Thursday, June 25, 2009

Fraudulent Costs

I find it amusing that the Google ads have changed based on my overseas IP address. Several have assumed that I'm traveling abroad in search of an abortion. Huh.

Anyway, Judge Smails writes in:
Heard an interesting anti-public option argument today. I like the idea of public-private competition, so don't take this as me on some sort of crusade. I just thought it was a pretty solid argument against the public option:

Private insurance firms work on a profit-system. This allegedly has many good benefits (i.e. competition reduces prices). But it also has at least one bad side effect in the health insurance industry: firms seek to make more profit in part by getting out of paying claims. Indeed, this is a major complaint of many people --- their insurance company fought them over paying out for things they were supposed to pay for. In theory, a public option that had no profit-motive wouldn't worry nearly as much about such things; there would be no profit to be gained by aggressively denying claims.

However, there is a flip-side to this coin. Private firms that aggressively fight paying out claims in order to make more profits are also likely to aggressively fight fraudulent claims, since those claims would also undermine profits. Conversely, a public option that has no profit-motive will have less incentive to fight fraudulent claims. So we should expect that the public option will be burdened with a higher-level of deadweight loss due to fraud. And indeed, Medicare fraud is a serious problem that costs billions of dollars.

Thought it was an interesting argument. It's not a damning argument against the public option idea, but it does raise one legitimate negative that makes sense to me.

This is the first time I've heard of Medicare fraud being a particular problem (who is getting the extra dough? It can't be the patients, so, doctors? hospitals?) but I'll take that as a given for the purposes of this post. There are at least two replies to defend the honor of a public system.

First, even though a public option would be a non-profit, it doesn't follow that it would be less concerned about fraud, any more than any other non-profit doesn't need to keep an eye on the bottom line (assuming that the public option doesn't have access to limitless subsidies, which is an argument for another time, but certainly I'm hoping that it doesn't). Faced with fraud, a private insurer can either recoup the cost by decreasing profits, decreasing care, or trying to limit fraud. The public plan would have only two of those three avenues open, and I don't think it necessarily follows that the tolerate-fraud-decrease-care would be the default position.

Second, I think the main attraction of the public option is the competition aspect of it. Private insurers keep their costs down by denying claims, but raise costs by making a profit. The public option can have higher costs (i.e. giving more care) because it doesn't have a profit motive. So even if the public option were burdened by fraud above and beyond a private plan it could still be competitive.

Looks like Obama is really starting to put some weight behind this. Krugman and Yglesias have made been arguing the point, however, that Obama seems to run to the middle too early. Krugman:
My big fear about Obama has always been not that he doesn’t understand the issues, but that his urge to compromise — his vision of himself as a politician who transcends the old partisan divisions — will lead him to negotiate with himself, and give away far too much. He did that on the stimulus bill, where he offered an inadequate plan in order to win bipartisan support, then got nothing in return — and was forced to reduce the plan further so that Susan Collins could claim her pound of flesh.

Framing effects are important in politics. The public-private competition is supposed to be a compromise between the pristine vision of single-payer and the desire of private insurers not to be put out of business. It creates a situation in which insurers are challenged to prove that single-payer advocates are wrong, rather than simply assert it. But with no single-payer plan in the mix, this gets lost, and the compromise becomes the leftmost anchor of the debate. A single-payer plan couldn’t possibly have passed, but I think having hearings on single-payer and having one committee draft a serious single-payer bill that gets a serious CBO score would have been a useful exercise. In particular, it would have focused the mind on the costs involved in rejecting this option.