New Report Shows Why Health Care Reform Must Include Obama's Public Health Insurance Plan

National health care reform legislation must provide consumers the option to join a new public health insurance plan that would directly compete with private health insurance plans, according to a new report, "A Public Health Insurance Plan: Reducing Costs and Improving Quality" released today by the Institute for America's Future. The report compares the long and successful track record of Medicare, which would partly serve as a model for a new public health insurance plan, against the record of private plans, and argues that such a model is the best way to drive down costs and improve health care quality.

During the campaign, President Obama proposed a public health insurance plan as part of a new National Health Insurance Exchange, through which individuals and small businesses could purchase health coverage. Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, has made a similar proposal.

"The public health insurance plan will be a major point of contention as the debate over health care reform heats up," said Roger Hickey, co-director of the Institute for America's Future. "Groups representing consumers and patients are aligned in favor of Obama's proposal, and the insurance, drug and hospital industries are arrayed against such a proposal."

Frank Clemente, health care expert and author of the report, joined Hickey on a conference call today to release the report. "There is overwhelming evidence that a public health insurance plan controls spiraling health costs much better than private insurance, while providing high-quality care and the broadest choice of providers to consumers," said Clemente. "Giving consumers the ability to choose between competing public and private health insurance plans will save the system enormous sums of money and give consumers peace of mind."

Richard Kirsch, national campaign manager for Health Care for America Now, a coalition of groups working hard to make quality health care affordable, joined Hickey and Kirsch on today's call. Kirsch pointed to new public opinion data by Celinda Lake that shows most Americans want a public health insurance plan.

Said Kirsch, "Including the choice of a new public health insurance plan in comprehensive health care reform is the only way to bring down costs and force private insurance companies to compete. We need a guarantee of quality, affordable health care for all in 2009, and the public clearly understands the importance of having a choice of a private or public health insurance plan. The public clearly understands it's how we hold insurance companies accountable and guarantee we will have quality, affordable health care when we need it."

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**For more information, including the full report, a one-page brief of key findings, and public data, please visit: https://institute.ourfuture.org/public_plan**

Major findings from "A Public Health Insurance Plan: Key to Controlling Costs and Improving Quality" [PDF] include:

• Private insurers' health care spending has grown much faster than Medicare spending over the last 25 years. Private health insurers' average annual spending growth per enrollee was 29 percent higher than Medicare spending growth between 1983 and 2006, and it was 59 percent higher between 1997 and 2006, according to Centers for Medicare and Medicaid Services data. The spending was for comparable benefits and despite Medicare's much older and therefore much costlier population. The beginning of these two time periods correspond to major reforms to Medicare's provider payment policies designed to deliver greater value for our health care dollar.

• The private health insurance market is highly consolidated and needs competition from a public plan to lower skyrocketing premiums. In 16 states the dominant carrier accounts for at least 50 percent of private insurance enrollment. In 40 states the top three carriers account for between 60 percent and 100 percent of the market. Despite this consolidation, dominant insurers are not driving hard bargains for reduced prices from hospitals because insurers want to offer their customers access to flagship hospitals, which are not reducing their rates to private carriers because the hospital market has also become highly concentrated. In this increasingly consolidated insurance and hospital marketplace, employer-paid premiums have increased an average of 12 percent a year since 1999.

• Insurance company and hospital profits have skyrocketed during this consolidation. The combined profits of 15 of the country's largest private health insurance companies rose from $3.5 billion in 2000 to $15 billion in 2007 - an increase of 330 percent, according to company SEC filings. CEOs at the health insurance companies were compensated a combined $147.5 million in 2007 - an average of $10.5 million each, or 259 times more than the $40,690 an average worker made that year. U.S. for-profit hospitals reported $43 billion in profits in 2007, their best single-year jump in profits in at least 15 years, according to the American Hospital Association.

• Administrative costs are dramatically lower under public health insurance plans, resulting in enormous savings to the system. The administrative costs and profits of Medicare Advantage plans, which are run by private insurers, were 11 percent of spending in 2005, according to the Congressional Budget Office (CBO). By comparison, Medicare's public plan had administrative costs of less than 2 percent. A Government Accountability Office study found an even bigger gap - private Medicare Advantage plans spent 16.7 percent of their revenue on administrative costs and profits in 2006. Moreover, private health insurance industry spending for administration and profits jumped 12 percent a year from 2000 to 2005 - 40 percent faster than overall health spending growth and 50 percent faster than growth in hospitals' and physicians' spending. Private health insurance industry employment grew 52 percent from 1997 to 2007, but during the same period private health plan enrollment of those under 65 rose by just 3.4 percent.

• Public health insurance plans' much greater bargaining power achieves more reasonable provider costs than do private health insurance plans. Medicare pays hospitals about 25 percent less than do private insurers for comparable benefits, according to the Medicare Payment Advisory Commission (MedPAC). Yet, virtually all hospitals participate with Medicare. Medicare pays physicians 19 percent less than do private insurers for comparable services, according to MedPAC. Yet, 97 percent of all doctors are taking new Medicare public plan patients, virtually the same rate as are accepting private PPO patients. The number of physicians billing Medicare is growing much faster than enrollment growth in Medicare Part B, which pays for physician care.

• In a head-to-head competition, the public Medicare plan is much better at containing costs than private Medicare Advantage plans. Private Medicare Advantage plans are being paid 14 percent more than Medicare's public plan for providing comparable coverage in 2009, according to MedPAC - nearly $1,250 more per Medicare beneficiary. CBO has found that private Medicare Advantage plans are no more cost-effective than the public Medicare plan, but that those enrolled in Medicare's public plan are at greater risk of health problems and therefore more costly to cover.

• The quality and effectiveness innovations occurring under the public Medicare plan show that public plans have greater potential to drive the quality revolution than do private plans. Like with Medicare, the large market share of a new public plan for people under 65 will have the resources, power and incentive to reshape market practices to promote quality and cost effectiveness. Public plans have more incentive than private plans to improve quality in order to curb costs because they operate under tight fiscal constraints, and they operate in the open and are widely scrutinized by the government, providers and the media, unlike private insures. Private insurers have limited incentive to conduct comparative effectiveness research and disseminate findings because the research is very expensive and its benefits, if made public, are not theirs alone.

• Public plans increase choice, competition and accountability. A public plan offers people an alternative to private insurance as well as broader access to health care providers. A public plan will promote competition, which will place an important check on both public and private plans. A public plan will promote accountability and transparency because it must meet the test of democratic support. In comparison, the billing, payment, and care management practices of private insurance plans, as well as their claims and outcomes data, are mostly proprietary and of limited access to government oversight.