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Why the Public Option is Critical

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The health reform proposals being considered by Congress depend on private insurance companies competing. Proponents of this strategy believe that to win subscribers from competitors, insurers will need to find innovative ways to keep costs down at the same time they provide good coverage. To keep them focused on providing good value to the public, some of the proposals, including the President's original one, include a public plan to compete with the private firms. If retained in the bills, this contentious provision may sink the reform effort. So, how important is it to achieving reform's goals?

The answer is no mystery: The competition strategy is so weak that the public option is essential. The fact is that competition is a good thing only when it produces innovation that leads to better, less expensive things for sale. The new computer we bought a year ago was faster, more powerful, and less expensive than the one it replaced -- in part, at least, because of competition.

The U.S. already has the most competitive health insurance system in the world. Many insurers make lots of money. How do they do it? My colleague, Jim Post, who has studied the industry, reports insurers have only 3 factors to work with: who is covered (availability), what they are covered for (quality), and price. So, among other things, in the present, badly broken system, they refuse to cover people with pre-existing conditions or make coverage so expensive for such people that they cannot afford it. They provide coverage that excludes some of the services their subscribers need. They charge cost-sharing amounts that make doctor-recommended services unaffordable for many covered patients. They introduce administrative procedures that make it difficult for patients to receive and doctors to provide covered services. And with it all, instead of falling, premiums keep rising and lead increasing numbers of employers and employees to drop coverage.

So, given this history, how do policy makers arrange for a competition-based strategy that will cover everyone and keep costs under control? The president and his allies in Congress have proposed 2 main strategies. One is to impose regulations that prohibit the firms from using the tactics just described. Guaranteed issue and renewal, community-rated premiums, and limits to cost-sharing would be required.

But if private insurers can no longer engage in the tactics that got them to profitability, what methods are left to them? How will they keep spending under control at the same time they provide value to the public? That is a question they should be forced to answer.

To protect the public against the possibility that they will find ways to vary the 3 factors in their control in ways that undermine the reform goals, the second proposed strategy is to introduce a publicly operated plan to compete with the private firms. The primary mission of this government-run insurer would be to offer affordable coverage for people who could not find it from private firms. It would not need to earn a profit for shareholders, nor to engage in expensive marketing campaigns to win subscribers. In order to avoid losing too many subscribers to it, the idea is that private insurers would need to respond to its offerings. The coops that are suggested as a substitute pale in comparison.

The best hope insurers -- and the public -- have to achieve the goals of reform is to change the incentives on providers by ending fee-for-service payment and to promote the development of integrated group practices which would have the means to furnish better, more efficient care. This being the case, should we expect insurers to contract selectively with physicians and pay capitation rates? Will they encourage creation of integrated delivery systems which, being fewer in number and larger than most of today's practices, would have more bargaining clout over rates and terms?

If we are stuck with a competition-based strategy, the public option is the last, best chance for private insurers to show us they can provide better value at lower cost. The public option is needed because the insurers have already demonstrated that they do not do that on their own.

Supporters of reform should demand that Senator Conrad and his like-minded colleagues who oppose the public option answer these questions: In the absence of the public option, what actions will insurers take to accomplish the goals of reform? And why they have not used them until now?

Advocates of the public option should not allow themselves to be put on the defensive. Instead, they should insist that opponents explain what innovations insurers will introduce to provide good value at affordable prices.

Davidson, a Boston University School of Management professor, is author of the forthcoming book, In Urgent Need of Reform: The U. S. Health Care System.