Steve Reads

There’s some justifiable fear that a public health-insurance plan wouldn’t compete on a level playing field with private insurance, and would therefore necessarily kill off private insurers.

I say “justifiable,” but it seems pretty clear that this needn’t happen. One word provides the evidence: Medigap. It turns out that Medicare doesn’t cover everything that the elderly need. A full review of The Political Life of Medicare is forthcoming, but suffice it to say that “cost control” has been the guiding theme of Medicare more than has “expanding benefits.”

So Medicare doesn’t cover every medical bill. This leaves room for private insurers to cover what Medicare doesn’t. The insurers that fill in that gap are known as “Medigap” providers. “On average,” says The Political Life of Medicare, “the elderly carried 1.25 supplemental policies per person, and private insurance policies paid for approximately 7% of medical care expenditures for the elderly in 1984.”

The extent of Medigap coverage — the 7% — will vary with how extensive cost sharing is in Medicare. Set the Medicare deductible high enough, and the market for private insurers will grow larger. But note that Medigap is parasitic on Medicare: “Over 24 years after Medicare’s enactment, fewer than one-half of such policies covered prescription drugs [Medicare Part D hadn't yet been enacted -- SRL] or any physician bills in excess of what Medicare paid as ‘reasonable charges.’” The insurance market for the elderly will not form on its own; the elderly are uninsurable, which is why Medicare exists.

Medicare reimburses providers less than private insurers do, which is why Medicare payments have famously risen less than private insurance payments. I don’t understand all the contours of Medicare just yet, but one thing is important to note: it’s voluntary. Hospitals can choose not to honor Medicare. The fact that they continue to do so suggests that the government isn’t squeezing them too hard. If a public option were just an expanded version of Medicare, it would continue to be voluntary. If it ever squeezed doctors too much, they could refuse to honor it.

Another reason to fear a public plan is that the government can print money, which private insurers can’t. The story goes that the government would offer a gold-plated insurance policy that needn’t break even, which private insurers just couldn’t do. Hence private insurers would quickly be driven out of the market.

Again, Medicare suggests that this fear is misplaced. Medicare Part A is financed from its own dedicated pool of money: 1.45% of your income comes out of every paycheck to pay for Medicare insurance, and your employer chips in another 1.45%. That money can only be used for Medicare, just as the Social Security tax (6.2% each from you and your employer, on the first $106,800 of your income) can only be used for Social Security. The fact that this money is in a separate bucket means that Medicare and Social Security can go bankrupt; this is why we only ever hear about the impending insolvency of Medicare and Social Security, never about the insolvency of the Department of Defense. The DoD is funded in a totally different way, and the government really could keep it going by printing money.

Why couldn’t universal health care be funded by a dedicated tax that goes into its own special bucket? Wouldn’t this deflate the fears of those who think that a public plan and private insurance would be playing on an uneven field?

If we look to Medicare, I think we’ll find that a lot of our health-insurance questions have answers. And Medicare at least holds open the possibility of transparent decisionmaking: every year, Congress and the various oversight boards discuss Medicare’s future solvency; actuaries dutifully compute dates to exhaustion based on public demographic statistics. Private insurers compute this sort of thing in secret. Medicare has public criteria for determining whether a procedure is covered; insurers increase their profits by secretly coming up with more-clever ways to deny coverage to those who need it.

One conclusion from The Political Life of Medicare is pretty clear: Medicare teaches us more about how to cut costs than it does about how to protect against sickness. The universal health care we should aspire to is much greater than we’ll ever get from Medicare. Medicare was a good start.