How well with the public option work?

Austin Frakt has a good post on this topic, excerpt:

I wonder how optimistic we can be about the degree of variation in
spending predicted by risk adjustment models. I think the answer is
“not very.” From the literature on health care risk adjustment (via this post):

Statistical models developed by scholars have relatively
low predictive power. Predicting ten percent of the variation in
[health] expenditure is considered good (e.g., Medicare Advantage’s risk adjustment model).
That means ninety percent of the variation is unexplained by the model
or chalked up to random error. An individual ought to be a better
predictor of his or her health expenditures than a model that cannot
include measures unobservable to the researcher. (How much better? I
don’t know.)

Expenses for some specific services are more predictable. Drug
expenses, for example, are persistent because individuals tend to use
the same medications year after year. The best statistical models of drug spending can predict about 55% of the variation in next year’s drug expenses, leaving 45% to random error.

That puts a reasonable cap at 55%, but only for very persistent
services, like drugs. Expect the best overall risk adjustment to be no
worse than 10% and no where near as good as 55%.

Private insurers should not be so worried but taxpayers should. The public plan looks game-able.

The middle, double-indented quotation is also from Frakt.

I also view the public plan as game-able, though through a slightly different mechanism.  I don't think individuals are such good judges of their future health expenditures (self-deception) and in this regard the adverse selection model has been over-promoted.  That said, private insurance companies can and will find ways of keeping these people off their books — poor service anyone? — and many of them will end up in the public plan.  The CBO confirms that the public plan will not be a major force for cost reduction.  And if you think we will succeed in using taxes and fees to get the private insurance companies to take on their share of these people, as they do in the Netherlands, well…I believe that is a battle they will win, after the fact, when the public is no longer watching the implementation of the details of the legislation.  It's one easy way of buying them off as a lobby.


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