long as health reform doesn’t bother the insurance industry – on the public plan will prove extraordinarily costly down the road. The cost would be measured first in dollars – as suggested in my previous posts in this series (here, here, and here) – and later in votes.

If sweeping health care reform gets passed this year, irreversibly associated with Barack Obama and the Democratic Party regardless of the number of Republicans voting for it, and if a few years after that reform cost growth in health care continues at its current clip, Democrats will be in serious political trouble for a long time.
Why is the public plan option so crucial, for cost control? Building on my prior three posts about market power in health insurance and health care provider markets, I want to offer a simple, straightforward answer to this question: bargaining power.

No reason to expect efficiency where there’s no competition

To briefly recap my two main arguments up to this point (in the prior posts):

If we do not significantly reduce the current rate of health care cost growth, we are in deep trouble as a country. President Obama has been both eloquent and insistent on this point since the debate over health care reform began. “The long-term fiscal balance of the Unites States will be determined primarily by the future rate of growth of health care costs,” in Office of Management and Budget (OMB) director Peter Orszag’s neat summation.
The rate of health care cost growth stops looking so strange and unexpected as soon as you take a serious look at the extent of consolidation and the lack of competition in most of the country’s health insurance and health care provider markets. Given the extent of concentration in those markets, extreme rates of health care cost growth – with nothing to be shown for them, in terms of better outcomes for health care consumers – become expected, normal. In short: why would anyone expect oligopolist insurers and oligopolist providers to restrain prices, without effective pressure from the purchasers of insurance?

Why we need the public plan

Many critics of President Obama’s proposed reform have argued that regulation alone could do the job of ensuring coverage and restraining cost growth. They are mistaken.

I have cited a number of empirical studies in my prior posts to substantiate the claim that most health insurance and health care provider markets are deeply uncompetitive. This sort of argument might lead some people to imagine that what’s needed is simply regulatory action to break up trusts and get competition working again. But any dream of “restoring” robust competition to health insurance and health care provider markets through improved rule-setting and rule-enforcing government action alone is just that: a dream.

More aggressive regulation (especially prohibiting exclusion of applicants from insurance coverage for “pre-existing conditions”), prosecution to prevent price-fixing collusion, and dismantling of the biggest oligopolists would all be important and valuable steps for the federal government to take, surely. Each might “bend the curve” of health cost growth downwards slightly. Yet all three of those steps taken together would not add up to a restoration of competition. Far from it.

Full-fledged competition – i.e., the kind most people have in mind when they hear the word “competition,” the almost magical efficiency-generating kind economists rhapsodize about – in health insurance markets simply is not possible.

There are several reasons for this impossibility of full-fledged competition in health insurance. Among the most important:

There are significant economies of scale in the provision of insurance, including the simple fact that risk pooling works best when the pools are large;
The costs of entry into a health insurance market are very high;
It is hard to imagine what a viable, desirable substitute product for health insurance could be, to introduce competition from outside; and
“Health care markets remain and will likely forever be local,” making a significant degree of concentration in all small- to medium-sized local insurance markets inevitable.

So no matter what we do by way of rule-setting and rule-enforcing government action, private health insurance markets will remain far from competitive.

When insurers’ inherent uncompetitiveness gets combined with extreme concentration among health care providers, it becomes entirely logical and expected that health care costs would balloon out of control. The insurers stand between the providers and the purchasers of health care services in a three-party transaction. From the insurers’ perspective, on one side they find purchasers: diverse firms small and large, and families. On the other, they find the providers: increasingly consolidated firms that dominate local markets throughout the country. The bargaining power of the providers vastly exceeds that of us purchasers. They have market power; we’re disorganized (and also frankly confused by the whole byzantine system, its copays and deductibles and premiums and networks). Why would the insurers ever do anything other than strike deals with the providers (which raise prices for us health care consumers), given the lack of competition in both provider and insurance markets?

The only thing that can set this picture aright, that can bring balance and stability to the transaction, is the establishment of some real bargaining power on the purchaser side.

And the only way to do that is by offering a public plan option.

