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Kip Sullivan on the sordid history of the so-called public option

[Reprinted, with permission, from Health Care Now! -- lambert]

It’s easy enough to explain why the “public option” was defeated. It’s a lot harder to explain why it rose to prominence in the first place. Even in the watered down form in which it was adopted by Democrats, the PO was probably no more politically feasible than single-payer was, but it was a lot harder to explain. And the watered down form wouldn’t work, and it probably wouldn’t even have survived.

The PO was so tiny when Democrats introduced it in June 2009 that it is fair to say it was moribund upon arrival if not dead on arrival. It was placed on life support when Sen. Reid struck it from the Senate bill in November, and it was finally put out of its misery by the election of Scott Brown in MA in January of this year.
The PO wasn’t politically feasible in 2009 for the obvious reason that it was opposed by the same people who would have opposed a single-payer system. Perhaps as importantly, the PO wasn’t politically feasible because the people who promoted it weren’t serious enough about it to make it a condition of their support for the Democrats’ bill.

So it’s pretty easy to explain why the PO fell. What’s not so easy to explain is why a lot of smart people thought the PO was such a good idea to begin with and why, if they thought it was such a good idea, they didn’t make it their bottom line. When the campaign for the PO began in 2005, it wasn’t at all clear that the leaders of the campaign intended to throw the PO overboard if that’s what it took to get Congress to pass an insurance industry bailout (by which I mean the individual mandate and the subsidies to make the mandate affordable). But by June 2009, it was clear the leaders of the PO campaign had NO intention of making a big, powerful PO a condition that Democrats had to meet. And by Xmas Eve 2009, it was clear the PO campaign had no intention of even making a TINY, ineffective PO a precondition for its support.

It appears, in short, that the leaders of the PO campaign saw an insurance industry bailout as more important than the PO. Many leaders of the PO campaign may even have seen the PO as merely a fig leaf to induce progressives (both inside and outside of Congress) to think it was ok to support a bailout.
The modern version of the PO was brought to us by Jacob Hacker. And it was promoted by Health Care for America Now and the Herndon Alliance. The Herndon Alliance has received much less publicity than HCAN, but it played a seminal role in the development of the PO campaign. So, to understand why the proponents of the PO supported it, but not enough to make it a non-negotiable demand, it helps to review the thinking of Hacker and of the founders of HCAN and the Herndon Alliance.

I doubt I’ll have enough time to describe both Hacker’s thinking and that of the Herndon Alliance and HCAN leaders. I think what I’ll do is describe Hacker’s original version of the PO, his rationale for it, what happened to the PO after it arrived in Congress in 2009, and how Hacker accommodated himself to the degradation of the PO. And then, if I have any time left over, I’ll talk briefly about the Herndon Alliance and HCAN. If I don’t have time to talk about HCAN and the Herndon Alliance, that’s ok. Their thinking pretty much mirrored Hacker’s. Like Hacker, they saw single-payer as politically infeasible; they started out supporting a big PO as a more politically feasible substitute for single-payer; and they didn’t object when congressional Democrats unveiled a microscopic form of the PO in June.

Hacker first proposed what he called Medicare-Plus in a paper he wrote in 2001. He published another version of his idea in 2007. In that second paper, he called his idea Health Care for America. The label “public option” didn’t appear till early 2009.

Hacker’s idea, basically, was to have the federal government create a health insurance company that would sell health insurance to the nonelderly. Hacker assumed this company would enjoy all the efficiencies of Medicare and would therefore be able to undersell the insurance industry. Hacker never used the word “company” or “business” to describe the federal program he had in mind. Instead, he repeatedly described his proposed public entity as a program that would be “like Medicare.” Hacker’s refusal to use appropriate terminology contributed greatly to the confusion that became rampant among PO advocates by 2009.
There is, of course, a huge difference between what Hacker was proposing and Medicare. Medicare is a single-payer program – it’s the only insurer of basic medical services for Americans over 65 and the disabled. Because it is a single-payer insuring such a large population, and moreover a population with above-average medical needs, Medicare enjoys advantages that the insurance industry will never enjoy, including huge size, low overhead, and an ability to induce docs and hospitals to accept below-industry reimbursement rates.

