Who Cares About a Public Option?

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Much of the debate over health care reform has been dominated by a provision known as the “public option.”  Under this measure, which is included in many of the bills that have been introduced by the Democratic leadership, government would offer a health insurance plan in direct competition with private insurers participating in a new government-sponsored health insurance exchange.  The fact that this relatively minor provision is the most publicized feature of the bills has led to suspicions that it is really just a stalking horse.

Indeed, its eventual removal could create a conciliatory political narrative about the triumph of moderation that hastens the rest of the bill’s passage into law.  Unfortunately, removing the public option would not do anything to lessen the damage that many of the other provisions would impose on U.S. public finances and the system of private health insurance.

Let’s review quickly why many see the public option as a threat to private health insurance and why all the attention may be distracting.  House Republicans have touted a study by the Lewin Group that found the public option would cause 114 million Americans to lose private health insurance.  That estimate was based on the premise that the public plan (option) would pay Medicare reimbursement rates to doctors and service providers, which are lower than those paid by private insurers. 

The most recent version of the Democrats’ health care reform bill would instead force the public plan to “negotiate payment rates with all providers and suppliers of health care goods and services.”  The difference is significant: under negotiated prices, the Lewin Group estimates that only 20 million people would enter the public plan, as opposed to the more than 100 million that would at Medicare payment rates.  The Congressional Budget Office (CBO) interprets “negotiated rates” to mean that the rates paid to providers “would, on average, probably be comparable to the rates paid by private insurers participating in the exchanges.”  Overall, CBO expects the public plan’s premiums to be higher than the private options because it would do less to manage utilization decisions and have a less healthy pool of enrollees. 

It is reasonable to wonder how voluntary any negotiation with a government entity would truly be voluntary.  Once the law is in effect, it seems likely that an aggressive Health and Human Services Secretary could press to improve the public plan’s competitive position.  The bigger issue, however, is that the bill would socialize the health insurance market by dictating the terms of every health care relationship, contract, and coverage option.  What does it matter if the government sponsors a competitive alternative when the bill already establishes an “Independent Advisory Committee” to determine the terms and conditions of all health insurance plans that can be legally sold in the United States?  Initially created to determine the benefit package for the plans sold in the exchange, the Committee’s jurisdiction seems destined to be extended to employer plans.  The bill would require individuals to buy coverage but limit their options and complicate movement towards the consumer-oriented plans that rationalize health spending decisions.

Another noteworthy feature of the latest measure in the House is that it purports to save money relative to the previous version by expanding eligibility for the existing public plan – Medicaid – to 150% of the poverty line.  After adjusting for changes in spending prior to 2013, the Medicaid expansion is expected to cost $465 billion from 2013-2019 (including $34 billion paid by state governments), while the subsidies for private insurance are expected to cost $598 billion over this period.  By 2019, 15 million additional people will be covered by Medicaid and 18 million will receive subsidized coverage through an exchange.  Although the cost of the subsidy will vary based on the beneficiary’s income, the average subsidy cost will be $6,800 in 2019 compared to just over $6,100 per newly insured Medicaid beneficiary (including the state government contribution).  Since the subsidies phase-out at 400% of the poverty line ($43,000 for an individual or $88,000 for a family of four), a newly insured individual just above the new Medicaid eligibility level would receive considerably more government support than the individual just below it. 

In total, the House bill, as proposed, is projected to increase public expenditures by $1.055 trillion over 10 years, and would reduce the number of uninsured by 36 million.  However, this does not include “the other spending increases in the bill that add up to $217 billion, with the largest items being higher payment rates in Medicaid ($57 billion) and funding for the public health, prevention, and wellness funds ($34 billion).”  (See the e21 exclusive piece by Donald Marron that details all the “cost” issues.)  Adding these to the coverage costs ($1.055 trillion) suggests that the total gross cost of the bill is close to $1.3 trillion. 

Not surprisingly, there are even more costs to consider.  Right now, none of the reform plans take-on the long-term problem of reimbursement rates for doctors (the so-called "doc-fix”) because of the large price tag associated with such legislation (~$245 billion).  Congress may pursue a “patch” or short-term fix (as it has in previous years) to keep from having to add this big ticket item.  Most experts agree, however, that a long-term fix should be factored into the long-term cost of any comprehensive health care reform effort. 

It is right to worry about the impact a hypercompetitive and predatory public plan would have on the coverage options of the 202 million Americans that currently have private health insurance.  But removing the public option from the current bills simply reveals all the other provisions that need more attention.  Let’s hope that this stalking horse is deleted sooner rather than later, so legislators (and the public) can focus more on the other big issues, like the powers of the Independent Advisory Committee, the mandate and subsidy inequalities, and the long-term budget consequences that this health care expansion entails.  These issues are too important to obscure – and nobody should be surprised if the “public option” is removed (all of a sudden and at the end) to create an artificial political narrative, as if all the extreme provisions in the bill were magically moderated.