Contents
- Introduction
- Cost/Benefit overview
- Cost-Benefit analysis
- Case study: Germany and Japan
- Conclusion
1. Introduction
Health care in this country is a topic that is close to my heart. I have a couple of very sick family members, so we need to be very careful about making sure we keep our health care.
Be that as it may, we need to strive to make policy decisions that will benefit the most people over the longest term. It's a hard thing to gauge, and requires us to measure cost and benefit, as one must when building just about anything.
2. Cost/Benefit overview
Benefits
The primary benefit to a public option is, as we have heard a great deal about, covering the uninsured. More than that, it's about making sure that those who can't buy into a group insurance program have the ability to do so.
This ties into the second benefit to a public option -- driving down overall costs. There are two reasons that being employed with a larger company allows employees to afford health care--the whole company purchases premiums at a group rate, lowering the per-capita cost, and the employer pays a certain percentage of the premiums. In the United States, an average employee pays just over $3,300 per year in fees(1), but his employer can expect to pay three to four times that amount. This drives up costs to businesses and to individuals.
The third benefit to a public option, and, indeed, a logical goal of any health insurance reform, is making health insurance stable. It is rare, in most other industrialized nations, to see a family lose their savings and perhaps their home over medical bills. Not all of these nations have a public health insurance plan, but those who do not have a fairly high level of government regulation(2).
Costs
There are several costs associated with health care reform and the public option.
The first cost is, for lack of a better word, the cost. The CBO projects that the House bill (which includes a public option) will cost just under $900 billion. (Only $29 billion less, pocket change, right?) It also projects that the bill will lower the Federal deficit overall. A less robust public option proposed by moderate Democrats will not reduce the deficit as significantly. So far the option has been projected to be paid for by premiums and additional taxes on medical equipment, as well as a tax on the wealthiest Americans. (3) The cost of the cost is a worry--new taxes are not always the way to go, and there is only so much we can squeeze out of the wealthiest Americans. In addition, a tax on medical equipment may (or may not) increase hospital costs.
The second cost is the cost of implementing such a program. Federal programs are often awkwardly implemented in their infancy. Older programs (such as the V.A. and medicare) are actually quite robust, but are still routinely victim to fraud and error. The potential scale of a public option leaves little room for such error. Put another way, they'll need to get it right from the outset.
The third potential cost is a worry of many, the cost to the quality of patient care, and more broadly, to insurance companies. Many worry that insurance companies will be unable to compete with the public option and will be forced to either A. Reduce coverage, B. Increase premiums, C. Decrease quality of care, or D. Fold entirely.
3. Cost/Benefit analysis
There a lot of variables affecting how broadly this bill will reduce the number of uninsured. With a public mandate to purchase insurance, it has been speculated that about 94-96% of Americans will end up with coverage. The bill includes exemptions and subsidies for those who can't afford it. It is hard to tell if anything but a purely single-payer system would eliminate these remaining 4-6%. We can assume that many of the country's most destitute will continue to remain uninsured, and broaden this to say that those in this country who simply live "off the grid" will be included in this number. The success or failure of this goal will depend on the specific implementation of the hardship subsidies included in the bill--if they are such that families near the poverty line are assisted in obtaining insurance, the bill should succeed. Otherwise, it will fail.
When it comes to driving down health care costs, the existence of a public option is not so critical as the rest of health care reform. It is easy to speculate that the existence of a not-for-profit entity will provoke insurers to drive down premiums, and indeed, if the public option is successful in keeping its own costs and premiums low, insurance companies will be forced to emulate this behavior or risk having to decrease quality of care, client roll, or fold entirely. (One of the previously-stated costs). Wellpoint, Inc, a very typical insurance company, had a profit margin of about 3 billion dollars in 2008.(4). This is about 4.19% of its total revenue. This is a very typical margin, and leaves some wiggle room to decrease premiums. However, the rest of the reform package is what will decide the future of private premiums--they aim to drive down administrative costs, which accounted for about 12% of Wellpoint's expenses. (Benefit expenses were about 7 times greater.) This decrease could be potentially significant, and would offset many concerns about the failure of insurance industries as a whole.
Finally, it is clear that a non-profit public option would be a stable option, and it is likely that the additional reforms found in this bill would force insurance industries to go the same route.
The actual cost of the bill, and whether it would add to or subtract from our deficit in the long term depends, once again, more on the rest of the bill than on the public option. If we assume that the CBO's estimates are close to accurate, then we can assume that overall the bill will be roughly deficit-neutral. The real savings in the long term comes from the adjustments to medicare. According to the CBO, the bill could reduce the growth of medicare costs from 4% / year (adjusted for inflation) to 2% / year. This will primarily depend on whether or not future congresses stick to the provisions of the bill. (5) In the best case, (the CBO's estimate is spot-on) the bill as a whole could reduce annual deficits by ~1% of the nation's GDP each year. (5). In the not-best case, the whole thing would likely wind up deficit-neutral.
