Reform without creating a public insurance option is not real change

For the great majority of Americans, staying just one step ahead of mounting medical debt is a constant struggle. Medical crises contribute to approximately half of all home foreclosure filings. According to a widely circulated study conducted by researchers at Harvard University, 50 percent of all bankruptcy filings in 2004 were partly the result of medical expenses; 68 percent of those who filed for bankruptcy actually had health insurance, but found that insurance inadequate to cover their bills.

Even as skyrocketing healthcare prices are bankrupting millions of Americans, however, the earnings of private health insurance firms are rising. In most areas of the country, the insurance market is dominated by one or two large providers. Rather than bargaining for lower rates, large insurer conglomerates are transferring the higher prices charged by hospitals to patients, and padding their profits. Between 1999 and 2008, as premiums increased 117 percent for families, the profits of the top ten insurance companies grew by approximately 1,000 percent. During the same period, insurers merged more than 400 times, but employee premiums increased nearly eight times faster than average U.S. incomes.

The U.S. healthcare market is broken. Large insurers have little incentive to bargain for lower prices, and smaller insurers do not compete on premiums to gain market share. Instead, they follow the pricing of the dominant insurer and compete on risk. As the Urban Institute has pointed out, competition in insurance markets is often about getting the lowest risk enrollees as opposed to competing on price and the efficient delivery of care.

Health reform must restore competition into health markets and reorient business model toward quality of care. A healthcare reform initiative that includes a new Medicare-like public option would permit individuals who do not receive coverage through an employer to choose from a menu of private and public coverage options. Enrollees would pay a subsidized premium (should they qualify for a government subsidy) and receive the coverage of their choice. The new public health plan would build on the existing Medicare infrastructure and negotiate with hospitals and doctors for the best healthcare prices. Costs would be set through a process of competitive bidding in which all of the different healthcare plans (public and private) would participate to provide standard benefits.

The new plan would also use its inherent advantages to do what private insurers have only promised: control costs over the long term. Unlike private companies, which typically spend between 20 and 50 percent of healthcare dollars on expenses such as administration, executive salaries, advertising, and shareholder return on equity, Medicare has low administrative overhead and the ability to bargain for volume discounts, as the new public plan would have.

Remember, the private sector’s high administrative spending is responsible for a good portion of the excess spending in the healthcare system. According to an analysis by the McKinsey Global Institute, excess spending on health administration and insurance accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Eighty-five percent of this excess overhead can be attributed to the highly complex private health insurance system in the United States.

The new public health insurance option could use its ability to negotiate for lower prices and volume purchasing capacity to muscle private insurers into lowering their administrative spending and using more healthcare dollars to provide actual healthcare. This kind of reform could reduce projected healthcare costs by about $2 trillion over eleven years. It could lower premiums by 20 percent on average, simplify the medical billing process (thus pleasing doctors and patients alike), and allow small businesses to finally enroll their employees into a health insurance program that provides comprehensive health benefits.

Dean is a former Vermont governor, Democratic National Committee chairman and presidential candidate. This op-ed is excerpted from his new book, Howard Dean’s Prescription for Real Healthcare Reform: How We Can Achieve Affordable Medical Care for Every American and Make Our Jobs Safer.