“The administrative efficiencies of government-run health insurance plans” – their dramatically lower overhead, compared to private insurers – and “the purchasing power of government to control costs” would be combined, in such a public plan, to introduce a degree of competition on price that is currently absent from oligopolistic insurer and provider markets. Regional or state-based public plans, cooperatives, and all the other compromise options on the table simply would not have the level of bargaining power required to eliminate waste and restrain cost growth. Without a robust public plan to compete with private insurers “we will continue to lack strong institutional mechanisms to rein in costs and drive value down the road, putting the broader goals of reform and our nation's public and private budgets at risk.” “The power of a large purchaser motivated to contain costs is needed to control rising health care expenditures,” note the Urban Institute’s John Holahan and Linda Blumberg.

The exercise of some “monopsony” (one buyer, multiple sellers) power by the government does not offer a panacea, but it is the best politically available means to rein in escalating costs. It will bring the three-party transaction into some balance – keeping the insurers honest, as President Obama has put it.

Universal coverage can boost economic growth

Building this countervailing bargaining power can be – very happily, for anyone with some degree of social conscience – a byproduct of offering universal coverage. But this will only happen if a robust public plan is offered alongside private insurance plans in the new insurance “Exchange” to be created by health reform legislation.
Some of us, of course, simply view access to quality health care as a social right. We’d be willing to pay a significant price, to sacrifice some economic efficiency or personal income, in order to achieve universal exercise of that right. (And I’d argue that far more people fall in this category than recognize that they do so. The principle of rationing by willingness/ability to pay would, I think – if it was articulated in clear terms – strike most people as seriously immoral and inhumane when it comes to the distribution of health care services.) But with health care reform no such deal needs to be brokered. It is precisely through the aggregation of our purchasing power that comes with universal coverage and a public plan that we can restrain cost growth, eliminate waste, enhance growth.

Our economy is weighed down – and will within a decade or two be positively wrecked, if present trends continue – by skyrocketing health care costs that yield no gain in health outcomes. In a marvelous feat of historical irony, it is precisely the decision to assert a sweeping social right that can save us from this great drag on growth – if we assert that right by creating a new public plan that challenges private insurers to restrain costs.

If we instead choose to assert that right – to bring universal coverage – in a way that avoids the private health insurance industry’s ire, we will be left with something like what Massachusetts now has: near-universal coverage, yet with no restraint whatsoever on health care costs. Such a path – which is exactly what all the “centrist” forces in both parties are now proposing, under many guises, as alternatives to a robust public plan option – would buy us a few years of feeling good about ourselves at the cost of both our country’s economic future and the very capacity to continue providing coverage to all.

Without restraint on health care cost inflation, we are screwed as a country. That’s regardless of what we do or don’t do about the equity (universal coverage) question. Without the exercise of some collective bargaining power on prices, it’s hard to imagine how we could ever restrain the health care cost inflation, given the characteristics of health insurance and health care provider markets. And that’s why a public plan option must be non-negotiable, in the health care reform debate now raging in Washington. It’s not that reform without a robust public plan option will be less effective. It will be ineffective, thus temporary and – as I’ll discuss in a moment – politically self-destructive.

An historic political opportunity

Happily, the public needs little convincing. The poll numbers are astounding. This should be the biggest political home-run of a generation.

72% support a government-administered public plan, according to a recent New York Times/CBS News poll. The Employee Benefits Research Institute – a group funded by the likes of JPMorganChase, Wal-Mart, General Dynamics, Morgan Stanley, Blue Cross Blue Shield, CIGNA, and United Health – found 83% in support of the public plan option.

If you’re unfamiliar with the world of public-opinion polling, let me assure you: these are historic-victory, beat-the-living-daylights-out-of-the-opposition polling numbers. When you add in the facts that a) the public plan option has already been widely framed as a controversial, partisan policy issue, and b) it has already made its way onto many voters’ radar, these margins are astonishing.

This is, without much room for argument, the best electoral opportunity the Democrats have seen in a generation; and it is quite possibly the best opportunity they will see for a generation to come. If they screw it up – by failing to restrain cost growth, when they extend coverage – it could be their Waterloo.

