Tennessee’s Troubled ‘Public Option’ – TennCare – Could Foreshadow Obama’s Health Care Plan

By Fred Lucas | July 17, 2009 | 6:11 PM EDT

State of Tennessee (in red)

(CNSNews.com) – A government-run health insurance plan is enacted on the promise of increasing competition and bringing down costs, but over the years, as more people leave their private insurance to take the “public option,” the cost to operate the government plan skyrockets.
Various litigation ensues, preventing the government’s attempt to reform or cut benefits. Eventually, dramatic cuts become necessary.
This is not a hypothetical scenario sketched by opponents of the health care overhaul plans working their way through Congress. Rather, it is the case of what happened with a state plan in Tennessee.
Tennessee is in the process of cutting about 150,000 people from the TennCare program after a reevaluation of enrollee eligibility to participate in the state-run insurance program.
TennCare, the managed care Medicaid program that began in 1994, now serves about 1.2 million people in the state and has a $7 billion budget. That’s after cuts were made.
Rep. Marsha Blackburn (R-Tenn.) was a Tennessee state senator through much of the TennCare problems and believes it is a forecast of what would happen under federal health care “public option” plan. While supporters of the Tennessee program said it would save money, it wound up eating 38 percent of the state’s budget, she said.
“As a result of this, insurance rates for those who have private coverage were going through the roof,” Blackburn told a gathering at the conservative Heritage Foundation last week.
“There is no example that you can point to that shows where having private insurance in competition with the public option brings the costs down. It leads to exploding costs,” she said.
Gov. Phil Bredesen’s office referred CNSNews.com to the TennCare office for comment. A TennCare spokesperson Carol Fite told CNSNews.com on Friday that no one in the office would be able to speak about the matter that day.
But TennCare’s Oversight Presentation, published by the agency in March, concluded that “TennCare is fortunate to be in a strong financial and operational position,” that, “The Governor has stressed the importance of leaving the state on a good financial footing for the future,” and that, “We must continue to monitor and respond to increased needs due to the nation-wide economic downturn.”

President Barack Obama (AP Photo)

The public option is a key piece of the health care reform legislation promoted by President Barack Obama. The legislation also includes mandates for employers to provide health care for their employees or face fines, and requirements for individuals to buy health care.
Supporters of the Obama plan point to rising health care costs and a rising number of uninsured people throughout the country, estimated at 46 million, including those who are uninsured by choice or are illegal aliens.
A public plan, advocates argue, would inject one more competitor into the marketplace of insurers that deny coverage to many Americans.
“In Tennessee, they have struggled to make a public plan work,” Merrill Matthews, director of the Council for Affordable Health Insurance, told CNSNews.com.
“They were tired of insurance companies denying people universal access, and thought they could save so much money with a public plan to cover not only the people on Medicaid but all uninsured. Sound familiar? Costs began to explode immediately,” Matthews said.
Hospitals were paid about 40 cents on the dollar, which eventually rose to 64 cents, while Tennessee became the number one state in the country for consumption of prescription medications because of TennCare, according to Craig Becker, president of the Tennessee Hospital Association.
“The public plan they are talking about in Congress makes me nervous, because it does seem like TennCare a lot,” Becker told CNSNews.com.
“Once people got on TennCare, they wouldn’t get off because it was a better deal [than private insurance]. There were several court cases to get people off the rolls that didn’t belong. I have no doubt we would go down the same road nationally with a public plan,” Becker said.
TennCare was an initiative of Democratic Gov. Ned McWherter. It began in January 1994 by expanding Medicaid coverage to the uninsured and uninsurable and had an enrollment cap of 1.7 million. McWherter’s commissioner of human services was Nancy-Ann Min DeParle.
President Obama this year appointed DeParle as director of the White House Office of Health Reform, or health czar. Private firms such as Blue Cross/Blue Shield of Tennessee were contracted to administer the program. (See TennCare Timeline)
The following year, three new departments were created or designated to administer the TennCare program: the TennCare Bureau, the TennCare Division and the Comptroller of the Treasury.
In May 1996, a federal court ruled that benefits could not be terminated because being attached to the Medicaid program required notice and a hearing before termination.
In the first nine months of 1997, TennCare lost $20 million, according to the state comptroller’s office. By 1998, the program enrollment had grown from 800,000 to 1.2 million. This occurred after employers moved employees onto TennCare because the subsidized plan cost less.
A March 1999 review by PriceWaterhouse Cooper found that TennCare paid providers 10 percent below what would be considered “actuarially sound.”
A state audit in July 1999 reported that the state had spent $6 million to insure 14,000 dead people. Meanwhile, 16,500 enrollees actually lived out of state and 20 percent were found ineligible to be in the program. Further, 450 of those who were ineligible had access to the state’s help insurance plan.
By 2001, TennCare enrollment had grown to 1.4 million and Republican Gov. Don Sundquist sought an income tax to pay for TennCare’s costs, as Tennessee only has a sales tax. The governor tried and failed again in 2002 to get an income tax.
The program’s budget grew at a 1.5 percent annual rate, and costs went from $2.5 billion in 1995 to $8 billion in 2004.
In January 2005, Democratic Gov. Phil Bredesen announced a TennCare overhaul that would eliminate 323,000 adults from the program and impose across-the-board benefit limits on the 396,000 adults remaining on the program and reserving benefits for 612,000 children.
Litigation ensued to prevent people from being taken from the rolls, and a federal judge in March 2005 halted TennCare cuts, but a three-judge appeals panel said the judge “overstepped” his bounds. Thus, the state could make benefit cuts.
“Once it was moved to more limited benefits, not everybody decided to go into the program,” said Matthews, who gives Bredesen much credit for tackling the issue.
In January 2009, a federal court ruled that Tennessee could review the eligibility of enrollees. This led to the state moving to cut additional people from the program.
“By allowing TennCare to remove those individuals who are no longer eligible, the court’s ruling will enable the state to reduce or avoid some of the budget reductions we otherwise would have had to make in the state’s effort to balance its budget during this difficult economic period,” TennCare Director Darin J. Gordon said after the January ruling.
“This gives us hope that we may be able to realize savings that will help minimize cuts we will have to make,” said Gordon. “It’s simply a matter of fairness that we are allowed to take people off the program who no longer qualify to minimize the budget reductions we will have to make that will impact TennCare’s truly eligible members.”
TennCare estimates that the state spends about $1.2 billion a year to provide health care insurance for the 150,000 people with questionable eligibility. The agency estimated that if only 10 percent are found not to be eligible, the state could save as much as $120 million ($42 million of which is state-funded) annually.
But other health care observers have found little good to say about the program.
“Tennessee is a primary example of government interference in markets,” Dennis Smith, former director of the federal Center for Medicaid and State Operations and senior fellow in health care reform at the conservative Heritage Foundation, told CNSNews.com.
“When government promises too much, it can’t possibly fulfill all those promises, so it resorts, as TennCare did, to more and more of a budget issue,” Smith added.
He added that at least TennCare had more than one option that was administered by private companies. The proposed public option at the federal level, Smith said, is designed to lead to a single-payer system.”
“That would just accelerate what has happened in Tennessee once you get a government plan,” Smith said. “A monopoly – whether it’s a government or private – would result in higher costs, and the ultimate way for the government to bring down those costs is through rationing.”