In a recent Wall Street Journal article titled, “Pelosi Pressed for a Public Option,” a new possibility for controlling health care costs under a public option plan was revealed. The article stated, “Congressional aides said including a government-run plan for people under 65 in the health overhaul could save as much as $100 billion, if such a plan were to pay health care providers the low rates used by Medicare, the federal health program for the elderly. The resulting savings would allow Democrats to keep robust subsidies and other provisions intended to help lower-income people buy health insurance.” This comment was supported by a quote from Speaker of the House, Nancy Pelosi, who was quoted as saying, "It saves the most money...If we don't take the full benefit of the savings, then what are our opportunity costs? Where else would we go...to pay for the legislation?" In all of the information that I have read regarding the health care debate thus far (and believe me, I’ve read a lot of information), this comment from Nancy Pelosi is perhaps the most honest and simultaneously, the most scary thing I have ever read.
For the first time in all of the discussions about health care, someone who is pushing for health care reform has come up with a concrete idea for how to reduce costs enough to finance the expansion of coverage. That’s the honest part. So what’s the scary part? The scary part comes from an understanding of what will happen to the health care delivery system if Pelosi’s vision for financing this plan actually becomes reality.
To examine the real impact of a public option, which will compensate health care providers at Medicare rates, you have to understand what makes up the cost of health care and how the current system forces the private insurance industry to subsidize the reimbursement deficiencies of Medicare and Medicaid. The cost discussion is an easy one; all health care cost controls can be broken down into a price or volume discussion. This is because cost is a function of the price that is paid for each service times the number of services that are provided. If you want to reduce the cost of health care, then obviously you have to reduce the price that you pay for each service, reduce the number of services that are provided, or both. Pelosi’s comment in the Wall Street Journal was the first time that I have seen something that directly addresses the cost issue. It is true that if a public option were passed, then paying providers at Medicare rates would actually reduce costs. The reason for this is because the commercial insurance companies who do not have the “take-it-or-leave-it leverage” of the Federal Government are forced to pay physicians and hospitals rates that are significantly higher than the Medicare reimbursement levels. In fact, many studies have shown that Medicare reimbursement levels are actually below the actual cost of providing care in most hospitals and that these hospitals are only able to survive by collecting higher-than-Medicare-rates from their commercial insurance contracts.
While it is true that this approach would reduce costs, that is only half of the story! To understand the crucial other half the story, you have to understand another simple business principle. In the world of health care costs, a reduction in cost is a reduction in revenue to someone. The $100 billion dollars in cost savings mentioned in the article represent $100 billion dollars of revenue that is currently being received today by a health care provider; i.e. hardworking doctors. What would be the impact of pulling $100 billion dollars out of the health care delivery system? Let’s see how this would impact a typical primary care physician office. Consider a hypothetical practice we’ll call “5 Internists.” Each of the five doctors in our hypothetical practice makes $150,000 per year right now. The patients at their practice comprise 40% Medicare and Medicaid and 60% private insurance. These doctors get paid 30% more for their commercial patients than they do for their Medicare patients. The practice has overhead that is 50% of its revenue. Now, let’s assume that a public option is formed, and it pays Medicare rates for their insured. Let’s also assume that 30% of all of the people that are not covered by Medicare or Medicaid are covered by the public option. In this scenario, the practice sees the same number of patients and their costs are the same. However, since part of their patients who used to be covered by private insurance are now covered by the lower paying public option, this means the practice’s revenue goes down. Now, the net effect is that the doctors who used to make $150,000 per year each take a 12% cut in pay and now they only make $132,000 per year.
As if that were not bad enough, think about how the rest of this scenario might play out. So now we have a public option that is competing with the private insurance companies. This public option has the potential to be so successful because it has a lower cost structure due to the fact that is pays Medicare rates to physicians and hospitals. So in order to compete, the private insurance companies must lower their fee schedules to the same Medicare-based reimbursement that the public option uses. When this happens, all of the patients who go to our hypothetical medical group will have services paid at Medicare levels. In that case, the physicians in our hypothetical medical group go from making $150,000 per year to making only $96,000 per year. While there are many people who would be happy making $96,000 in this bad economy I would hazard a guess that not too many of them spent the kind of time and money it takes to become a doctor. Specialists like surgeons spend between 11 and 17 years in training where they typically accumulate significant debt from student loans. While that seems bad enough, consider that in a recent survey over 33% of all physicians reported working more than 60 hours per week.
This sobering scenario quickly makes me wonder how many doctors would continue working those kinds of hours for less than $100,000 per year. How many doctors will actually put up with spending much less time with each patient to try and make up for the loss in revenue? How on earth are we going to attract our best and brightest students into becoming physicians when the income does not compensate fairly for the long hours and the highly-skilled work involved? And how many physicians are going to retire early or drop Medicare, Medicaid and the public option altogether and make “cash only” practices for those that can afford it?
Isaac Newton stated that every action has an equal and opposite reaction. The bottom line is that by reducing the number of practicing physicians at the same time that we are adding 40 million new patients to the health care system, this kind of approach to health care reform will result in a tremendous catastrophe. You see, we cannot eliminate costs without having an impact on someone. In this case, the doctors are the ones who will be hardest hit. I don’t know about you, but I want my children and grandchildren to have the same exceptional, quality healthcare that I have today. After all, how good is health insurance if there are no doctors available to provide the care?
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