Harnessing competition

Self-proclaimed defenders of “Competition” and “The Free Market” always argue that government is woefully inefficient and wasteful. But as President Obama pointed out in a press conference last week, one can’t oppose a public plan on the grounds that it will compete the private insurers out of existence and still make such arguments about government inefficiency. It’s simply “not logical.” One of the views – a) inherent government wastefulness or b) the danger posed to private insurers by a public plan – must be relinquished in order for the other to be maintained, if one is to meet minimum standards for logic.

No one should hold their breath waiting on public plan opponents’ repentance for illogic, of course. But the president’s explanation of the rationale for a public plan calls attention to one of his reform proposal’s most important, defining characteristics: its very American belief in the good that comes from enhanced competition.
Rather than dismantling the private insurance system to replace it was a universal-coverage system in which government is, in a sense, the monopoly insurer and monopsony purchaser (as advocates of a “single-payer” health policy propose), President Obama proposes that we simply offer a public plan to compete with the private ones. If government provision of insurance proves wasteful and inefficient, private insurers will outperform the public plan. If the public plan proves more efficient, and grows as a result, it’s hard to see – from not just the standpoint of social welfare but of economics – why any rational citizen, outside the adversely affected industries, would see that as a bad thing.

Market-power-wielding firms will of course fear, and fight against, the enhancement of competition, even in small degree. That’s not really a critique of health insurers but a simple statement of fact regarding any firm that wields substantial market power. A public plan (with administrative efficiencies and some monopsonistic bargaining power) could force the private insurers to rein in their premiums, introducing a degree of competition on price and thereby cutting into the profits the insurers and the provider conglomerates have been enjoying.

Why would anyone expect the insurers to accept such a fate without kicking and screaming? Such protests should not, however, be confused with serious arguments about what’s good for society.

Conclusion

The fundamental falsehood in all the attacks on “Big Government” made by opponents of the public plan is the unspoken assumption that health insurance and health care provider markets are currently competitive – and thus that a public plan offered within a new insurance exchange would reduce rather than enhance competition. To confuse the absence of government action with the presence of competitive markets is at once the dumbest and the most widespread of the intellectual fallacies propagated by conservatives as “economics”.

Democrats habituated to caution and conservatism during the party’s long period lacking a critique of laissez-faire ideology need to listen to the political winds (and poll numbers!): the general public no longer believes in this dumb dichotomy between government and markets, policy-making action and competition. The usual bogeymen and scare tactics just aren’t resonating, this time around.

Voters want a robust public plan option. And voters will judge the Democratic Party for years to come on the success or failure of this reform – a reform which, given the characteristics of insurance and provider markets, has no chance of reining in out-of-control cost growth without the introduction of some substantial new bargaining power for the purchasers of health care services.

Attempts to “triangulate” on health care – whether they’re driven by ideological identification with the anti-government ethos that’s been dominant for so long, a habit of political caution, belief in the electoral or inherent virtues of bipartisanship, or some combination among these – will, if they succeed, steal defeat from the jaws of a sweeping social, political and economic victory.

Phillip Cryan received his Masters degree in Public Policy from the University of California, Berkeley’s Goldman School in May 2009. His report on the expected effects on employment from adoption of a “play-or-pay” employer contribution policy for health care was published by the Institute for America’s Future and the Economic Policy Institute in June.

Why Health Insurers Don't Control Costs

Phillip Cryan — Wed, 10 Jun 2009 07:50:14 -0700

In my prior two posts on health care reform, I described the debate now raging over whether establishing a new public health insurance option open to everyone should be expected to stimulate or kill competition and assessed the extent of competition in health insurance and health-care provider markets.

On the latter topic, the verdict was quite clear: In both insurance and provider markets, there is little evidence of anything like healthy competition. Instead, in most parts of the U.S., the two markets appear to be oligopolistic: A small number of firms dominate, wielding price-making power.

All this leads us, then, to the question posed in the title: Why, exactly, are health insurers so bad at controlling costs?