The public company Hacker was proposing would have to compete with 1,500 other insurance companies within the multiple-payer jungle. The public company he was proposing would NOT be a single-payer – it would be just one insurance company among hundreds. It’s therefore far more accurate to refer to what Hacker was proposing as a company, a corporation, or a business that would be set up by the government. It was ALWAYs misleading for Hacker to refer to his proposed entity as a government program like Medicare, and it was EXTREMELY misleading for him and his acolytes to continue doing so after the Democrats adopted a microscopic version of the PO.

However, the early version of the PO that Hacker proposed DID have the potential to become a Medicare-for-all program for nonelderly Americans. In his 2001 and 2007 papers, Hacker said he wanted to give his public insurance company several very important advantages that would have allowed the company to start out with enormous size and to grow even larger early in its life. Hacker proposed five
advantages or criteria for his original PO:

(1) It had to be prepopulated (he would have shifted Medicaid and SCHIP enrollees and all or some of the uninsured into the PO);
(2) Subsidies would go only to the PO;
(3) It would be open to all non-elderly Americans;
(4) It would have the authority to use Medicare rates (this was not as important as the first three criteria); and
(5) The insurance industry had to offer the same coverage.

According to an analysis of Hacker’s 2007 paper by the Lewin Group, Hacker’s original PO would have enjoyed premiums 23% below those of the insurance industry and would have enrolled 129 million people, or about half the non-elderly population. According to the Lewin Group, Hacker’s original version of the public company would grow rapidly, from insuring half the non-elderly in 2008 to two-thirds of the non-elderly within a decade. Conversely, the insurance industry’s share of the non-elderly market would shrink from half to 35% within ten years.
In my view, the Lewin Group grossly underestimated how much damage Hacker’s original version of the PO would do to the insurance industry. I think a public insurer with half the non-elderly population and premiums at 23 percent below the industry’s would have quickly destroyed the insurance industry. Twenty-three percent is an enormous differential. To put 23 percent in perspective, consider that HMOs in the 1980s had premiums only 5-10% lower than the traditional non-managed-care insurance companies they eventually displaced. Even though most Americans didn’t want to be in HMOs, employers all over the country pushed their employees into HMOs in order to take advantage of that 5-10 percent premium differential. And that was two decades ago when premiums took less of a bite out of everyone’s pocket. Can you imagine how fast employers would dump their existing insurance company today for a 23 percent cut in their premium, especially if the PO were as kind and gentle as PO advocates say it would be?

It’s hard to believe that someone as informed about health policy as Hacker didn’t know his original PO had the potential to become a single-payer for the non-elderly. Let me read to you a portion of a transcript of a phone conference call sponsored by EPI on January 11, 2007 in which two participants, Ezra Klein (a blogger for the Washington Post) and Bob Kuttner (co-editor of the American Prospect), asked Hacker why he thought his proposal would succeed any better than Clinton’s 1993 Health Security Act. Klein says, “What you’ve proposed here is much more fundamentally dangerous to the actors who killed it [ie, the Clinton bill] the last time around.” Kuttner, who must have seen an early draft of the Lewin report, says, “[Y]ou’re setting in train a gradual process whereby the whole system gradually shifts from 50/50 [meaning, 50 percent are in the public program and 50 percent are insured by the insurance industry] to 60/40 to 70/30. So after a couple of generations, almost everybody is in the quasi-Medicare program. Is that the intent?”

Hacker denied that was his intent. He agreed that the PO would start out at 50 percent, but then it would basically just get stuck there despite its enormous cost advantages over the private insurance industry. Here’s what Hacker said: “[Lewin] did not forecast a huge shift over just a 10-year period. I think it was a shift of two percentage points over that period. So, at that rate, we’d have everyone within Medicare in about 250 years.”

