Why Business Fears the Public Option

Executives contend that it will lead health-care providers to charge patients in private plans higher rates

By Jane Sasseen and Catherine Arnst

The Obama Administration's proposed overhaul of the U.S. health-care system—and the possible creation of a publicly managed insurer—has unnerved much of the business community. Business lobbyists don't buy the White House line that reform plans will reduce the explosive growth in health-care costs. Instead they see Obamacare shifting much of the cost of extending coverage to 45 million uninsured Americans onto the backs of major companies and private insurers.

To understand why, you have to wade into the murky waters of a debate over an alleged industry practice called cost shifting. The U.S. Chamber of Commerce and the National Association of Manufacturers contend that Uncle Sam has long underfunded public health programs such as Medicare and Medicaid. That has prompted hospitals to jack up the rates they charge patients with private insurance to make up any losses. Insurers then pass those costs to companies in the form of higher premiums. But plenty of economists say such concerns are overblown.

If the government jumped into the health insurance field, this whole rob-Peter-to-pay-Paul dynamic would intensify, public option critics say. R. Bruce Josten, the U.S. Chamber of Commerce's top lobbyist, cites data that Medicare (which covers elderly Americans) reimburses just 78% of health-care providers' costs on average. The Medicaid program for low-income patients doles out even less. "The government doesn't try to reimburse at market rates, and that just results in a lot of cost shifting back to premium payers," he says. "So why would we want to let them set up a public plan that reimburses at those same rates?"

This line of attack, along with warnings that a public insurance option would crush private insurers and lead to a nationalized U.S. health-care system, has gained some traction. On Sept. 29 advocates of a public option failed to get it included in a key reform bill moving through the Senate. But Speaker Nancy Pelosi (D-Calif.) and her liberal allies have kept the idea alive in the three House bills still in play. It's unclear whether President Barack Obama will demand the inclusion of a public insurance option in any final deal.

In the end, a compromise bill is likely to allow for a publicly backed insurer later if promised cost savings don't occur. For now, Pelosi argues that creating a public insurance option could trim $100 billion from the cost of covering the uninsured. Proponents add that government competition would force private insurers to lower premiums, making coverage more affordable for all.

But the business community keeps cranking out studies undercutting such arguments. The insurance industry trade group, America's Health Insurance Plans (AHIP), compared the lower reimbursement rates for health care paid by public programs vs. private payers. The group claimed the difference reflects cost shifting, which added an estimated $1,512 to the average premiums paid by a family of four. "The existence of the private sector allows that shift," says Karen Ignagni, the head of AHIP. "If you clamp down on one side of a balloon, the other side just gets bigger."

PRICE DISCRIMINATION?

Still, many economists suggest business is overstating the level of cost shifting. "This debate has a religious nature to it," says Rick Mayer, an associate professor of public policy at the University of Richmond. While a majority in the industry insists that cost shifting occurs, he says, "most health economists just don't believe in it."

He and others argue that hospitals and other providers aren't engaged in cost shifting as much as in price discrimination. Take that $1,512 difference claimed by AHIP. Critics such as Austin B. Frakt, a health-care economist at Boston University School of Public Health, say the assumptions behind that number are flawed. He argues there is no reason to assume that if Medicare reimbursement rates were to go up, hospitals would charge private insurers any less.

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