Why Business Fears the Public Option

The Obama Administration's proposed overhaul of the U.S. health-care system—and the possible creation of a publicly managed insurer—has unnerved much of the business community. Business lobbyists don't buy the White House line that reform plans will reduce the explosive growth in health-care costs. Instead they see Obamacare shifting much of the cost of extending coverage to 45 million uninsured Americans onto the backs of major companies and private insurers.

To understand why, you have to wade into the murky waters of a debate over an alleged industry practice called cost shifting. The U.S. Chamber of Commerce and the National Association of Manufacturers contend that Uncle Sam has long underfunded public health programs such as Medicare and Medicaid. That has prompted hospitals to jack up the rates they charge patients with private insurance to make up any losses. Insurers then pass those costs to companies in the form of higher premiums. But plenty of economists say such concerns are overblown.

If the government jumped into the health insurance field, this whole rob-Peter-to-pay-Paul dynamic would intensify, public option critics say. R. Bruce Josten, the U.S. Chamber of Commerce's top lobbyist, cites data that Medicare (which covers elderly Americans) reimburses just 78% of health-care providers' costs on average. The Medicaid program for low-income patients doles out even less. "The government doesn't try to reimburse at market rates, and that just results in a lot of cost shifting back to premium payers," he says. "So why would we want to let them set up a public plan that reimburses at those same rates?"

This line of attack, along with warnings that a public insurance option would crush private insurers and lead to a nationalized U.S. health-care system, has gained some traction. On Sept. 29 advocates of a public option failed to get it included in a key reform bill moving through the Senate. But Speaker Nancy Pelosi (D-Calif.) and her liberal allies have kept the idea alive in the three House bills still in play. It's unclear whether President Barack Obama will demand the inclusion of a public insurance option in any final deal.

In the end, a compromise bill is likely to allow for a publicly backed insurer later if promised cost savings don't occur. For now, Pelosi argues that creating a public insurance option could trim $100 billion from the cost of covering the uninsured. Proponents add that government competition would force private insurers to lower premiums, making coverage more affordable for all.

But the business community keeps cranking out studies undercutting such arguments. The insurance industry trade group, America's Health Insurance Plans (AHIP), compared the lower reimbursement rates for health care paid by public programs vs. private payers. The group claimed the difference reflects cost shifting, which added an estimated $1,512 to the average premiums paid by a family of four. "The existence of the private sector allows that shift," says Karen Ignagni, the head of AHIP. "If you clamp down on one side of a balloon, the other side just gets bigger."

PRICE DISCRIMINATION?Still, many economists suggest business is overstating the level of cost shifting. "This debate has a religious nature to it," says Rick Mayer, an associate professor of public policy at the University of Richmond. While a majority in the industry insists that cost shifting occurs, he says, "most health economists just don't believe in it."

He and others argue that hospitals and other providers aren't engaged in cost shifting as much as in price discrimination. Take that $1,512 difference claimed by AHIP. Critics such as Austin B. Frakt, a health-care economist at Boston University School of Public Health, say the assumptions behind that number are flawed. He argues there is no reason to assume that if Medicare reimbursement rates were to go up, hospitals would charge private insurers any less. Just as airlines charge different prices for the same seat, depending on when and how it is purchased, hospitals and doctors seek more money from private insurance plans than from Medicare. They don't do so because they must to avoid losing money but because they can. "If you have lots of market power, then you can demand higher payment," says Frakt, adding that most regions are dominated by just a few large hospitals.

A study by the Medicare Payment Advisory Commission (MedPAC), an independent panel that advises Congress on Medicare issues, bolsters Frakt's argument. The March report looked at historic pricing patterns and concluded that a hospital's market strength—not losses on its Medicare business—causes private insurers to pay much higher rates.

In the 1990s, says MedPAC, private insurers used managed care to curb cost hikes by hospitals, reimbursing only selected doctors and hospitals at predetermined rates. But by 2000 a backlash against managed care by doctors and patients, combined with consolidation in the hospital industry, gave hospitals the upper hand in rate negotiations, and costs began rising again.

Not surprisingly, hospitals with the most market power charged private insurers the most and had the highest overall profit margins, according to the study. By contrast, hospitals that were not able to demand higher payments from private insurers managed to stay in the black on Medicare payments by operating more efficiently, reducing errors, and keeping their costs in check—without any loss in quality of care.

A Congressional Budget Office report issued in December 2008, which also debunked the notion of cost shifting, suggested that hospitals "facing shortfalls in payments" would run leaner, more efficient operations. More efficient hospitals might also reduce their rates for private insurers.

Whatever the reality, the debate over cost shifting isn't going away. With the House certain to include a public option in its bill, the key fight between liberals and more conservative Democrats is over what reimbursement rates it will pay. The health-care debate, in all its complexity, really boils down to this: If you are going to cover uninsured Americans, someone will have to pay if the reform plans on the table don't deliver promised savings. And plenty of business executives worry that one way or another, that burden will fall to them.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkThe Maryland CaseAn article in the September-October issue of the journal Health Affairs points to Maryland as a model of how states can use regulation to prevent cost shifting. Since 1977 the state has required that private insurers and Medicare reimburse hospitals at the same rate. As a result, Maryland's average hospital cost per patient was 2% below the national average in 2007, compared with 26% above in 1976.To read about Maryland's experience, go to http://bx.businessweek.com/us-healthcare-system/reference/

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