But Hacker was wrong. As I’ve already told you, when the Lewin Group released its analysis of Hacker’s proposed program a year after this conversation took place, they projected a 34% increase in the PO’s enrollment over a decade, not 2%. And as I said, I think Lewin was being way too conservative.

Hacker’s answer to Klein and Kuttner illustrates the strange state of denial Hacker and other PO advocates induced in themselves as they tried to sell the PO as a politically feasible alternative to single-payer even though it would, in its original form, do a lot of damage to the insurance industry and would probably have led to a single-payer for the non-elderly.

But Hacker’s confusion (and the confusion of other PO leaders) over whether the PO would be more feasible than a single-payer was MINOR compared to the confusion that set in when congressional Democrats adopted a microscopic version of Hacker’s original PO. When the Democrats released their draft legislation in June 2009, it was clear they had stripped out four of the five criteria for the public company that Hacker had specified in his original papers.

The only criterion the Democrats kept was the one requiring insurance companies to offer the same coverage as the PO. The other four criteria –
• the one calling for prepopulation of the PO,
• the one requiring that only the PO get subsidies,
• the one requiring that the PO be available to all non-elderly Americans, and
• the one authorizing Medicare’s reimbursement rates
– all four of those criteria were gone. Now it was crystal clear to anyone who understood what Hacker had originally proposed that the PO the Democrats had adopted was so small it wouldn’t affect the insurance industry. The Congressional Budget Office said the Senate version of the PO would insure no one; it said the House version would insure 10 million, and then later scaled that back to 6 million.
Now that the PO had been shriveled down from 129 million people to zero to 6 million, PO advocates faced not only the same old political feasibility problem (the insurance industry and the Republicans continued to scream about the tiny PO as if it were a big PO or a single-payer), but they also faced a huge logistical problem. A PO that represented no one on the day it opened for business wouldn’t be able to crack most insurance markets in the US, and might not even be able to survive.

This is where Hacker’s habit of always comparing the PO to Medicare became extremely misleading. When Medicare commenced operations on July 1, 1966, it represented nearly all seniors. With the exception of a few hospitals in the south that temporarily resisted integrating their facilities, all clinics and hospitals in America immediately began accepting Medicare enrollees even though there was no law requiring them to do so. The reason all clinics and hospitals did that is that Medicare represented an enormous constituency on day one and providers didn’t want to walk away from so many patients and so much money.

The tiny PO the Democrats incorporated into their bills was no Medicare. It would represent no one on the day it opened for business. It would have to do what NO insurance company has done in the last three or four decades, which is to create a new, successful insurance company in every state in the US. In fact, I’m pretty sure no insurance company has expanded into even ONE new market in the last three decades by building a new insurance company from scratch. For the last three decades, insurance companies that wanted to expand their empires have done so by BUYING their way into new markets. That is, they bought an existing insurance company.

But Hacker and other PO advocates blithely ignored this issue. They ignored it because they continued to talk about the Democrats’ PO as if it were the same huge PO Hacker had originally proposed. I might add that the CBO totally ignored this issue as well. The CBO never examined the issue of whether the PO would be able to crack even one US market, much less all of them. I think the CBO was being extremely generous to the House version of the PO when they said it would insure 6 million people.

Nevertheless, as inexplicably rosy as it was, the CBO’s reports on the PO sealed its fate. The poor PO was already hated by the right wing and the insurance industry. It was being promoted by people who cared more about an insurance industry bailout than the PO. And now the CBO was revealing the truth about the Democrats’ version of the PO – that it was laughably small and for that reason was going to save little or no money.

When Democrats throughout Congress, especially those in swing districts, asked themselves why they should vote for something as controversial as a PO when the darn thing wouldn’t save any money, PO advocates had no answers.