There are several components to a full answer to that question, of course. Among the most important:

The great market power wielded by insurers, as discussed in my last post;
“Shadow pricing” by smaller insurers (setting their prices based on the prices of larger, market-power-wielding insurers, instead of seeking to compete through offering lower prices);
Barriers to entry in both insurance and provider markets;
Our “fee for service” payment system (which creates incentives for provision of more, and more expensive, services, rather than for effectiveness and efficiency);
The lack of comparative effectiveness research and standards, and more generally the “public good” characteristics of information about health care practices and outcomes (making private insurers unlikely to invest in generating such information);
The great information-gathering challenges buyers of health insurance face; and
The high administrative and marketing costs of private (compared to public) insurers (six times the average administrative costs per capita in wealthy countries, according to a recent McKinsey & Company report).

But here I want to focus on a less frequently discussed factor contributing to the runaway inflation of health care costs: market power among providers. This factor is especially important to understand, I think, for the current debate over whether to include a public plan (and one permitted to use its bargaining power when negotiating rates with providers) in a reformed health care system.

The Importance Of Providers’ Market Power

Here's a quick summary of my argument in this post: even if we were to assume that private insurers act as beneficent seekers of the public good, it is hard to see how they would effectively bargain for lower premiums by forcing providers to accept lower payments, given the market power now wielded by the top providers in most local markets.

Let me explain.

All else being equal, providers prefer higher over lower rates of compensation for the health care services they provide. (To be clear: when I say "providers," I'm not referring to the doctors, nurses, nurses' aides, etc. who take care of us but to the increasingly-consolidated hospital companies for which most of them work.) More pay—whether it goes to shareholders, employees, new investments, or some combination among these—is a self-evidently good thing, if it can be achieved. When providers enter negotiations with insurers, they seek—for perfectly respectable, ordinary reasons—to maximize the payments they receive.

The insurers' position is actually more ambiguous. They're situated in between the sellers and buyers of health care services. They provide insurance to the buyers and purchase services from the sellers, to deliver those services to the buyers they insure. If there was no market power on either side of the insurers—if the bargaining power of both providers and payers was close to zero, with provider markets functioning competitively—then insurers would seek to increase their market share by competing to provide the highest quality coverage, the lowest prices, or some especially desirable combination of price and quality.

Unfortunately, health care provider markets operate nothing like that. On one side of the (highly consolidated, oligopolistic) insurers are the consumers of health care—all of us lucky enough to still have insurance - operating for the most part as employees of a firm or as individuals. On the other side sit the providers, who in many local markets are more consolidated than even the insurers. Under those circumstances, it would be foolhardy for a profit-maximizing insurer to seek to do anything other than accept price increases demanded by providers, at the expense of consumers. A market-power-wielding provider's threat to not work with an insurer (if the insurer tries to insist on cost control) must be taken very seriously.

And on the other side, patients lack the alternative options ("if you don't rein in the growth of premium prices, we're going to….."), access to information, and collective voice necessary to make any countervailing demands on insurers. For an insurer situated between these two sides—even if you suspend disbelief for a minute and assume them to be concerned primarily about the health of the people they insure—it's a no-brainer: concede to what the providers demand, and pass the higher premiums along to consumers.

Why should the insurers fear providers' threats of pulling out? Because most patients, and most employers who provide insurance to their workers, expect to have some choice among local hospitals. In fact, it's one of the very few things about health insurance plans that patients and employers have access to clear information on and are in a position to compare. If, for example, two out of the three major insurers operating in a local market cover care from all the major local providers, and the third insurer does not, then that insurer will lose business until it wises up.

Insurance companies simply size up the bargaining power on either side of them and make the logical choice: meet the providers' demands, and pass along payment increases to health care consumers. As long as they're not forced to restrain price inflation by some kind of countervailing bargaining power on the patients' side, it's hard to see why anything about this dynamic would change.

So-called "flagship hospitals" have always exercised a degree of market power in local provider markets. Everyone wants access to the famous medical center with the genius doctors as part of their insurance plan, if they live in a place where such a provider exists—giving that provider a degree of monopoly pricing power when it negotiates with insurers. What has changed over the last 20 years—beyond the general trend of consolidation among hospitals, which has increased oligopoly market power—is that those flagship institutions have increasingly become part of multi-hospital consortia. A consolidated group of hospitals that includes a flagship institution wields not just the market power of constituting a large percentage of the local market but also the market power of including a provider that buyers of insurance value above others. Whoever came up with this idea—of letting lots of other providers "piggyback" on a flagship, vastly expanding the consortium's pricing power—richly deserves the early retirement on some Caribbean isle I imagine they're enjoying.

