Alter: Obama Must Make Insurers Compete

"That was pretty impressive, wasn't it?" President Obama said with a smile after he slapped a fly that was buzzing around him during an interview last week. "I got it. I got the sucker."

If only slapping around the players in the health-care reform debate were so easy. The annoying creatures he has to contend with this summer are the bickering stakeholders in a $2.1 trillion market that makes up 16 percent of the economy.

Obama's got good odds of getting some kind of bill this year. But will the country see real reform that both expands coverage and cuts long-term costs? Or will the legislation include lots of necessary but insufficient changes that leave it well short of transformational? That depends on whether Obama gets approval for a "public option"—a choice that would allow people to keep their insurance or buy into the same kind of plan offered to members of Congress. The latter is—let's face it—Medicare with a different way to pay for it.

But why would we want more Medicare? Isn't Medicare a mess? Well, yes and no. The fabulously popular free health-insurance program for the elderly is running out of money, thanks to exploding costs. But the administration of Medicare is a miracle of low overhead and a model, despite all the fraud and abuse, of what government can do right. Three percent of Medicare's premiums go for administrative costs. By contrast, 10 to 20 percent of private-insurance premiums go for administrative costs. Roll that figure around on your tongue. When you swallow and digest it, you'll understand that any hope of significantly reducing health-care costs depends on a public option.

Reducing those costs has always been Obama's focus. Unfortunately, the upfront cost of, well, cutting those costs just went from $1 trillion to $1.6 trillion last week when the nonpartisan Congressional Budget Office priced the version of the bill that the Senate Finance Committee put forward. It's not going to go on the credit card—that's settled. So where's the money going to come from?

Partly from taxes. Unions and some rich people won't like it, but we're coming to the end of the era when cosmetic enhancements are not only covered by insurance but the premiums are fully tax-deductible. Why should the taxpayers subsidize 40 percent of the cost of a designer smile?

But getting rid of the full tax deductibility of gold-plated employer plans won't solve the problem. It goes deeper. The president wants everyone to read an article by Atul Gawande in The New Yorker that explains the absurdity of regional variations in health-care costs. Gawande found that McAllen, Texas, had much higher health-care expenditures than nearby El Paso, even though their demographics were the same and McAllen got no better outcomes.

The supposed remedy for these outrageous variations is a concept called "comparative effectiveness," where doctors would be advised that this treatment for a urinary-tract infection or that surgery for back pain was ineffective and should not be used. The key word is advised. Advising doctors on best practices would save some money, but not enough. Forcing doctors to avoid certain treatments that they believe are essential by not reimbursing for them would lead to doctors taking to the streets like Iranian protesters. And Gawande's model, the fabled Mayo Clinic, unfortunately cannot be replicated nationwide.

Obama's budget director, Peter Orszag, tends to hype how much sexy ideas (in thewonk world) like comparative effectiveness can save. This is ironic because, in his old job as head of the CBO, he issued reports showing that comparative effectiveness was a comparative spit in the ocean when it came to savings. Same with highly touted electronic record keeping, as health-policy experts Theodore Marmor and Jonathan Oberlander have shown.

That takes us back to a public option, which would force insurers to redraw their business models and accept lower profits. The House bill will include it, but the Senate's almost certainly won't. Instead, moderates there are pushing health-care "cooperatives." Nobody has a clue what that means. Would the co-ops be like utilities? Farm cooperatives? Starting fresh with a quasi-public/quasi-private organization might bring some much-needed creativity to health-care financing. But without a federal charter and some seed money to help them enroll millions, co-ops will get swamped by the private-insurance lobby, which has become expert at marginalizing state-run experiments.

When it comes time to hammer out the final plan in the House-Senate conference committee, Obama and Rahm Emanuel will likely make the House accept a reduction in the deductibility of employer-based plans and make the Senate accept some kind of public option or co-op with teeth. Anything less means the president didn't get the sucker.