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Thursday, March 14, 2013

Sorry, "private option" still likely to cost a lot more than Medicaid expansion

Posted By on Thu, Mar 14, 2013 at 11:15 PM

David Sanders image
  • Sen. David Sanders

David Sanders image
  • Sen. David Sanders

In a post earlier this week, I attempted to offer the perspective of Rep. John Burris and Sen. David Sanders — two of the key Republican leaders on a potential deal for expansion of healthcare coverage — quoting each at length. I did so because I thought that an under-reported fact in the debate is that key Republican leaders simply do not believe the economic consensus that the "private option" approach is going to cost more.

Though I believe them to be sincere, I find their arguments unpersuasive. Many of the counters I would bring up were already well-covered a week ago by Austin Frakt, a Boston University health economist. Read it! But I know that some of y'all don't click links so to quickly summarize the biggest points: 1) Even if private insurance improves outcomes (and Frakt notes that studies have found “an association on this score, but not causation”), the WAY this might be achieved is higher reimbursements. As Burris put it, "you get what you pay for." The problem is he's hoping to get more by paying more, and there's no evidence that this will lead to a cost savings in the end. 2) Competition is unlikely to dramatically reduce prices in a market like the ACA exchange where the government is paying the full premiums of the expansion pool. Consumers are not price sensitive when they're not the ones paying.

I'll add a couple of general observations to Frakt's outline.

The first is that if the various complications offered by Burris and Sanders to the "simple equation" actually worked to reduce costs, we'd have seen it. As Sanders himself pointed out to me several times, premium assistance is not a new idea. And indeed one of the reasons that Frankt could anticipate these arguments is that they've been made before. But it turns out that when you look at real-world examples, offering coverage via private health insurance is more expensive. I invite you to do some research and if you can find an empirical counter, send it my way. Yes, there are some features of the Arkansas approach that will be different but the delivery mechanism for premium assistance here—fully subsidized, heavily regulated—seem likely to exacerbate, not alleviate, cost issues. (One obvious comp is Massachusetts. What say you liberal grad students? "The average cost of an individual exchange plan was $5,143 in 2009. That same year, their average Medicaid expenditure per nonelderly/nondisabled adult was $2,965.")

We have experience with various schemes to funnel government money through private insurance companies to offer coverage to folks. We have empirical evidence. It costs more. A “private option” approach, whether or not it has other virtues in its favor, is significantly more expensive. All of the magic that Burris and Sanders are hoping will happen in Arkansas doesn’t change that.

The other general point I’d make is that while I believe Burris and Sanders to be sincere in their theoretical framework, I also think that they’re engaging in a little bit of wishful thinking here. Part of the appeal of the new approach is that they believe it upholds Conservative principles, but it strikes me how un-conservative (small c) their arguments about cost are. If you go back over their ideas, they have all sorts of grandiose optimism about the various ways that markets, and a move from public to private, are going to work miracles. It reminds me in some ways of the way neoconservatives rejected foreign policy realism. The notion is that the simple facts on the ground are missing the big picture because big ideas are going to bring big change and you can't calculate that.

I think it’s useful to compare their ideas about the private option with the original projection on Medicaid expansion run by DHS. That featured nothing about economic multipliers despite billions in federal spending in the state. It intentionally used high-end cost estimates. On savings, it was narrow in scope—to use one of many examples, it calculated only the savings in uncompensated care on direct state spending, not the savings for local governments or the impact of hospital savings. It was (again, small-c) conservative. Whereas the Burris/Sanders thesis that the "private option" won't be pricier for the federal government requires every little thing to go implausibly, perfectly right.

The truth is that their argument is finally not anchored in economics or in history but in ideology. They are convinced that a private approach simply must be more cost-effective than a public approach. It is an article of faith.

Of course, sometimes, conventional wisdom turns out to be wrong. But if you think you’re right and the economic consensus is wrong, you’d better have pretty solid reasons. Maybe Burris and Sanders are seeing things we’re not. Who knows? Predicting the future is hard. But policy makers have to operate in probabilities. And everything we know suggests that the door that HHS opened is going to lead to higher spending by the federal government.

p.s. Whatever its flaws, one thing in favor of the "private option" is that so long as expansion happens, some experimentation between different states is a good thing. Some of these questions — about cost, about outcomes — will likely have clearer answers five years from now than they do today.

p.p.s. DHS is supposed to have new cost projections for the "private option" out tomorrow, which will be interesting. My guess is that they'll show more federal spending but still show savings to the state bottom line. But lots of moving parts so...we'll see!

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