We Don’t Need a Public Option

Health-care reformers who want a public health-insurance option to keep private health insurers competitive have a point: If there were ferocious competition in the private health-insurance markets, prices would be better controlled. In Switzerland, for example, competition among that country’s 85 private health insurers resulted in negative price increases since 2005 and considerable public support. In the U.S., by contrast, health-insurance prices rose by 16.5 percent and Americans hold insurers in low regard.

But, as President Obama clarified last night, the public option is unlikely to get off the ground. People are worried that Congress will underprice the public plan, inducing enrollees to leave private insurers and forcing all of us to make up for their underpayment through increased taxes and deficits. Medicare’s $38 trillion liability provides worrisome validation of these concerns.

But there is another remedy for shaking up this market: increased transparency. Unlike the public option, this is actually favored by voters: Americans overwhelmingly want the government to require that performance ratings on hospitals and doctors be publicly available.

Transparency could stimulate competition by revealing which insurance companies and policies provide the most medical-care benefits and best outcomes per dollar, which ones offer the best doctors and hospitals, and which ones hassle sick people the least. Armed with answers to these questions, consumers could reward best value. If insurers with lackluster scores do not improve, competitors would enter this surprisingly entrepreneurial market. (The leading providers of high-deductible insurance, for example, were formed only nine years ago.)

The benefits of transparency extend to insurers who could control costs by offering narrow networks consisting of the doctors and hospitals that provide the best values. In health care, as elsewhere in the economy, the best providers are frequently the lower-cost ones. The U.S. Congressional Budget Office (CBO), for example, estimated Medicare savings of $140 billion, from 2010 to 2014, from the utilization of regional centers of excellence for surgical procedures. Insurers typically do not offer these narrow networks because Americans suspect that insurers favor providers who are low cost, rather than high quality. The availability of data through which enrollees could independently verify the quality of doctors and hospitals would alleviate such concerns.

Further, the mere act of providing data motivates providers to effect changes, a phenomenon known as “the audit effect.” The CBO estimated that sharing peer-profile scorecards with physicians would save Medicare $350 billion from 2010 to 2014. Some evidence suggests that hospitals respond to publicly reported data with efforts to improve patient care and their standing in reports.

Transparency can also spur the adoption of important innovations. For example, although Johns Hopkins researchers virtually eliminated one type of hospital infection in Michigan intensive-care units, this intervention disseminated slowly, probably because infection rates are invisible. This life-saving program would have spread much faster were the public aware of infection rates.

Finally, if medical-care providers were required to post their prices for the uninsured, competition might follow. After all, from 2005 to 2006, the highest relative growth was among wealthy uninsured, those with household incomes of $75,000 or more. Some medical bankruptcies — one-fourth of which are incurred by the uninsured — could be avoided if uninsured people could compare prices for their medical care.

Yet despite transparency’s many benefits, we have virtually none of it in our health-care system. Transparency sites maintained by the federal and state governments and private firms contain sparse, frequently outdated information, limited only to hospitals, which generally measure the process of rendering care rather than the outcomes.

But let’s not dismiss government as a transparency agent. Although present government health-care efforts are unsuccessful, government can provide excellent transparency, as exemplified by the Securities and Exchange Commission. The SEC was created when Franklin D. Roosevelt opted for transparency to deal with the stock market’s collapse during the Great Depression. FDR called the SEC “the Truth Agency”: It required corporations whose securities were publicly traded to disclose their results, using generally accepted accounting principles audited by independent certified public accountants. The commission superseded numerous inconsistent state and private transparency agencies and thus enabled the development of a national capital market.

Although the SEC has recently failed miserably in its regulatory function, extensive research demonstrates the success of its truth-telling mission. Transparency lowered the cost of capital, because investors who were more certain about performance required lower returns. Most important, it enabled the appropriate allocation of resources: Investors rewarded productive, socially responsible firms more than others.

Health-care transparency can be achieved with laws that create the features essential to the SEC’s success:

• Required disclosure: The health-care transparency agency would require public disclosure of quality information for health insurers and providers and of prices for the uninsured.


• Private-sector standard-setting and auditing: The agency would delegate its powers to work out the measurement standards to a private, nonprofit organization that — like the Financial Accounting Standards Board — represents a broad professional constituency and is aimed at consumer protection. The agency would require auditing of the information by independent, certified professionals, such as CPAs.


• A focus on outcomes, not processes: While process measures are commonly used and have a number of advantages for clinicians (most notably, they provide direction for quality-improvement efforts), consumers generally care little about them. Moreover, a sole focus on process measures may stifle innovation. Because around 15 percent of evidence-based recommendations are reversed in a year, 25 percent within three years and 50 percent within five years, the use of process measures may inculcate antiquated practices. In contrast, outcome measures permit providers to innovate and compete on the outcomes achieved.


• Public disclosure site: The agency would create a public disclosure site allowing all users immediate access to the statements filed by health insurers and providers.


• Penalties: The agency would be armed with powerful penalties for unethical market participants.

Could transparency be obtained through voluntary efforts? Obviously not. Few health-care providers have willingly offered disclosure. Instead, they raise many objections to this proposal, including consumers’ lack of interest along with the proposition that the agency’s costs will exceed its benefits and that the measurement of outcomes is not feasible.

The problem is not that Americans aren’t interested in transparency; the problem is that they don’t have it. And the many benefits of transparency trump its costs. Although it’s true that the measures of health-care transparency are not yet well developed, with time they will be. This is different from other health-care reforms in that the American people actually want the federal government to help with it. Those who put their lives and pocketbooks on the line by receiving medical care without any notion of the quality of the provider or insurer deserve this help. President Obama and the Congress must act now to provide it.

This piece originally appeared in National Review Online

This piece originally appeared in National Review Online