Many of the health care providers with the greatest market power plow a large percentage of their annual surpluses into construction projects and new technologies, after taking out a relatively small percentage of their surplus as profits (or none, if they're nonprofits). Such investments have led to a kind of "medical arms race" in which "new medical facilities generate their own demand, because when there is more treatment available, doctors order more care for their patients." Such spending exacerbates the market failures (of oligopoly and monopoly power) already discussed. Excessive spending due to reliance on expensive but not necessarily better technologies is one of the inefficiencies in the U.S. health system most commonly noted by scholars comparing it to other countries' health systems.

Low Transparency, High Prices

For example, to prove the effects of provider consolidation, it would be great to be able to look at insurers' pricing practices. But "health plan pricing data is proprietary", so such an analysis is something "only the federal government can undertake through exercising its subpoena power." Since "contracts between insurers and hospitals typically include confidentiality agreements" it is very difficult for the public to determine whether insurers pay rates to providers based on anti-competitive price-coordination rather than the kind of cost-minimization competitive markets are supposed to generate.

Fortunately—as long as a couple of them continue to exist, anyway—newspapers can sometimes step in when regulators are asleep at the wheel: in late 2008, the Boston Globe published a series of investigative articles on Partners HealthCare, a multi-hospital consortium founded in 1994 through a merger between Boston's prestigious Brigham and Massachusetts General hospitals. Each of these two hospitals already exercised significant "flagship" bargaining power prior to the merger.

Globe reporters discovered that in 2000 the CEOs of Partners and the state's largest insurer, Blue Cross Blue Shield (BCBS) of Massachusetts, agreed to a major payment increase for Partners. In return for receiving higher payments from BCBS, Partners "promised to push for the same or bigger payment increases" from other insurers. The Partners CEO's attorneys warned him at the time "that a written agreement between the state's biggest hospital company and its biggest health insurer that would make insurance more expensive might raise legal questions about anticompetitive behavior," according to the Globe. So the deal was sealed not with a contract but a handshake. BCBS called it a "market covenant."

Partners is the state's largest private employer, and it appears to have had little trouble convincing other insurers to go along with the higher prices the dominant insurance player agreed to. BCBS, meanwhile, saw its largest-ever increase in enrollment in 2000—the year of the "covenant" with Partners—and its profits have topped $200 million for five consecutive years.

It seems reasonable to assume that Boston is not the only place in the country where market-power-wielding insurers and market-power-wielding providers have reached such gentlemen's agreements, given the basic principles of economics. Absent some bargaining power on the purchaser side, it's perfectly natural that consolidated, poorly regulated insurers and consolidated, poorly regulated providers preside over a rapid increase in health insurance prices. Why would they do anything else?

A Final Note

What's funny about this whole discussion is that all the arguments I've been making—not just about providers' market power, but in the list of other factors contributing to cost inflation mentioned at the beginning—are drawn from elementary microeconomics. They're about the virtues of competition, and standard ideas of what you can do to generate more of those virtues in situations where you find oligopolies and other kinds of market failure.

Isn't the other side in this debate—the opponents of a public plan—supposed to be the one championing markets, competition, and the whole microeconomics "self-interest" creed? Aren't progressives supposed to be the ones who don't care about costs, who waste everyone's hard-earned money on do-gooder schemes?

Lest we forget, while focusing so much on cost control (on which the pro-public plan side's arguments are indeed both more persuasive and better informed by economics than are those of the public plan's opponents), I want to remind you in closing that comprehensive health care reform that includes a public plan would do considerably more than rein in cost inflation. It would, in fact, help us to remedy what Martin Luther King, Jr. called "the most shocking and inhumane….of all the forms of inequality": inequality in people's access to the basic human right of good health care.

Phillip Cryan received his Masters degree in Public Policy from the the University of California, Berkeley's Goldman School of Public Policy.

