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Details are still sketchy, but the Senate compromise on health care is described by the Washington Post in this morning’s edition:

The short answer — subject to Senate revisions — is that those without employer-provided insurance would have more options for buying coverage, but if they are younger than 55, their money would go to a private insurer, no matter what. Rates would be more competitive than what they are offered now, but possibly less so than under a “public option.” And if they are between 55 and 64, they might be able to buy into Medicare early, though at what prices remains to be seen.

As congress moves toward health care reform the comparison between private health care insurance firms and the existing government programs like Medicare becomes more important. While many private health insurance companies are already non-profit, the administrative expenses in private firms are said to be from 10 to 20% of total expenditures. Medicare is quoted at under 6%, or 8 to 9% when assistance from other government agencies is included.

The premium cost for someone 55 and older buying into the Medicare system has not been determined, but it is expected to be equivalent to the cost of private group insurance. Guaranteed eligibility would attract those who cannot obtain private insurance due to pre-existing conditions. It is possible that the premium cost could offset the extra expenditures for the younger group of people. And I expect subsidies to be in place for low to moderate income people.

I have never been able to determine the exact accounting rules used to calculate Medicare’s administrative costs; private companies generally use something like GAAP (Generally Accepted Accounting Principles), a set of accounting rules used to prepare, present, and report financial statements. But the government does not; financial details are reported on a cash basis, and administrative costs are often allocated to a program based on its share of total government expenditures. There is an argument that Medicare’s administrative costs per person are higher than in the private insurance business, as Robert Book has noted at Heritage.org:

Medicare patients are by definition elderly, disabled, or patients with end-stage renal disease, and as such have higher average patient care costs, so expressing administrative costs as a percentage of total costs gives a misleading picture of relative efficiency. Administrative costs are incurred primarily on a fixed or per-beneficiary basis; this approach spreads Medicare’s costs over a larger base of patient care cost.

But you can slice and dice the numbers a lot of different ways. One long and detailed paper supporting the idea of a public plan, written before the current administration took office, is provided by Jacob Hacker (pdf file). Hacker uses Medicare’s lower administrative costs as a reason for implemention:

The CBO study suggests that even in the context of basic insurance reforms, such as guaranteed issue and renewability, private plans’ administrative costs are higher than the administrative costs of public insurance. The experience of private plans within FEHBP carries the same conclusion. Under FEHBP, the administrative costs of Preferred Provider Organizations (PPOs) average 7 percent, not counting the costs of federal agencies to administer enrollment of employees. Health Maintenance Organizations (HMOs) participating in FEHBP have administrative costs of 10 to 12 percent.

Note that FEHBP, the Federal Employees Health Benefit Program, is rumored to be the model for a national private insurance exchange for those under 55. Unlike a government “public option”, this exchange would be an array of private company plans administrated by the federal government. Minimum requirements for the plans are set by the government, and employees are able to choose among providers. Historically, rate increases for the FEHBP generally exceed those of private group plans administered by employers, running at 7 to 8% per year as opposed to 5%.

One advantage of extending voluntary Medicare coverage to those 55 and older is that many people entering the system at 65 are in frail health, with undiagnosed diabetes or heart disease. If preventative care is started at 55 overall program costs could be reduced. The problem is that making the system the “insurer of last resort” would mean that only those in poor health or unable to pay for private insurance would take advantage of it. It remains to be seen if overall savings would result.

Cross posted to Donklephant

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Now that the public option appears to have been declared really, really dead, focus can brought upon the areas of health care reform that most people want. One of those is “portability”, the promise that someone with health insurance will be able to retain it after losing their job.

The problem with most of the promised reforms is that they ignore the principles that make insurance possible in the first place. As Howard Audsley notes in Conversations Around a Wood Stove:

insurance is a social mechanism for the transfer of the risk of monetary loss from the individual to a larger group. The concept is that risk of loss fits a random pattern of probability. It works very well for things like lightning strikes, hail, wind, etc. Risk and the premiums charged for insurance vary directly with the probability of loss. Hurricane insurance premiums are greater for folks living in Pensacola than for those in Minneapolis. Car insurance premiums for a guy with 3 DWI’s and two at-fault accidents are higher than for grandma, who only drives to church on Sunday. Life insurance premiums for an aging rodeo clown who smokes and has a bottle hidden behind chute #9 are higher than for a young (straight) desk clerk. You get the idea.

Insurance doesn’t work when the pool is exposed to catastrophic losses (exclusions for acts of war, earthquakes, etc), or when the pool as a whole is exposed to a high probability of loss. Assuming a guy with 3 DWI’s still has his license to drive, he isn’t going to be able to buy insurance from a commercial company. It will have to be a low limit, state fund that sells him insurance. How about $1,500 a quarter for $10,000 liability only coverage? That is the way it works.

