Thoughts on Health Care Reform and the "Public Option"

I submitted the following to the local papers. We'll see if I get published.

There has been much written pro and con on the proposal for a “public option” as part of the Obama administration’s health care reform. It will supposedly provide competition to keep the insurance companies honest. Some proponents have suggested it will be the equivalent of letting everyone sign up for Medicare, with Medicare being touted as a wonderful, efficient medical insurance program.
Not enough has been discussed about the economics of this proposal. Two questions must be answered: How high will the premium be? How high will the reimbursements to providers be?
The effective Medicare premium is hard to calculate. Medicare is supported by a payroll tax on everyone of 2.9% of income – half paid by the employer, half by the employee. Those actually on Medicare pay a small monthly premium – under $100/month. We don’t know what the effective premium is per Medicare enrollee. What we do know is that despite the tax on all workers and the additional premium, Medicare is forecast to be bankrupt within a few years without either a substantial increase in the tax and/or premiums or a reduction in benefits, or both.
On the other hand, Medicare reimbursements to providers (doctors and hospitals) are low – only about 80-85% of the provider’s cost of providing care, based upon the government’s own calculations. (Reimbursements from Medicaid are even lower.) This leaves a shortfall that must be made up by a combination of private insurance paying significantly higher reimbursements (about 130% of cost nationally, less in Hawaii, due to HMSA’s near monopsony) and, for the non-profit providers, fundraising. It is also responsible for many hospitals suffering financially. Note, also, that even at the low levels of reimbursement, the cost of Medicare has risen to about ten times what it was projected to cost when passed by Congress.
Moreover, Medicare reimbursements are not uniformly related to the cost of living. Hawaii’s rate of reimbursement is significantly lower that that of other high cost of living areas of the U.S. These low reimbursements account, in large part, for the fact that two Oahu hospitals have filed for bankruptcy in recent years, all three hospitals on the Big Island have reportedly been struggling financially, and a number of physicians have left the island in recent years to practice in areas where they can make more money.
What does this suggest for a new “public option”? It will likely be underpriced and provide low reimbursements. Low premiums will attract participants away from their existing insurance companies. Later, after it is discovered that the premiums are too low to sustain the program, the private options will be gone.
Despite the low level of reimbursements, providers will participate. With the government’s large market share, they won’t have any choice. However, the low reimbursements will exacerbate the existing financial problems of many hospitals – especially those in rural areas – and the departure of physicians from less lucrative areas. If reimbursement patterns hold, Hawaii will get the short end of the reimbursement stick again.
The only possible way a “public option” would be helpful is if it reduced costs through greater operating efficiencies, while paying out reimbursements on par with private insurers. As I know of no existing government enterprise that is more efficient than its private counterparts, I am not optimistic.