EMBARGOED until

June 4, 2009 10 AM CT


Wisconsin Cost Savings under

National Health Care Reform:

The Economic Case for a

Public Health Insurance Option

By Robert Kraig, PhD

Citizen Action of Wisconsin

  Release Date: June 4, 2009

INTRODUCTION

There is a broad and unprecedented national consensus that health care hyperinflation is no longer sustainable.  As a consequence, both President Obama and key committee Chairpersons in Congress have committed to enacting fundamental health care reform in 2009.  The question has shifted from whether there will be health care reform this year to what shape it will take.

As the national health care reform debate in Washington heats up, Congress is beginning to make decisions that will dramatically affect the future cost of health care coverage for Wisconsin families, individuals, and businesses.  Seemingly technical decisions that are flying beneath the radar screen for the general public may have dramatic financial consequences for Wisconsin family pocketbooks and for Wisconsin’s economy in general.

One of the pivotal decisions Congress is making is whether the emerging national health care reform plan will include the choice of both public and private health insurance options.  Health care reform frameworks suggested by President Obama and by leaders in the U.S. Senate and House contemplate the creation of a National Health Insurance Exchange where health care consumers can choose between regulated private insurance options and a new public health insurance plan similar to Medicare. This concept of offering a choice between regulated private insurance and a public health insurance plan has been discussed in Wisconsin for several years. In fact, it was one of the key elements in the Healthy Wisconsin reform plan that passed the Wisconsin State Senate in 2007.

Despite the familiarity of opinion leaders in Wisconsin with this concept at the state level, most people in Wisconsin are barely aware of the discussion now taking place at the national level. Nevertheless, the New York Times recently called the question of whether there will be a public health insurance option “the most explosive issue in the debate over comprehensive health care legislation.”[1]  The issue is “explosive” inside the Washington Beltway because powerful lobbying interests, especially the health insurance industry, are going all out to avoid having to compete against public health insurance.[2]  The public is just beginning to be engaged on the issue, with paid advertising which began at the end of May.[3]

Currently available economic projections indicate that whether or not a public health insurance option is included in the final national health care reform package will have dramatic financial implications for Wisconsin families and employers (both business and government).  Using current average Wisconsin health insurance premiums as a benchmark, the report finds that Wisconsin employers and workers could realize over a billion dollars in additional savings if Congress includes a public health insurance option in its emerging national health care reform legislation.

BRIEF SUMMARY of FINDINGS

Wisconsin families and businesses stand to save hundreds of millions of dollars each year if Congress creates a large pool under a National Health Insurance Exchange.  However, the aggregate savings, as well as the individual savings for Wisconsin families and employers, will be substantially larger if the legislation Congress crafts this summer includes a public health insurance option.  Strikingly, the savings could be up to 250% greater if there is a strong public option offered on the proposed insurance exchange.

All told, Wisconsin employers (both private businesses and governments) could save between $700 million and $1.837 billion dollars per year over what they paid in 2008 according to currently available economic projections for the cost of health insurance on a national exchange.  This large difference of $1.137 billion per year in potential savings pivots on whether there is a strong public health insurance option offered on the exchange. The low end estimate assumes there is no public health insurance option and the high end estimate assumes a public option which pays Medicare rates.

There is a similar savings gap for health insurance premiums paid by employers and workers, with a public health insurance option saving substantially more money than private insurance options alone.  For example, Wisconsin family group health insurance policy premiums were an average of $13,559 per year in 2008.  Under a public health insurance plan which paid Medicare rates family premiums have been projected at $9,132 per year, a 33% savings, while under private health insurance offered on a national exchange premiums would be a projected $11,640, a 14% savings over current rates.

FINDINGS and ANALYSIS

This analysis compares the cost savings to Wisconsin families and employers under several of the major national health care reform options Congress is currently considering. 

President Obama and leaders in the U.S. Senate and U.S. House of Representatives seem to have coalesced around the creation of a National Health Insurance Exchange where individuals could select from different health insurance plans which offer benefits comparable to Members of Congress and other federal employees. [4] There seems to be an agreement that the new health insurance exchange will offer regulated private health insurance options. What is in dispute is whether the exchange will also offer public health insurance.   A public health insurance option has been suggested by President Obama and key leaders in Congress, but is under fierce attack from health industry lobbyists.

There are two key points of contention around a public health insurance option.

1)     The health insurance industry contends that a public health insurance plan would be so attractive that most consumers would choose it, putting many private insurers out of business.  They want to avoid competition with a public health insurance option in order to preserve their business model.

2)     Provider groups fear that a public health insurance plan would pay rates which are too low. They contend that Medicare and Medicaid, the two largest public health insurance plans in operation, pay hospitals, doctors, and other medical providers less than their actual cost.  One possible solution that has been offered is for the new public health insurance plan to pay rates to providers which are somewhere between Medicare and private insurance.