I would like to mention the concerns about quality of care ("rationing") overall, and also discuss how critical the public option really is. In truth, the public option is not as crucial as the goal of the bill -- universal health care that is stable, as opposed to entirely based on your job. The truth is that virtually all industrialized nations have a system of universal health care. None have fallen victim to communism. It is true that many of these nations utilize a public option, but not all. We have all heard horror stories about their health care systems, but the truth is that these stories exist in every system. This is what an engineer would call "operator error," (see also: rtfm, read the manual. I couldn't possibly know what the f stands for.) in which it is less the system than those responsible for running it have failed, or else small, noncritical errors in the system have been found. A VLSI circuit such as an Intel i7 processor can have as many as 730 million transistors in it. All of these transistors have to be placed, and sized for speed and space efficiency, but also routed for operational correctness. In a 730 million transistor circuit, not all paths actually pertain to the normal use of the device. There may be a broken functionality that is not exposed in normal operation until well after the circuit's release. This does not mean the circuit is broken, but that there is a broken element to the circuit. It is highly unlikely that in fixing this error Intel would scrap the layout and start over. In addition to the enormous cost of such an endeavor, it is a waste of effort. This applies to both the stories we have heard about health care abroad ("The socialist doctor thought that a giant cartoon mallet made the tumor in my brain!") and to our own system. ("Insurance companies are massive, evil entities run by creatures who bathe in the blood of newborns.")
Our system can be fixed. It will take reform, and in the end, we will need to choose between two things that fiscal conservatives will abhor: A new Government entity or extremely tight regulation.
Therefore, to return to the intent of this section, the criticality of the public option, it's not. There are alternatives, but none have been proposed. An insurance co-operative is not the answer, because it only fixes part of the problem--access to insurance. It does not necessarily increase stability, nor ensure universality, because in the end, there needs to be a nonprofit entity which exists somewhere in the system of health care. In the public option plan, it's the public option. In other systems, it is the regulatory body of the government.
4. Case study: Germany and Japan
It is not necessary to reinvent the wheel to implement a universal system of health care, so to conclude and illustrate this point, I would like to contrast two systems of health care which are both relatively effective: Germany and Japan.
In Germany, health insurance is provided entirely by private industry whom the government regulates tightly to ensure legitimate business practices whose goal is first and foremost to maintain an adequate level of coverage to all Germans. (Market gains and profit come second.) Ironically, the German system is essentially a "single-payer" system, in which individuals pay premiums out of their paycheck (a payroll tax) whose funds are redistributed based on market share to the companies that provide insurance. The companies have no ties to government (i.e. they are private corporations) and compete with one another. Since the companies are still private businesses and their income depends on their market share, competition still exists, driving down prices. Since the government handles dissemination of funds, premiums are regulated and it is up to the companies to keep their costs down. In addition, companies are more tightly pressed to adhere to regulation, since the government can cut their funding for any infractions they may commit. (It is perfectly possible to implement this system in America, or a system similar to this, speaking purely in financial terms--up to 45 percent of premiums for many health insurance companies could be spent on "marketing, broker commissions, administration, other expenses, and profits".*(6))
The Japanese system of health care is very similar to a proposed American system with a public option, however, it is stricter. It, too, relies on heavy regulation of the industry (overall profits are banned and must be spent on improving quality of care and payouts to stockholders.) It also has a public option which is reserved for the unemployed, the poor, and the self-employed. It costs about half of what the U.S. system costs, due to the universality of insurance, as well as the strict way in which the system is regulated, but suffers from some problems, such as a frequent shortage of hospital beds. The reason for this, however, is based primarily on the implementation of the system--patients are treated "too" equally, with low-priority cases being given beds with equal preference to high-priority cases. Presumably an American system, which already does an excellent job of regulating who goes where for how long, could do better. American doctors tend to be better-trained, and more specialized, and the Japanese system suffers from a lack of specialized doctors and primary caregivers in public hospitals. This is because their pay is lower and they are overworked. Most of these issues, as previously stated, stem from the lack of "gatekeepers" in the system--that is, people who can filter out those who are truly sick from those who are simply coming in from worry. In addition, Japanese medical training does a poor job of training doctors to have this filter, and any system which is universal in nature must emphasize this filtering. (1).
5. Conclusion
Overall, the case for the public option is not as strong as the more general case for some form of universal, stable health care, but I think it is clear that a purely private system of insurance cannot stand. The costs that I have mentioned here can, to some degree, be offset by a proper implementation of what comes of the health care bill. You will notice that I have not discussed the ethics of implementing such extensive regulation of an industry, nor the moral arguments for or against universal health care as a human right. So long as the public option is not dangerous (and I hope my C/B analysis has indicated that it is not) such questions are not for an engineer to discuss.
* This number comes from a lobbying group, the Council of Affordable Health Insurance, who protested a regulation demanding that insurance companies spend at least 70% of their premiums on benefits. The group stated that unless a non-group insurance company spends around this much, they cannot be successful in the non-group market.
References
Many of my facts came from the marvelous New York Times economist Uwe Reinhardt. He has professed no opinion for or against the public option, and as such has done an excellent job of analyzing the state of health care in this country. I suggest you look him up if you have some free time.
(1). Health Care in Japan: Low-cost, for now. Harden, Blaine. Web. 07 Sept. 2009.
(2). Health Reform Without a Public Plan: The German Model. Reinhardt, Uwe. Web. 17 Apr. 2009.
(3). CBO Finds Dem Bill with Public Option Reduces Deficit. Walsh, Deirdre. Web. 21 Oct. 2009.
(4). Budget sheet for Wellpoint, Inc. Web.
(5). Will the Senate Health Bill Tame Costs? Sahadi, Jeanne. Web. 24 December 2009.
(6). What Portion of Premiums Should Insurers Pay Out in Benefits? Reinhardt, Uwe. Web. 09 Oct. 2009.