To sum up: The PO rose to prominence because powerful Democratic constituency groups thought single-payer was not feasible but the PO was. They were wrong. The PO failed politically, and it failed as a policy idea. Politically, it turned out to be no more feasible than single-payer. As a policy, it was a disaster. The tiny PO adopted by Democrats would have accomplished nothing other than to embarrass all of us who believe government must play a prominent role in insuring the uninsured.

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vastleft's picture
Submitted by vastleft on

Now, how "P.O." became the coin of the realm (and the realm of the coin) for access bloggers, that's a story worth telling, as well.

nycweboy's picture
Submitted by nycweboy on

Interesting piece; I've never entirely understood why Hacker's been taken so seriously on the issue of healthcare, because he's never seemed especially willing to look at the realities of what we have now, which is why his pie-in-the-sky proposals always struck me as ... well, just that. If you don't face up to where we are... you have a hard time making a map of where we ought to go.

One thing the article leaves aside is what I think is a confusion of terms: many advocates of the "Massachusetts Model", I think, saw a "public option" similar to what Massachusetts created as a way to get to full insurance: there is a group of people that private insurers either can't, or won't, insure, and if you mandate full insurance.... you need a place for them to go (and because this group, basically, sits just over the poverty line, they don't qualify for Medicaid as it is currently structured). Hence, a "public option" meant, basically, to clean up the leftovers - and that, I think, is where you get the idea of "small."

I suspect, then, that what drives the "public option" debacle in the national bill is that Ted Kennedy, for instance, saw a Mass-like public option, while other progressives saw a stalking horse for single payer, along the lines of what Hacker originally proposed. The thing is, as a stalking horse for single payer it's a) not nearly subversive enough, since everyone immediately gets that a government run plan which undercuts every insurer will kill the insurance industry and b) it's wildly unrealistic, as Sullivan notes, when the numbers don't really add up.

More to the point though, the problem lies here: "he would have shifted Medicaid and SCHIP enrollees and all or some of the uninsured into the PO." The big problem with Hacker's proposal - and with much of the idea of a "public option" - is that it already exists. It's Medicaid. And much of the "public option" energy that drove progressive support for it was a convenient way to sidestep the real elephant in the room: that massive reform of Medicaid is needed to fix our healthcare problems, particularly for the poor. By embracing an expansive "public option", which would offer subsidized premiums for workers just outside of current Medicaid eligibility, progressive educated elites could feel good about Doing Something For The Less Fortunate while quietly sweeping Medicaid - the program that currently fails to do just that - under the carpet. That dovetails very nicely with more conservative types in both parties who've always hated Medicaid and have no interest in seeing a well run - and more to the point, well funded - program for the poor.

It was one thing for Massachusetts to create a program that covered people just outside of Medicaid eligibility, since they have no real control over the whole program (and Massachusetts, actually, was leveraging the fact that its Medicaid program is one of the most comprehensive and well funded in the country); but for the feds to engage in similar sleight of hand was foolish. The simpler solution to get to full coverage from the national level was to expand and strengthen Medicaid up over the poverty line (a bad, arbitrary distinction anyway), federalize it (i.e. end the block grant program to the states), and subsidize premiums up to about 500% of poverty to help fund it. Instead... we got endless maneuvering to create a "public option" that was, in fact, Medicaid for the working poor as a new, separate government entity. It's fair to ask... when you already struggle to manage Medicare, Mediciad and the VA... why on Earth are you creating a fourth monster?

There's a longer, harder discussion here about the problems with "Medicare for All" that I think is a necessity to realizing that progressives have, too, been unrealistic about a lot of what it might take to really achieve any kind of single payer. But I don't think it's a crucial element to examining why the "public option" failure was so much a part of where the healthcare debate went wrong and why its failure is so central to understanding why we're not getting real reform. Almost all the energy aimed at Public Option robbed the necessary political will to reform Medicaid first, foremost, and through to the finish. The question is, have we learned anything from it... and in particular, to ask if we've gotten any better handle on a progressive approach to poverty issues. I think we haven't... which is why I think things are indeed in very bad shape.