All Hail the Market!: The Wisconsin Health Plan

I’ve been meaning to write a post urging critics of government employee health plans to get on board with broader reform of the health care system.

If even half of the energy conservative activists put into recall elections and tax reduction measures could be directed toward true health care reform, it would benefit all citizens in the state and likely reduce the overall amount of public money going toward health care.

I was going to use the Wisconsin Health Plan as an example of specific legislation that could be championed—but after reading a Legislative Fiscal Bureau report on it from December 2005, I’m not so sure.

There are two main issues with health care, although the two aren’t mutually exclusive: cost and the (rising) number of uninsured.

While the WHP does an excellent job dealing with the uninsured problem by virtually ensuring coverage for all Wisconsin residents, the cost issue does not appear to be significantly affected.

The basic idea of the WHP is that all employers and employees in the state will pay an assessment toward a fund that will be used to provide health insurance to nearly every Wisconsin citizen under the age of 65. The amount of the assessment will be determined by how much the employer pays in wages and how much the employee pays in social security taxes.

Unfortunately, the plan does nothing to address the problems of the multiple payer system we currently employ for health insurance. In fact, the plan reinforces the multiple payer system by allowing any and all insurance companies (as long as they meet certain quality requirements) to participate. The idea that’s driving this is the belief that competition in the marketplace is always the best way to achieve lower costs.

In health care, however, this is simply not the case.

The WHP authors have made claims that the plan would reduce the overall cost of health care in Wisconsin. The actuarial report acquired by the authors demonstrates this reduction in cost, but in its review of the WHP, the Legislative Fiscal Bureau challenged some significant assumptions made by the actuaries in their analysis.

According to figures provided by the Wisconsin Hospital Association for 2004, there are a variety of discount rates given by health care providers to the various insurers. The discount is based upon the notion that people who are part of an insurance plan together have more purchasing power than an individual who seeks health care alone.

It’s similar to the idea of buying in bulk. You get a cheaper rate because you’re purchasing a larger amount.

The various discount rates reported by the WHA were 61% for Medicare, 72% for Medicaid, 42% for other public sources, 23% for commercial insurance companies, and 5% for other payers.

When the actuaries hired by the WHP authors completed their analysis, they used discount rates of between 40% and 45% in their calculations of cost, despite the fact that the plan would use commercial insurance companies that typically only get a discount of around 23%. Clearly, this actuarial assumption significantly reduces the overall cost projections of the plan.

A large reason plans like Medicare are able to get such significant discounts is that they have more people, which translates into more purchasing power, which makes for lower costs overall. Plus, overall administrative costs--which are estimated at almost 1/3 of total health care costs--are less when there are fewer insurers. This is the power of a consolidating the number of payers in the system—something that the WHP does not do.

The reason the WHP could not viably reduce the number of payers in the system is because the move would be antithetical to the notion of a competitive marketplace—a notion that carries significant political influence through the business community.

According to the marketplace theory, the more companies that are out there competing, the more costs will go down. But as the discount rates released by the Wisconsin Hospital Association make clear, that is not the case for the health care system.

Before I get critiques that I’m pushing socialized medicine, that’s actually not what I’m suggesting. In fact, I’ve said before that Canada is not a good model for health care in the United States.

France, on the other hand, does provide a usable model because it employs a public-private hybrid system that simultaneously provides a single-payer and multiple-payer system. While we have a public-private hybrid now in the US, the single-payer part is only open to seniors and those who qualify for options like Medicaid or VA benefits.

Overall, while the Wisconsin Health Plan does an excellent job of addressing the uninsured problem in Wisconsin, its effect on cost is not clear because it relies upon the multiple payer system that’s fueled by a misdirected belief in the universal promise of the marketplace.

We need to get beyond beliefs like this if we’re serious about addressing health care costs in Wisconsin and the US, which undoubtedly have a significant impact on increasingly-strapped public revenues.