So how does insurance work when the premiums can’t be paid at all? The short answer: it doesn’t.

Most people don’t realize that their employer often picks up 80% or more of the monthly health insurance premium. The guy who thinks he is paying too much for health insurance at $300 a month doesn’t realize the full bill is $1,500. When he loses his job he finds that COBRA payments are the full amount (the law allows up to 102% of the total cost). So you can get your health insurance coverage, for up to 18 months, but it will cost you dearly. Right at a time when you cannot afford to pay for it.

It is unreasonable to assume that insurance companies will be able to pick up the cost of covering people who are not paying for coverage. There is no free lunch, so premiums have to increase from the paying customers to cover those who are between jobs … and sometimes people are “between jobs” for a long time, especially if all their needs are met.

Portability could be provided, and without using tax dollars to do it. Allow insurance companies to offer “loss of job” riders, allowing employees to pay extra each month to insure specifically for COBRA payments for unemployment. Some insurance companies already offer “loss of job” insurance; an example plan pays out $1,500 a month for up to four months for a premium of $70 per month. A similar product is found in the “mortgage protection plans” that pay your mortgage payments for up to six months (cost is about $40 per $1,000 of monthly payment).

If we must, we could structure such a plan the same way we do the horribly inefficient “Worker’s Compensation” plans, with a state payroll tax of one to two percent of all worker’s wages. The problem is, like all government give-aways, such a plan is ripe for the same kind of fraud as Worker’s Compensation.

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The law of unintended consequences always seems to surprise our lawmakers. Democrats can’t seem to understand that a “public option” for health care insurance will compete unfairly with private insurers, even the non-profit ones like Kaiser and Blue Cross. And the costs of that public plan will exceed all estimates due to swelling enrollment.

Hawai’i's Keiki Care, intended to cover uninsured children not eligible for Medicaid, was abandoned in late 2008 after enrollment swelled far beyond the estimates. The reason? As KaiserNetwork.org indicated:

According to some state officials, many of the children enrolled in Keiki Care previously had private health insurance, the AP/Herald reports. Kenny Fink, administrator for Med-QUEST at the Hawaii Department of Human Services, said, “People who were already able to afford health care began to stop paying for it so they could get it for free.” He added, “I don’t believe that was the intent of the program” (Niesse, AP/Miami Herald, 10/17).

It isn’t just individuals that will willingly abandon higher cost private health care plans, but employees forced to move to the public option by their companies.

Remember the controversy when large companies like Walmart started filling their ranks with part time employees, thereby avoiding the benefits that flow to full time employees? Public opinion was shocked to find out the companies were providing brochures explaining how the employees could get Medicaid coverage from the government to replace their missing company health plan.

The response from lawmakers has been to try and craft a “play or pay” provision fining companies that eliminate their in-house plans. But the temptation will still be great for a CEO to scuttle the in-house plan for other cost savings … reduced staff in HR, decreased uncertainty about future costs, etc. Because many companies ‘self insure’, with the insurance company acting as the plan’s administrator, health care costs represent a variable cost, just one illness away from spiraling out of control. Having a number you can budget for, such as the “play or pay” fine, means good management can just cut back a few more jobs, hire more part time workers, and eliminate the company health plan.

Robert Moffit, director of the Heritage Foundation’s Center for Health Policy Studies, explained the reasons a public plan simply won’t work in testimony before the House Education and Labor Committee:

Moffit dispelled popular belief that a government-run health insurance plan would compete on a level playing field. “There are a lot of ways to improve competition in the health insurance market without the public option. The public option doesn’t solve the current problem of consolidation — in fact, it makes it worse.”

A public option with any special advantages, such as being able to use Medicare payment rates, would reduce the number of private health plans, and thus further consolidate the insurance market, Moffit pointed out to the committee. This would worsen the very problem champions of the public plan in Congress say they want to fix.

To compete fairly, a public plan would have to follow all of the rules and regulations current health insurance plans face, including laws for malpractice tort and contracts. “It should be allowed to compete for business and fail, without artificial bailout from the government” if the public plan loses market share, Moffit said.

Massachusetts’s universal health plan, long discussed as a possible model for the nation, is facing budget crunch pressures. The solution? Eliminate “automatic coverage” for the poor, and eliminate dental coverage. This “limited coverage” rationing is a foreseeable result of any national “public option” plan, as the promised cost savings never materialize. As Democratic Treasurer Timothy P. Cahill told the Boston Globe:

“We’re all still waiting for the savings,’’ Cahill said. “Universal healthcare was supposed to eventually save us money.’’

“It’s a warning for the federal government as it looks to do something similar,’’ he added. “I’m not saying we can’t afford any of it, but it certainly doesn’t appear that we can afford all of it.’’

The public option is another lesson in the law of unintended consequences waiting to be taught. But, unfortunately, its a lesson our legislators are apparently unable to learn.