The Trojan Horse in Obama's Health Plan

When the Part D program was first being implemented in 2005, there was a lot of talk about the legislation's "fallback" option.

The Medicare Modernization Act contained a provision that allowed the government to set up a federally chartered drug plan in any market that had fewer than two commercial entrants. These "fallback" plans would be privately run. But Medicare would stand them up. These "fallback" plans would get more favorable financial terms in order to entice them into what are judged to be less appealing markets.

Regulations make the plan's state based insurance exchange a tough commercial opportunity.

Democratic critics of Part D argued that the program itself was so cumbersome, so financially unattractive, and so poorly designed--that Medicare would need to stand up a whole series of these fallback options to serve beneficiaries. Or else, critics said, Medicare would choose to establish only a dozen or so "regions" so that each of the "markets" were sufficiently large to ensure two commercial entrants.

All of that turned out to be far from the reality.

Hundreds of companies entered the program. There were so many plans available, that criticism soon turned to the "confusion" consumers confronted choosing from among so many options.

The marketplace for Part D plans has since consolidated, there are fewer offerings today and prices have stayed low. The program's competitive forces have driven down bids to a tight cluster. But this history bears reminding.

The point is that the legislation assured early success by intent. Risk corridors and other measures were designed to reduce the financial gamble. Hundreds of companies saw the opportunity and took advantage of it. Competitive elements assured that any excess profits were soon erased.

It's hard to say that the same holds true for the Obama health plan. Regulations make the plan's state based insurance exchange a tough commercial opportunity. Rather than make the market easy to enter, and then rely on competitive forces to drive down profits (and rates), the Obama plan uses up-front regulation to keep the economics low from the outset--maybe too low to cover costs.

The upshot is many plans may choose to stay out of this program.

A defining moment may come this Fall, when the Department of Health and Human Services releases regulations defining how much premium revenue plans can spend on overhead costs and take as profits. The prospect is that this regulated "floor" on insurers' "medical loss ration"--the quotient of premium revenue spent paying medical claims--will be defined too narrowly. If HHS goes this route, it could make it hard for plans to divert enough revenue to cover their overhead costs.

In many markets, the only plan that's offered could well be the government-contracted option offered by the Office of Personnel Management (OPM).

This, in the end, is a Trojan horse lurking inside the Obama health plan. For those who opposed the creation of a government plan, these OPM options may become one by default. Many private insurers may sit this out.

Scott Gottlieb, M.D., is a resident fellow at AEI.

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