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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Scott
Gottlieb

What's new on AEI

In year four of Dodd-Frank, over-regulation is getting old
image Halbig v. Burwell: A stunning rebuke of a lawless and reckless administration
image Beware all the retirement 'crisis' reports
image Cut people or change how they're paid
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Event Registration is Closed
Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.