Proponents of a public health insurance plan concede that Medicare and Medicaid pay much lower rates to providers than private insurers. For example, on average, hospitals are paid 9% below the costs of care by Medicare and 15% under costs by Medicaid. Similarly, Medicare pays physicians 22% less than they are paid by private insurers, while Medicaid pays 47% less. Yet public plan enthusiasts do not view Medicare’s pricing power as a problem; instead, it is part of their publicly stated rationale for a public plan: to leverage purchasing power on behalf of members to get the best rates and lower premium costs. In fact, the House Tri-Committee bill explicitly ties provider payment rates to Medicare levels for the first three years and allows for nationally negotiated rates thereafter. While Senate bills do not legislate where to set rates relative to Medicare, there are likely to be strong political pressures to keep payment rates under new public plan as close to Medicare rates as possible.
However, while experts disagree on the amount, most evidence suggests that for hospitals and pharmaceuticals, at least some portion of the sizable discounts obtained by public plans such as Medicare and Medicaid are passed along to private health insurers. While some experts have suggested that there is no cost shifting of Medicare underpayments (or negligible amounts), the available evidence does not entirely resolve the issue. This claim contrasts with more than a half dozen empirical studies suggesting hospitals recover at least 28 cents of every dollar of Medicare underpayments in the form of higher prices for private patients (and a more typical figure may be closer to 40 cents). Similarly, there is good evidence that for every dollar saved by Medicaid due to mandatory price rebates, the savings are more than made up by increased prices for private patients. But by lowering its own costs at the expense of private plans, a public plan will amplify its competitive advantage unfairly.
By the very nature of the politics required to sustain it, a public plan also is likely to keep its true costs hidden by subtly shifting burdens onto its own members. These are not hypothetical concerns. They are based on decades of actual experience with the largest public plan ever run by the U.S. government: Medicare. Medicare has grown increasingly stingy over time, with the consequence that the financial burden imposed on Medicare beneficiaries by medical expenses relative to their income has grown in the past and is projected to rise dramatically in the decades ahead. Within 75 years, the premiums, deductibles and copayments that seniors will have to pay for their Medicare benefits will absorb 97% of the average Social Security check; for the average 85-year-old, the share will have risen to 117%. This reinforces the view that the federal government should focus its energies on fixing the public plans it already manages rather than taking on the responsibility of a new public plan.
Here’s the evidence to support those conclusions.