This analysis examines the relative cost savings in Wisconsin under three of the politically most plausible versions of the National Health Insurance Exchange that may come out of Congress, including:

Option 1: A national health insurance exchange which offers regulated private health insurance plans and a public plan which pays Medicare rates to providers.

Option 2: A national health insurance exchange which offers regulated private insurance and a public plan which pays providers at a mid point rate between Medicare and private insurers.

Option 3: A national health insurance exchange which offers only regulated private insurance and no public plan.

This analysis finds Option 1 would provide the greatest savings to Wisconsin families and businesses, and Option 3 would provide the least savings.

1) Group Health Insurance Premiums

The Lewin Group—the respected health care policy consulting firm which provided cost savings estimates for the Healthy Wisconsin plan in 2007—recently completed an analysis of health insurance premiums under a national health insurance exchange.[5] Chart 1 compares the average rates Lewin projects on an insurance exchange to current average Wisconsin health insurance premiums for employer-based coverage.[6]   All types of plans would offer substantial savings, but the savings are much higher if there is a public health insurance option.  For family coverage, a public plan which paid Medicare rates would save over $4,400 per year; a public plan paying the midpoint rate between Medicare and private insurance would save over $3,000 per year, and private insurance purchased on a national exchange would save about $1900 per year.  For single coverage, the relative savings are substantial for both versions of the public plan. However, there would be virtually no savings for private individual policies purchased on the exchange over current Wisconsin rates.

 

Chart 1: Health Insurance Premiums: WI 2008 and 3 Reform Options

Sources: Lewin Group 2009 and New America Foundation 2009

Chart 2 expresses the relative savings in percentage terms.  All family policies would be cheaper, although the public health insurance options offers more than double the savings (33% compared to 14%).  The compromise option, a public plan that paid a midpoint rate to providers would save 9% more than private health insurance.  Importantly, individual group health insurance policy holders would receive virtually no savings under the private health insurance purchased on the exchange.

Chart 2: Percentage Savings: 3 Health Care Reform Options

Source: Lewin Group 2009

Chart 3 shows the savings for workers under the 3 health insurance reform options under consideration.  The public plan paying Medicare rates would save the average family almost $1000 per year on their share of insurance premiums.  Private insurance purchased on a national exchange would save the same family just over $400 per year.

Chart 3: Worker Contribution to Premiums: WI 2008 and 3 Reform Options

Sources: Lewin Group 2009 and New America Foundation 2009

2) Aggregate Wisconsin Employer Health Care Savings

The premium savings outlined in the previous section add up to massive potential savings for all types of Wisconsin employers, including businesses of all sizes and units of government.  Chart 4 and Chart 5 quantify the potential savings under each health care reform option.[7] The results are dramatic, with Option 1 saving Wisconsin employers $1.8 billion per year and Option 3 saving over 250% less ($700 million per year).[8]

Chart 4: Total Employer Health Care Spending: WI 2008 and 3 Reform Options

Source: Lewin Group 2007 and 2009

Chart 5: Total Employer Savings: 3 Reform Options

Source: Lewin Group 2007 and 2009

 DISCUSSION

This analysis shows that although the debate over a public health insurance option may seem highly technical, its outcome will have weighty financial consequences for Wisconsin families and employers.  By far the strongest impetus for health care reform is skyrocketing costs.  Making public health insurance one of the options, alongside private insurance, would dramatically increase the financial relief for Wisconsin families and businesses.

If a strong public health insurance option is present in the reform package that emerges from Congress this summer, family health insurance premiums in Wisconsin could be over $4,000 lower.  In addition, Wisconsin employer spending on health care could be as much as $1.8 billion lower then it was in 2008.  Even if Congress decided to adopt a public health insurance plan that paid a higher rate to providers, the savings in Wisconsin would be over $3,000 for a family plan, and $1.2 billion for all employers.

These projections are based on the well established premise that public health insurance programs are more efficient than private insurance.  As the Congressional Budget Office has documented in its analysis of national health care reform options, public insurance plans have substantially less overhead because they do not have to pay for profits, marketing, and other administrative costs relating to who to accept for coverage and policy pricing.[9]

It is very important to recognize that the reform options with the largest savings analyzed here assume that a substantial portion of the market will still be held by private insurance.  The question on the table in Congress is not whether or not there will be private health insurance options, but whether public health insurance options will also be in the mix.

Another argument that has been advanced for a public insurance option by President Obama is that it would “keep the private sector honest.”[10]  The question of whether the choice of public insurance would deter health insurance company abuses in general is beyond the scope of this report.  However, the superior price efficiency of public health insurance quantified in this report does suggest that such competition would put much greater pressure on the insurance industry to restrain premium increases.

Endnotes