Vital Signs Weak: Competition In Health Insurance And Health Provider Markets

Phillip Cryan — Wed, 11 Mar 2009 07:44:01 -0700

Republican attacks on President Obama’s proposal to give everyone the option of buying into a new Medicare-like public insurance plan have, as I suggested here, put ideological arguments about “Big Government” and “The Market” right at the heart of our public debate once again. Republican opponents of a public insurance plan claim, as ever, that they are the righteous defenders of “Competition.” And they cast the public plan’s supporters as competition’s enemies. But when it comes to health care reform, nothing could be further from the truth.

Markets work when many competitors vie for customers by offering better quality, new products, convenience, or lower prices. To know whether a particular market is working in this way – whether it is competitive, and thus likely to deliver on the benefits for which economists love markets – you have to actually look at it. The extent of competition in a particular market is an empirical question. You get nowhere, analytically, by just assuming that wherever there are private firms there must be a functioning market – as the self-proclaimed defenders of “The Market” always do.

You get nowhere analytically by making that simplistic assumption – but ideologically and politically, it’s a different story. If enough people can be convinced that “The Market” is a kind of all-seeing, all-knowing deity – and “Big Government” its sworn enemy – then you can preserve the kinds of uncompetitive markets that standard economic theory alone would tell us generate excess profits at the public’s expense. A few companies can consolidate market power, raise prices (because of the lack of competitive pressure), reap extraordinary profits, and still have plenty left with which to pay off their enablers (such as legislators who keep government off the companies’ backs and opinion-makers who keep people reverent, bewildered, prostrate before “The Market”).

To make sense of the urgent and resolute (if logically awkward, as pointed out here and here) calls by opponents of a public health insurance plan to uphold “Competition” by ensuring there’s no competition in health insurance, we should begin by simply turning to the data.

How competitive or uncompetitive are health insurance and health care provider markets? Answering this question will help us not only to make sense of the fervent Republican opposition but to understand the reasons a public insurance plan is so essential if we want to achieve President Obama’s twin goals of reining in health care price inflation and offering everyone quality coverage.

It turns out that both health insurance markets and health care provider markets are highly consolidated throughout most of the country. Competition is anything but robust. A single firm dominates the health insurance market (accounts for more than 50% of the market) in 64% of the country’s metropolitan areas, and one insurer controls 30% or more of the market in all but 4% of metropolitan areas. Across 38 states, Blue Cross Blue Shield’s median market share in 2008 <a href=“http://www.gao.gov/new.items/d09363r.pdf”>was 51%</a> -- up from 34% in 2002.

As a recent study by Kellogg School of Management economist Leemore Dafny concludes, “to date there is little empirical evidence to support the assumption of robust competition among insurance carriers.” Moreover, Dafny notes that“de facto price discrimination is most pronounced in markets with a small number of insurance carriers.”

Just how uncompetitive does a market have to be for us to have good reason to worry about the exercise of oligopolistic market power (a small number of firms controlling so much of the market they’re insulated from competition and able to raise prices at the public’s expense)? One measure of markets’ competitiveness used by economists and antitrust lawyers to determine when there’s reason to worry is called the Herfindahl-Hirschman Index (HHI). If a particular market has an HHI of 1,800 or higher, the Department of Justice considers it “highly concentrated.” For health insurance markets, 34 of the nation’s 50 states had HHIs higher than 1,800 in 2004, according to a study by health economist James C. Robinson. This absence of competition in local health insurance markets clearly matters, for health care consumers and for the nation’s overall health care spending. One recent study found insurance premiums 12 percent lower in markets with lower levels of concentration.

“There might be less concern about increasing costs if they yielded commensurate gains in health,” noted current Office of Management and Budget director Peter Orszag in a New England Journal of Medicine article he co-wrote in 2007. But they do not. Because of all the consolidation, in short, competition in health insurance markets has “devolved into [rewarding whichever] health plans [have] the greatest market share.”

But the astonishing rates of price inflation for health care – putting a heavy strain on both government and family budgets – cannot be accounted for by looking only at the market power wielded by insurers. We also have to look at – among other factors – the extent of competition among the firms insurers pay: health care providers, whether shareholder-owned or non-profit. Insurers have been “able to raise prices consistently above the rate of growth in costs,” notes the health economist Robinson. But they would have had much less ability to do so if the “balance of power” between purchasers of health insurance and health care providers had remained as it was until the early 1990s, before the wave of mergers and acquisitions among providers got started.

