Public Option, Private effects

A recent analysis funded by the insurance industry predicts tough financial times for hospitals if a public insurance option results in significant crowd out of traditionally higher-paying private insurance. In the absence of crowd out, hospitals will have improved revenues.

Hospitals receive patient revenues from multiple sources. Private insurers tend to pay better than public insurance payments from either Medicare or Medicaid. Sometimes, hospitals receive revenue from patients directly. However, such “self pay” bills are often never paid by uninsured patients and make up a large portion of a hospitals “bad debt.” For safety net hospitals, these unpaid bills contribute to perilous financial strains only partially offset by government disproportionate share (DSH) payments. Hospitals stand to gain from having self-pay/uninsured patients converted into paying customers (either through Medicaid or another public insurance option).

In the current analysis, acute care hospitals (utilizing a California database) were modeled under current conditions and then under assumptions that a public insurance option becomes available to uninsured Americans. Additional modeling tested conditions under which all Americans could access the public insurance option and provided estimates if enrollees switched from private insurance to the public insurance option.

Under current conditions, acute care hospitals operate on a 6.6 percent profit margin. The actual margin for patient-revenue-to-costs is actually negative however (-2.8 percent), and the overall margin is made positive through non-patient care activities.
When the uninsured enroll in the public insurance option, hospital margins improve as expected. However, if currently insured private patients are allowed to enroll in the public option, hospitals may experience lower reimbursement. Were this to occur, hospital margins would decline. In extreme circumstances this could produce patient-revenue-to-cost margins as negative as -10 percent.

Another important side effect of having multiple payers for health services is that private insurers often pay more than the actual cost of services. This analysis estimates a private-payer payment-to-cost ratio of about 1.30 (i.e. private insurers pay 30 percent more for care than the actual cost of services in order to accommodate lower payments from public sources and no payments from the uninsured. If the uninsured move to a public insurance option, this “over payment” becomes reduced. However, if insured patients switch to the public insurance option the private-payment to cost ratio would likely increase to 1.90 (three times as much over payment compared to current levels). As a consequence, private health insurance premiums may in fact increase after implementation of a public option.

Commentary

Many Americans can agree that health insurers should sell insurance to anyone who wants to buy it without discriminating against people with pre-existing medical conditions. However, the debate is fierce about whether health insurance should be delivered by private (for-profit and non-profit) firms or by the public sector. The centerpiece of controversy is the public option – allowing the government to directly sell health insurance in competition with private insurers. As currently constructed, the public option being debated in the House of Representatives would only be available to the uninsured.This analysis demonstrates that the public option will improve the financial situation of hospitals and likely decrease private insurance premiums.

Americans already spend over $1000 per family to cover the uninsured. With a public option, health care providers will recoup significantly more of the $116 billion of medical care provided to the uninsured and will therefore require less redistribution from private insurance.

Americans need to stop debating whether or not the government should sell health insurance policies. They should ask: “Should all Americans have health care?” If not, can the medical community ethically refuse to treat the uninsured because they can’t pay? If yes, is it preferable to pay for the uninsured directly through taxes or indirectly through higher premiums?
Health Affairs. 2009; 28(6): w1013–1024.

by
Cedric K. Dark, MD, MPH