Glossary Of Offsets
Efficiencies
• Public Option
• Health IT
• Comparative Effectiveness
• Medical Homes
• Medicare Cost Sharing

Taxes
• Taxes For Noncompliance
• Surtax On The Wealthy
• International Tax Changes
• Sugary Beverage And Alcohol Tax
• Tax On Insurance Companies
• Plastic Surgery Tax
• Changing Tax Exclusion For Employment-Based Health Insurance

Quality Of Care
• Measuring Quality Of Care
• Preventive Service
• Expanding Disease-Management Services

Provider Payment Revisions
• Pay For Performance
• Abolishing The SGR
• Bundling
• Reduce The Annual Update Factor
• Partial Capitation
• Penalties For High Readmission
• Cut Payments To Medicare Advantage

TOPIC PAGE: Health Care

Definition

The public option proposed by some Democrats makes a public health insurance plan available in health insurance exchanges or gateways, alongside private plans, for some uninsured Americans.

Executive Summary

The pitch for a so-called "public option" sounds simple enough: The federal government creates a public insurance plan some uninsured citizens can opt for over private insurers. Since the government has more leverage than private industry when negotiating with hospitals and doctors and can get lower rates, the plan would likely be the cheapest option out there.

But the two biggest questions in the debate over a public option are also the most contentious: How many Americans will sign up and will it lower private insurance premiums for the rest of us?

Proponents of a public option argue that lower prices will create beneficial competition and force private insurers to drop their premiums. The Congressional Budget Office estimates that the public plan would be 10 percent cheaper on average than the private plans in health care exchanges, markets where the uninsured can buy public and private coverage. However, the CBO says it's "unclear" what effect that would have on private premiums.

The New York-based Commonwealth Fund, meanwhile, argues in a June report that with a public option forcing private carriers to cut costs and improve efficiency, average annual insurance premiums would drop 14 percent from $4,704 to $4,068 in 2010.

Republicans counter that a low-cost public plan with an unfair competitive advantage will drive private insurers out of business, leaving the government running health care for millions of Americans.

And there's a chance, they argue, that private insurance rates would increase. Take, for example, Medicare, which pays providers far less than private insurers for the same services -- 15 to 20 percent lower, according to industry experts. And two-thirds of all hospitals lose money on Medicare, according to Len Nichols, director of the Health Policy Program at the New America Foundation. Hospitals depend on private insurance to cover their losses.

The rate at which a public option reimburses providers becomes critical then. The closer its rates are to Medicare's, the greater the chance that hospitals may jack up prices for private insurance. That in turn could raise private insurance premiums and send more Americans into the arms of the public plan.

Providers and private insurers have scored small victories in language of the current House and Senate bills. The original House bill reimbursed providers at rates five percent higher than what Medicare pays. But after prodding from the moderate Blue Dogs, the plan now lets the secretary of Health and Human Services negotiate rates directly with providers, which will likely lead to higher reimbursement rates. The Senate Health, Education, Labor and Pensions Committee bill would also let the secretary negotiate prices with providers. Liberal Democrats in the House are still pushing to lower the public plan's reimbursement rates (closer to Medicare level) in order to put more competitive pressure on private insurers.

Determining just how many Americans will opt for a public option is important too: More Americans on the public plan could mean more downward (or upward) pressure on private premiums. If access to health care exchanges is limited to small firms, enrollment in the public plan would necessarily remain small: The CBO estimates that if firms with fewer than 50 employees have access, just 2 million Americans would opt for the public option.

The House plan limits access to the exchanges to small businesses for the first two years of the plan but keeps the door open to expanding access down the road to larger employers if the exchange commissioners see fit.

And what if the public plan is more widely available? Republicans point to an April report by the Lewin Group, a health care policy research firm owned by United Health Care, which predicts that if all Americans are given access to the public option, 119 million of them will flee their private plans to join up. Many Democrats don't necessarily see that as a bad thing, though there is some concern that that scenario could stunt innovation in health care delivery.

The CBO disputes the Lewin estimate, though it adds that "estimating enrollment in the public plan is especially difficult." There are other reasons to doubt the Lewin figure, critics allege.

Excessive caution will prevent many people from immediately leaping to the public option, Nichols argues. "People may very well be wary -- is this Medicaid or not? -- and inertia is a powerful force, and especially powerful when it comes to your health," he said. "People aren't going to switch until it proves over time that it offers the same benefits."

The Lewin Group's estimate also assumes that private insurers won't trim fat and lower premiums to compete with the public option, says Stuart Guterman, who studies payment system reform at the Commonwealth Fund.

"Do you turn with the road or do you just drive straight off the cliff?" he asked. "I think private plans are more flexible than the Lewin Group gives them credit for, and I think they would make the adjustments to help them stay competitive with the public plan."

Of course, trimming the fat may not be enough to compete if hospitals begin charging private plans more to make up for the money it loses from patients covered by the public plan.

Complicating both unknowns -- the effect of a public plan on private rates and the number of Americans signing up for the public option -- is the fact that the CBO hasn't hazarded estimates for either. The crush of legislation the CBO must score these days -- from the stimulus package to the climate change bill -- may be behind the incomplete analysis, says Sen. Ron Wyden, D-Ore. The CBO scored Wyden's plan, the Healthy Americans Act, last year during the lame-duck days of the Bush administration when there was far less legislation in need of analysis.

"I sat across from [then-CBO Director] Peter Orszag for 18 months working on this," he told NationalJournal.com. "When else do you get that kind of time?"

Plans

The Senate HELP Committee and House Tri-Committee plans both include public options. The Senate Finance Committee is still debating including a public option in its bill. While the Wyden plan does not currently include a public option, Wyden said he is open to one. "I'm interested in making sure that what's done in this area brings down premiums," he said.

Links

• Lewin Group Report

• Kaiser Family Foundation side-by-side comparison of health care proposals

• Commonwealth Fund Report

• July 26 CBO Report on America's Affordable Health Choices Act