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Private vs. Public Provision of Health Insurance

Economists share lessons learned from the Affordable Care Act and Medicare
November 17, 2016

NOTE: Due to technical difficulties, the video begins a few minutes
into the presentation.

While health insurance was a major topic of conversation during election season, it is still unclear how a new system could take shape. "If we learned anything from Obamacare," reminded Heather Howard, Lecturer in Public Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, "it is that disruptions in health care are politically unpopular and repeal of the Affordable Care Act would result in 20 million people losing their health insurance. We are likely looking at immediate action, but not immediate implementation."

On November 17, Howard moderated a conversation on the lessons learned from the Affordable Care Act and Medicare with Amil Petrin, Professor of Economics at the University of Minnesota, and Robert Town, James L. and Nancy Powell Centennial Professor in American Economic Thought in the Department of Economics at the University of Texas - Austin.

Town's research has found that private provision of public health insurance seems to be winning the public policy argument. Both in the U.S. and abroad, this model is outperforming the old public option for a number of reasons. The growing complexity of operation and management, such as managing benefits, monitoring providers, determining payments and selecting networks is too much for a slow bureaucracy.

"We need private entities because they are able to respond more nimbly to changes in the healthcare setting, which is changing all the time,” said Town. Research has shown that Medicare Advantage, an example of the private/public model in practice, is more efficient in providing care and better at coordinating benefits.

The implementation of ACA, which aimed to reap the private/public model benefits, was successful by a number of measures. ACA resulted in 22 million people enrolling in insurance and reduced the population of uninsured to 8.6%. In addition, the total government outlay was significantly less than estimated, as was the cost per newly insured person at roughly $4,700.

Unfortunately, there are also some serious challenges on the horizon. Many carriers, who initially set very aggressive prices, didn't make money and are leaving the market. Now people shopping for insurance are seeing fewer choices and higher rates.

While the problems stem from a number of places, Town recommends that a few adjustments could lead to significant improvement. First, many of the exchanges are not big enough to take advantage of economies of scale. Opening them up to employers or private exchanges would make it more attractive for carriers to participate. Next, subsidies may need to be increased or retooled and more sophisticated approaches are needed for risk adjustment. Additionally, adjusting age rating provisions will make participation more attractive to the younger generations. Lastly, mandates have led to bad sentiment and other approaches, such as allowing for increased premiums for people who don't have continuous coverage, are worth consideration.

Town concluded by emphasizing that ACA has many interconnected parts and policymakers need to pay attention to the delicate balance of provisions when making adjustments.

Petrin focused on the comparison between traditional Medicare and Medicare Advantage, which was established in the 1980's to provide more choice and to benefit from the savings of privately managed care. It was not until 2003 to 2004 that the program took off after Congress made some changes to stimulate the market.

“Congress did two things: they risk adjusted the payments and raised the reimbursements rates well above the cost to insure an enrollee on Medicare,” Petrin explained. As a result of these adjustments, Medicare Advantage grew from 5 million participants in 2005 to 17 million in 2016, which is 31% of the senior market.

Medicare Advantage is sometimes criticized for its market structure. In many places three firms will dominate, each offering many different plans. While this could be cause for concern, there is evidence from other areas of economics that three may be the magic number in terms of holding margins down. “A monopoly is bad, but adding another player pushes markups down significantly," explained Petrin. "Three players pushes markups down even further, and then it levels out.”

Legislation is in place to bring down the level of reimbursement the government offers Medicare Advantage providers. Research suggests that consumers are only receiving a small benefit on the extra money that the government is spending, so it may in fact be the right time to bring down reimbursement rates.

Petrin's current research shows that there is still a lot of money being left on the table when it comes to switching from Medicare to Medicare Advantage. His model shows that taking a senior from Medicare to the best Medicare Advantage plan for them, saves them an average of $750 per year. Petrin concludes, “This points to the need to make it easier for seniors to be able to figure out what plan is best for them.”

Looking forward, Petrin could see Medicare Advantage growing under the Trump administration. But because Medicare Advantage is so popular among seniors who traditionally show up at the polls, it seems unlikely there will be dramatic changes any time soon.

View Town’s slide presentation, Petrin’s slide presentation, and photos from the event.