A public plan as envisioned by the Obama administration would be a "death spiral" that could wipe out many California hospitals already struggling with federal reimbursements that are far too low.

No wait. A public option, along with a national insurance exchange, is an excellent way to make the system much more efficient, saving between $156 billion and $315 billion per year between now and 2018. Private commercial insurance plans now spend that much to market and administer their products and process claims.

Those are two views of health reform released yesterday in reports from groups with obviously different agendas.

First to warn of a hospital Armageddon with a public option is America’s Health Insurance Plans, which went to California to tap into the nation’s largest database of hospital statistics to show how government payment would devastate healthcare in just that one state.

"As policy makers look at this issue, they realize that it will bankrupt hospitals," says Robert Zirkelbach, AHIP spokesman.

Already, 37% of California hospitals last year reported being in the red from total operational losses, including gains from their portfolios, but 48% reported red ink from operations alone, according to the California Hospital Association.

Current bills now being considered by Congress would have a public plan financed by rates that are only slightly higher than those paid by Medicare. But because Medicare and Medicaid rates are so low, they don’t cover the cost of providing that care, which is now subsidized by companies, individuals and families that pay health insurance premiums, AHIP officials say.

"In California, Medicare reimbursements only cover approximately 83% of hospital costs, and Medi-Cal [Medicaid in California] only covers 81%," AHIP said in a statement. "These shortfalls get passed through the health care system, and consumers and employers end up paying higher premiums as a result."

Now, the statement said, "an average family of four is paying $1,500–or an additional 10%–on their premiums to offset the under-reimbursements from government programs."

Another government plan that would recruit even more people away from private insurance, especially if some employers stop offering it, would mean even fewer people with private coverage to offset those costs, causing private insurance premiums "to increase even further . . . ultimately (leading) to a death spiral resulting in everyone moving to the new government-run plan," according to AHIP.

The California Hospital Association, which was not involved in the data analysis, agrees with AHIP’s conclusions. "This has been our concern all along," says Jan Emerson, CHA spokeswoman. "That a government-run plan that pays Medicare rates, or even Medicare plus 10%, is not sufficient to keep hospitals operating in California.

"In 2008, the total amount of uncompensated care was $11.3 billion, and of that amount, $3.7 billion is related to underfunding of Medicare, and almost $4.1 billion was from Medi-Cal shortfalls," she says.

And if there was another reform program that would pay Medicare rates, "we would stand to lose substantially more. You can not enact a plan that pays those rates."

Commonwealth Fund has different take
But on the other side of the issue is the Commonwealth Fund, which points out that the United States leads all industrialized nations in the amount spent to administer health insurance, and spends 30% more than Germany and three times more than in Japan.

"With the central feature of a national health insurance exchange (largely replacing the present individual and small-group markets)" a public-plan approach "could substantially lower those costs," wrote Karen Davis and colleagues in a Commonwealth Fund Issue Brief.

Looking at three scenarios, estimated administrative costs would fall from 12.7% of claims to an average of 9.4%, the authors wrote. "Savings—as much as $265 billion over 2010 to 2020—would be realized through less marketing and underwriting, reduced costs of claims administration, less time spent negotiating provider payment rates, and fewer or standardized commissions to insurance brokers."

The report added that a national insurance exchange with new insurance regulations and a choice of public or private insurance plans "would increase the transparency of insurance products, (and) streamline insurance plan purchase and enrollment."

"Adding in employer requirements to offer coverage, expanded eligibility for Medicaid, a standard benefit package and premium subsidies, the Lewin Group estimates that more than $200 billion could be realized in administrative cost savings during 2010-2019," according to the report.

The authors believe that a national insurance exchange is one important key to making such a cost-saving strategy work. They added "it presents a singular opportunity to reduce administrative costs substantially over time, provide access to high-quality, efficient care for all Americans, and move the health care system further down the road to high performance."