Since the early 1990s, providers have increasingly sought to merge and grow into multi-facility consortia capable of wielding market power. The mergers and acquisitions were precipitated, in large part, by providers’ recognition of their (prior) lack of bargaining power facing oligopolistic insurers. “The consolidation of hospital systems that has occurred in recent years” has by and large succeeded in increasing their bargaining power relative to insurers, according to a recent Urban Institute report– with disastrous consequences for private and public budgets.

Just how uncompetitive are provider markets today? Recall that a Herfindahl-Hirschman Index (HHI) rating above 1,800 suggests a “highly concentrated” market, according to the Department of Justice. By 2000, the median HHI for U.S. health care provider markets was 3,995, according to a 2006 report by Carnegie Mellon professor Martin Gaynor. In many rural areas and small cities, health care consumers face a single monopolist health care provider, or a market in which there are only two or three total providers. Any health care provider wielding substantial market power should be able to negotiate for significantly higher payments from insurers.

And the consolidations have not stopped. In a 2008 memo titled “Are You Ready for the Next Wave of Healthcare Provider Consolidation?,” the president of a health care strategic planning consultancy counsels that “some leaders can position their organizations as consolidators, while many others must be realistic about their likelihood of survival if they go it alone.”

Such market power-wielding providers can, of course, raise prices to their own benefit, at patients’ expense. Moreover, a study of hospital mergers from 1989 to 1996 found “sharp increases in rivals' prices following a merger, with the greatest effect on the closest rivals.” In other words, when providers merge to gain more market power, they are not the only ones in the local market enabled to raise prices. Those rivals who are not eliminated can too, due to the weakening of competition. In short, oligopolies work just as simple economic reasoning would expect them to, raising prices to the benefit of the oligopolists at the expense of the public – in health care provider markets, just as in health insurance markets.

And as we’ll see in my next post, it is the combination of the two that’s really lethal, if we’re concerned about both prices and quality in health care.

“For decades the United States has sought to use competition to motivate improvements in the health care system’s performance,” concludes Robinson. “But competition requires competitors.”

Competitors are scarce in most health insurance and health care provider markets in the U.S. The next task to take on, then – and a more complicated one – is explaining why this is the case. I’ll move from symptoms to diagnosis in my next post.

Phillip Cryan received his Masters degree in Public Policy from the the University of California, Berkeley’s Goldman School of Public Policy.

Who’s Afraid of Competition?

Phillip Cryan — Fri, 06 Mar 2009 07:50:20 -0800

For opponents of President Obama’s health care reform efforts, there’s no greater rallying cry than “Competition!” Invariably, government is presumed to be competition’s sworn enemy. Senator Tom Coburn, M.D. (R, OK) provides a nice summary of this point of view:

“We are either going to have a government-run health care system or we are going to have a private, vigorous, healthy, consumer-oriented system where we actually allow market forces to allocate these scarce resources.”

Unfortunately for Sen. Coburn’s line of reasoning – as Monica Sanchez recently noted (here and here) – when it comes to health insurance, “vigorous, healthy” competitive markets are a pipedream. They do not exist anywhere in the country, and it is highly unlikely that they could. Instead, in nearly every local market in the country a very small number of insurers exercise what economists call “oligopoly” power (the ability to charge prices higher than their costs, because of the absence of robust competition). And as long as private firms remain the dominant insurers (and weakly regulated ones at that), it’s very hard to imagine how more competitive health insurance markets could come into existence.

Strong government action – the antithesis of “vigorous, healthy, consumer-oriented” markets, in Sen. Coburn’s worldview – is desperately needed to bring some competition over price and quality into the health insurance industry.

The government action required includes the kinds of efficiency-enhancing measures President Obama kick-started through the stimulus package – investments in better information-technology systems in health care, in preventive care, and in studying whether “comparative effectiveness” measures can improve quality and control costs. His Office of Management and Budget director Peter Orszag is a leading authority on these tools for “bending the curve” of health care cost growth, and there may be bipartisan support for extending some of these measures further as part of a comprehensive health care reform package.

