Two substitute goods each satisfy the same need while not enhancing the benefit of consuming the other. For example, Coca-Cola and Pepsi both satisfy the need for a cola-flavored soft drink. Most people either consume one or the other. Few people like to combine the two. And because they are substitutes, their suppliers are natural competitors.
In contrast, complements are normally consumed together — think milk and cereal or bread and mayonnaise. Consuming one enhances the benefit of consuming the other. The suppliers of complements cooperate rather than compete.
Under current government policy, public and private insurance are substitutes. Consequently, they compete. Competition between private insurers is beneficial to consumers, but competition between public and private insurers is not. It has contributed to high private insurance premiums and the coverage gap.
But I contend that this harmful competition is a result of bad government policies rather than the natural order of things. Public and private insurance could be complements if we only chose the right policies.
The Importance of Primacy
Some people are covered by more than one health insurer. As profit-maximizing organizations, private insurers attempt to limit their financial liability by stipulating that all other insurers are primary. In other words, only after coverage by the primary insurer is exhausted is the secondary insurer liable for any healthcare expenses.
When an individual is covered by two different private insurers, it is a matter for a court of law to determine which insurer is primary. Not so, however, when a patient is insured by a private insurer and a public insurer. Federal law clearly establishes that the private insurer is primary in such cases, except in rare instances. Consequently, if an individual is enrolled in Medicare because she is over age 65 and enrolled in a private insurance plan through her employer, the private plan is liable for almost all her medical bills. She has little incentive to pay a premium for the private insurance coverage and the private insurer has little market power to charge a premium high enough to cover its costs.
The Balance Billing Ban
The government prohibits balance billing by providers of healthcare to Medicare and Medicaid enrollees. When a healthcare provider accepts payment from Medicare or Medicaid, it must agree to forego the collection of any additional fees from the patient except normal cost-sharing like deductibles and copays. There is a partial exception to this prohibition in certain cases, but in general it holds. This guarantees that public insurance enrollees have access to healthcare, regardless of income.
Like insurance primacy, Medicare and Medicaid are following common health insurance industry practice by not allowing balance billing. The typical managed care organization (MCO) contracts with a subset of available providers to form a network. These “in-network” providers agree to accept lower payments from the MCO with no balance billing in exchange for an increased volume of patients. They are also subject to practice constraints imposed by the MCO.
Since the MCO has no contract with “out-of-network” providers, it cannot stop them from balance billing MCO enrollees who choose to be treated by them. This is a strong incentive for enrollees to choose only in-network providers. Enrollees are further disincentivized from using out-of-network providers by bearing a greater share of costs.
They’re Substitutes Because They’re Not Substitutable … Huh?
Although private insurance primacy is a government policy meant to prevent the substitution of taxpayer funds for private funds, ironically this makes private and public insurance substitutes. It is commercially disadvantageous to offer private health insurance to individuals eligible for public insurance under the condition of private insurance primacy. The only exceptions are if the insurance is procured through a small employer (i.e. less than 20 employees) or for coverage of expenditures Medicare does not cover (i.e. Medi-gap insurance).
Also, the balance billing ban prevents public and private insurance from being complements which I contend is their preferred state. There is a reason that almost no one over the age of 65 has private insurance. And there won’t be any private insurance for people under 65 if either Medicare For All (MFA) or The Public Option (TPO) are adopted.
The way to make private and public insurance complementary is to stipulate that public insurance is primary and to allow balance billing by providers not in the public insurance network. For those long-acquainted with the health insurance industry, this first part will sound heretical while the second will sound somewhat familiar, if out of place.
A Variable Deductible
If public insurance was free and primary, wouldn’t providers always be paid by the government thus crowding out private insurance and forcing taxpayers to bear the full cost of the healthcare system, just like MFA?
Not if a household’s public insurance entitlement decreased as household income increased. For example, the ACA established a threshold for Medicaid eligibility at 138% of the Federal Poverty Level (FPL). This threshold applies only to those states that expanded Medicaid, however. For the other states, the threshold for Medicaid eligibility is somewhat lower. The free public option’s deductible could be set to zero for all families below this threshold and it would increase with household income above that initial level.
The result would be that the same households that qualified for Medicaid in the current system would have 100% public insurance coverage in the new system. There would be very little difference besides having a consistent threshold across the country instead of the highly variable and arbitrary one we have now.
In contrast, high-income households would have very high deductibles, perhaps a hundred thousand dollars or more. They would almost never be able to rely on public insurance to pay part of their healthcare bills. Instead, they would need to cover all their healthcare expenditures via private insurance or out-of-pocket. This too is little different from the current situation.
Wouldn’t balance billing allow providers to bankrupt patients without private insurance?
Not if the free public option was operated like an MCO. Providers that are willing to accept the relatively low payment levels of the free public option in full (i.e. without balance billing) in exchange for a steady volume of patients would be in-network. Out-of-network providers would be paid only a fraction of the rate paid to in-network providers but would be allowed to balance bill.
If you believe that this would create a two-tier healthcare system, one for the poor and another for the rest, then you would be right, but a little late. Such a system already exists. It is an underappreciated fact by those not intimately familiar with the American healthcare system that there is a wide gamut of healthcare providers.
For example, physicians range from foreign-trained immigrants who barely scrape by to Ivy League graduates who cater only to the upper class. Almost all the high-end physicians avoid treating Medicaid patients and many of them avoid treating Medicare patients as well. There is no trade off to accepting low public insurance payments the way that there is for in-network MCO providers. This has led to an appalling lack of access to physicians for Medicaid enrollees in some states.
Unlike high-end physicians, high-end hospitals cannot afford to reject Medicaid enrollees entirely, but many actively minimize their exposure to this population, nevertheless. I’ve consulted on a Certificate of Need application where a for-profit hospital intentionally chose a location because it had very few Medicaid enrollees nearby.
This two-tier system is a major reason why I think MFA and TPO would be so disastrous for the Democratic Party if either were adopted. Single-payer systems are one-size-fits-all. There is no room for variation in quality or intensity. Many people who were satisfied with their private health insurance will be apoplectic when they realize their healthcare choices have been so curtailed. Many of the high-end providers would simply exit the market. The resulting shortages would be met with outrage.
Balance billing by out-of-network providers would allow middle-income households to purchase relatively inexpensive private insurance that would afford them a choice from a wider array of providers, both in-network and out-of-network.
More about this next time.