There has been a lot of recent discussion about insurance companies’ sudden entrance into the health care debate. The Washington Post referred to the health insurers as Obama’s “top foe” last week, mainly as a response to actions taken by America’s Health Insurance Plans (AHIP), industry trade group, including an advertising campaign opposing health care reform and a controversial PricewaterhouseCoopers report commissioned by AHIP analyzing the recent Senate Finance Committee proposal.

Many others have criticized AHIP’s actions, claiming that AHIP is scared and attempting to block health insurance reform as a last ditch resort. Well, of course. The health insurance industry is reacting because the public option will put them out of business. Although they are not saints, the health insurers simply pay claims and charge premiums. In the end they make a 3% profit out of doing so. They also subsidize Medicaid and, to a lesser extent, Medicare-by paying doctors, hospitals, and more. The payment difference is not by choice-rather, free (and oligopolistic) market forces at work.

The idea that a public option will make health care more affordable can only happen in 2 ways: (1) pay doctors, hospitals, and others less. This may be a good idea, but there are consequences of monopolistic, heavy handed pricing tactics; (2) we can have taxpayers subsidize the public option.

The idea that the public option will save on administrative costs is not realistic. What does Medicare do for administrative costs? It contracts with Blue Cross and other insurance companies! If you still don’t believe it, go visit any major health insurer headquarters in CT (Anthem, Aetna, Cigna…). The places are half empty, having massively reduced costs over the last 5 years. “Profiteering” may be considered bad, but these insurers are very lean.

We don’t like HMOs, because they are too restrictive. We don’t like limited benefits so we pile on mandated benefits each year. We don’t like high deductibles, but we do like high tech cures. There is no ceiling and our solution? A public option? If our appetites are insatiable, NO option can solve the problem.

Senator Schumer’s “Give People Breathing Room – Burden belongs on insurance companies, not middle class families” reflects remarkable naivete or disingenuity. Insurance companies merely pass health costs to their insured members – but it is advantageous for these companies to do so as fairly as possible. If a beneficiary decides he or she cannot afford the cost of a premium and drops out of the market, it is the health insurance company that thoses, as there are less participants to share the cost. Yes, they make 3% profits but that is not what causes double digit premium increases each year. The Senator’s home state of New York is a showcase for the most broken individual and family health insurance market in the nation, where all major insurance companies exited the market years ago. If Mr. Schumer woudl tackle some of the real reason why health insurance is so expensive today, like premium taxes, massive mandated benefits, unpaid bills from Medicare and Medicaid, graduate medicare education taxes, monopolistic hospital costs and out of control medicare malpractice, New York and other states would have a more affordable market. Instead, Mr. Schumer supports a plan that adds hundres of billions of taxes to the insurance industry (read: taxpayers), does nothing to address increasing costs, and has the audacity to say the burden of affordability is on insurance companies!

You know the debate has really moved in the last few months when the headline of every major paper praises the congressional budget office scoring of the latest senate health bill, suggesting an 829 billion dollar cost over a decade (See the Wall Street Journal and the New York Times)! It is not clear if the positive review of the 829 billion dollar price tag includes the $444 billion cuts to Medicare and the $221 billion excise tax on health plans and the tens of billions of dollars of fees levied on insurance companies, medicare device makers and pharmaceutical companies. Note to Max Baucus: insurance companies and pharmaceutical companies don’t pay taxes: they merely pass costs onto consumers.

We started the health care debate to reduce the unsustainable medical trend or to “bend the curve” and to reduce the number of uninsured. It is not clear that with a trillion and a half dollars of new spending taxes and cuts to Medicare we’ll really have accomplished anything. The only cost cutting measure in this bill of significance is cutting fees to physicians, hospitals, and others- which does very little to affect the trend of increasing medical costs and, in fact, is a one times savings.

I wonder what constitutes an unattractive alternative.

Historically, Medicare HMOs offered seniors an opportunity to trade provider access for improved benefits; although HMO beneficiaries were limited to seeing doctors within their network, they received greater benefits than those beneficiaries insured under different plans. For taxpayers, HMOs offered expense savings. However, HMO plans were typically not available in many areas, particularly rural counties due to insurer reluctance to invest in a provider network.

PFFS plans were introduced for a variety of reasons, most importantly to offer choice to rural seniors and to offer a way for employers to enroll retirees scattered over the country. Without the confines of a network, seniors enrolled in PFFS plans could pay on a service by service basis and see whichever provider they wished, as long as the provider accepted PFFS payment terms. To make this option attractive for insurers to offer, CMS proposed “bids” that were over the average payment rate. These “overpayments” were intended to be temporary, to get the insurers in the rural markets, and over time to encourage the insurers to develop provider networks, or HMOs. In fact, 2010 is the final year PFFS plans will exist. So even if the government makes no cuts to the Medicare system in an effort to reduce spending, huge savings will be realized in 2011 Medicare Advantage costs, as PFFS overpayments expire.

It is not clear if in fact the insurers will offer HMOs in rural areas in 2011 when the PFFS plans go away. For example, in Maine and New Hampshire where Anthem Blue Cross is the dominant MA player,  MA plans are yet to be introduced. It may be that the rural provider community is too small to support Medicare HMOs where access is traded for benefits. Insurers may be forced to offer PPOs as an alternative option to PFFS plans-or drop MA coverage altogether. At the end of the day, MA plans-be them HMOs or PPOs-need to deliver high quality care at a savings or they will go the way of the dodo bird. We will know in 2011.

The demise of Medicare Advantage plans would merely change the contract that Medicare has with private insurers. For traditional Medicare, CMS pays the health plan a claim administration fee. For Medicare Advantage, CMS pays the insurance company a fixed fee for each enrollee, based on the age, gender, county of residence and health status of the enrollee. The insurance company then attempts to create a margin by savings on claims through various programs: excluding inefficient high cost providers from the network, medical case management, utilization review, etc.

The insurers can usually manage members at a very large savings, but then much of this savings is eaten up by the cost of acquiring members. A health plan’s average acquisition cost of a member is well over $1,000 and often as high as $1,500. If the member stays on the plan for a few years, the health plan can profit and Medicare saves money. If the member leaves after a year, the health plan loses money. As good government policy, CMS (and Congress) need to have consistent reimbursement to encourage health plans to invest in acquiring members. Unfortunately, the program has been marked by big swings in reimbursement.

This should not be a partisan issue. If the private sector can deliver a high quality efficient solution, we should want more of it. Government left to its own devices will use the clumsy lever of reducting provider fee schedules to save money. Providers just pass costs on to the private sector. Fortunately right now the government can rely on the private sector to pick up the tab. Did you ever wonder why medical trends in Medicare and Medicaid are in the single digits and the private sector is in the duoble digits? For my national health care enthusiasts, be careful what you wish for.