To have a “robust” public option or not to have a “robust” public option that is the question. The general opinion of those who have studied the impact of a robust public option is that the enrollment in private insurance would dramatically decline in favor of the public option over a 10 year period. The speed of this decline would be dependent on the incentives given to employers and employees to move from employee based or individual plans respectively.

Much has been said about the impact on insurers and physicians if the robust public option is implemented. Less has been said about the impact on hospitals. The immediate impact on hospitals will be a reduction in their average reimbursement per patient encounter. The “robust” public option will pay providers Medicare-like rates. Some analysts have estimated that Medicare on average reimburses hospitals between 30 to 40% less than private insurers. As subscribers move from their private plans to the public option, hospitals’ revenue per patient encounter will begin to decline.

The upside for hospitals is that bad debt as a % of revenue will also decline if most people are covered after the reform is implemented. In fact, the dollars written off to bad debt should decline much faster than reimbursement. This is because universal coverage will be implemented immediately while the transfer of people to the public option will occur over time. Patient volumes should also increase. History shows very clearly that insured people increase their demand for healthcare services.

As a result, hospitals could enter into a last golden age that may last for 3 to 7 years. After this period ends, an extended dark ages would appear to be inevitable. As many critics have pointed out, the reform initiatives currently on the table will not reduce the % of GDP currently spent on healthcare. This reform’s major accomplishment will be to create a new entitlement.  The notion that giving healthcare access to the uninsured will make them healthier and therefore less expensive in healthcare terms has never panned out. People with insurance coverage continuously demand more healthcare services than those who do not have it. Healthcare costs for the country as a whole and the government will rise at an even higher rate that the already high rate experienced during the last decade.

It seems that most everyone no matter what their ideology or position is on the current debate agrees that the US must reduce what it spends on healthcare services. The government will have basically two ways to reduce its healthcare costs when it finally gets serious; cut benefits or reduce the costs of providing those benefits. History teaches us that governments only rarely cut back on the benefits they offer to voters. It is much more politically palatable for governments to cut costs or raise revenues from either a small group of voters or from institutions that do not vote. The other option of course is to just borrow more money and not deal with the problem. It would seem that the clock is ticking on this latter strategy for a whole host of reasons. 

Hospitals can be sure that no matter what else happens their reimbursement will be one of the first targets for cuts when the government needs to rein in its budget. If there is any doubt, review what is currently happening in Massachusetts, which is some years into its universal healthcare experiment.  There is a very serious proposal on the table to convert providers to a capitation reimbursement system. Such a system would allow the State government to set an annual healthcare budget at a specific amount and put the financial risk for cost overruns on providers.  As hospitals learned in the 80s and 90s, this is a prescription for fiscal disaster. To survive hospitals will have to successfully reduce the level of services provided to patients despite patients having the same high expectations for services they have always had and doctors being more concerned about lawsuits than the hospitals bottom line.  Cutting hospital reimbursement will reduce healthcare costs in another way besides just paying hospitals less money. The number of institutional providers of all types will decline. Lowering the number of providers will act as a cap on how many healthcare services can be delivered. Rationing will ultimately occur not by government policy but by default. It is worthy to note that the Healthcare Commissioner is given the power to implement a capitation type reimbursement system in the future.

                The Unintended Consequences of Healthcare Reform – #1
                The Unintended Consequences of Healthcare Reform – #2
                The Unintended Consequences of Healthcare Reform – #3 Part 1
                The Unintended Consequences of Healthcare Reform – #3 Part 2
                The Unintended Consequences of Healthcare Reform – #4