Goldman Sachs: Public Option Would Dominate The Exchange
The HuffingtonPost has a fascinating look at the Goldman Sachs analysis of the effect of health care reform on the private insurances companies. Their basic conclusion is that any reform, even under the weaker Baucus bill, would be bad for the insurance companies. Of course, they concluded that the Baucus bill would be dramatically less bad for insurance companies than the House bill. While Goldman Sachs thinks it is unlikely a public option will make it into the final bill, I found this section of their report very interesting:
A “bear” case scenario, where we introduce a government-run public plan that we assume would capture the majority of coverage expansion under reform as well as some of the industry’s current market-share in the MML segment.
Goldman Sachs believes the public option would be the dominant player on the health insurance exchange, with over 50% of that market. This is significantly more than the CBO’s projection that the public option would only sign up 20% of the customers on the exchange. Of course, determining how well a new business would function in a new market place is very much outside CBO’s normal job function and abilities. I trust Goldman Sachs is much better at that type of analysis. This follows closely my projections of how well the public option will perform given its restrictions:
I think the most likely result if the House bill were the final bill is that the public option would be a success, but hampered by a failed exchange. I think the public option will easily get significant plurality of the customers on the exchange. While the CBO concluded that only 20% of people on the exchange would choose the public option, I believe that number will be much higher. A Quinnipiac poll in August found 25% of Americans would sign up for the public option, while an Emory poll from a few days ago found 41% would choose the public option. These polls ask all Americans about sign up for the public option. The people who would be eligible for the new exchange (self-employed, uninsured, small business) tend to have a lower approval of private insurance, and should be more likely to sign up for a public option compared to the entire population.
Scenario: The public option becomes the default insurance choice in people’s minds. It could easily end up being selected by 40-70% of all the people on the exchange. This large risk pool makes the lack of a proper risk adjustment on the exchange less consequential for the public option. The huge customer base allows it to negotiate good rates with providers, lower its premiums, and, in turn, attract more customers. The public option is the dominant player on the exchange with a noticeable percentage of people choosing slightly cheaper, more restricted, private HMO plans, and a small percentage selecting high-cost plans with more expansive coverage. The public option is strong enough and provides coverage for such low overhead that it forces some improvement in plans off and on the exchange.
The biggest hindrance to the public option is that it is restricted to a failed exchange. The problem is the exchange is seen by most of the public as a not very desirable place to get insurance. In many areas of the country only a few plans would be offered. Because of a short sighted decision by Congress, most plans on the exchange are fairly bare bones with relatively high deductibles. The single biggest issue with the exchange is that it generally has a higher-cost risk pool. This problem is made worse by small- and middle-sized businesses that are eligible to get coverage through the exchange. Those businesses with young, healthy employees choose to buy group coverage, but those with older, sicker employees give them vouchers to use on the exchange. The net result is that coverage on the exchange is relatively high compared to many employer plans.
Even though the public option and other plans on the exchange may provide more cost effective insurance, they still need to charge higher premiums because of the risk pool. Most people don’t want to use the exchange, and, as a result, there is no political pressure to open up the exchange. Equally, the private insurers push hard to prevent the exchange from being open to protect their market share from the public option. The public option is a successful at what it does. It has 40-70% of the market, but it is limited by being stuck in small exchange. The result is the fairly powerful public option with 25 million customers.
With 15-30 million customers, the public option would be one the largest insurance companies and would have the ability to really force the rest of the marketplace to reduce premiums. Goldman Sachs agrees that it would really push down profits. This is what really terrifies the private insurance companies, and it is why they are so strongly fighting against the public option. They would be subject to many new regulations, and a majority of their promised 36 million new customers will choose the public option. When it comes to determining if the public option will succeed, I recommond listening more to Wall Street’s analysis than the CBO’s.