The government action required also includes more aggressive regulation of private health insurers, especially by prohibiting them from competing through exclusion of the most sick or likely-to-become-sick from coverage. (Seems like a no-brainer, huh?) There may even be some Republican support available for such regulatory strengthening, at this time of rapid shifts in public sentiments about government. “Regulation” was a dirty word in American politics for three decades, reliably drawing a groan of dismay. (“There they go again – those bungling, greedy bureaucrats messing with The Market.”) But when President Obama, in his speech before Congress last week, mentioned regulating the financial industry, there was a standing ovation before he could even finish his sentence. And it was a bipartisan cheer – I couldn’t spot a single legislator, of either party, still in their seat.

As important as these kinds of reforms are, there is a third and absolutely critical form of government action required, if we want to provide quality coverage to everyone and rein in the runaway cost inflation in health care: creation of a new public insurance plan that is open to everyone, to operate alongside private insurance plans. This is what President Obama proposed on the campaign trail, but it has not appeared in his speeches this week on health care reform; apparently, he wants to leave this policy design question open for legislators to weigh in on.

Unsurprisingly, a group of Republican senators threw down the gauntlet this week, saying that they’re willing to talk about all the other components of health care reform but not this one last, critical piece. A public insurance plan would mean Big Government messing with the superior wisdom of markets once again, they said – “another Washington bureaucracy” stepping on our freedoms. But there was a curious twist to their argument, this time around: instead of suggesting that fumbling, wasteful government would make health care more costly and inefficient, their concern was that private insurers would be forced out of business through competition from the public plan. That’s right: the competition introduced by creation of a public plan is what they’re so scared of.

While the Republican senators contend that a public plan would drive private insurers out of business, careful analyses (such as this, this and this) of the kind of “hybrid” health-insurance system (with public and private plans operating side-by-side) proposed by President Obama predict a mix of public and private plans operating long into the future. What they also predict, though – and this may give us a better understanding of the Republican senators’ gauntlet-tossing – is that the public plan will force private insurers to slow down the rate of price inflation. In other words, they will actually have to compete for customers based on price and quality (that is to say, the mechanism through which markets work), thanks to the public plan. And there’s no reason to think they can’t do so, if this competitive pressure is introduced into the system.

At the same time, there’s no good reason to expect them to ever rein in health care price inflation as long as we fail to introduce more competitive pressure through creation of a public plan. Oligopolistic insurers and oligopolistic health care providers (the small number of consolidated hospital and clinic groups that dominate most local health care markets, as will be described in my next blog post) can pass on price increases to health care consumers (that is, all of us). In some instances, they do this through explicit anti-competitive price-raising agreements, but simple economic reasoning should lead us to expect that in a great many more cases a similar effect (prices raised, to the mutual benefit of insurers and providers, at the expense of the rest of us) is achieved with no need for direct collusion. This anti-competitive dynamic appears to be exactly what has happened in Massachusetts, where health care reform required everyone to get coverage from private insurers without creating a public plan or introducing any other means of “bending the curve” of price growth.

What’s needed, in short, to provide quality coverage for everyone and at the same time stop prices from breaking both our private and public budgets, is countervailing bargaining power for health care consumers. This bargaining power would balance out the price-setting power of oligopolistic insurers and oligopolistic providers, introducing more competition on price and quality into health insurance markets. A public plan open to everyone would provide that countervailing bargaining power, because of the large number of people covered (on whose behalf the government would have an incentive to bargain for better rates from providers) and the administrative efficiencies of public insurance programs compared to private ones.

Most importantly – for making sense of the political fight now fully joined on whether to include a public plan in health care reform – a public plan would generate, not impede, competition in health insurance markets. And that, in fact, is why the self-proclaimed defenders of the “Free Market” – who just happen to have some longtime friends in the health insurance and pharmaceuticals industries – fear and oppose it.

Phillip Cryan is a graduate student in the Goldman School of Public Policy, at the University of California, Berkeley. For his Masters thesis, he is analyzing the impact of an employer play-or-pay mandate for health care on employment.