The Risks of the Public Option

In early July, the health policy community heard a familiar proposal from familiar voices. After some restraint, Democratic presidential nominee Hillary Clinton promoted a public op­tion insurance plan in every state as a key pil­lar of her health care platform, a provision that appeals to Senator Bernie Sander’s progressive base as a step toward a single-payer system. President Barack Obama followed a few days lat­er, recommending in the Journal of the American Medical Association that Congress revisit a pub­lic plan option to build upon the Affordable Care Act. The public option, which entails offering a government-run health plan that any citizen can choose to purchase instead of private insurance, has been widely supported by Democrats for al­most ten years now. However, despite the nu­merous proposals that have reached Congress on the issue, no federal legislation has ever been passed that would establish a public option.

As the public option idea gains momentum in the upcoming months of campaigning by both candidates (and especially if Clinton and oth­er Democrats win in November), it is critical to understand the promises and risks of such a proposal.

The public option was first proposed at the na­tional level in the Democratic primaries of the 2008 election, when it was part of the platforms of then-Senators Edwards, Clinton, and Obama. Discussion continued into debates over the de­tails of the Affordable Care Act (ACA) in 2009, but although the public option was fiercely pro­moted by many congressional Democrats, it never made it onto the final version of the bill.

The rationale behind the current proposal is that a public health plan would compete with the pri­vate ones offered through the ACA state-based exchanges. Supporters of the public option note that monthly premiums for private plans offered through the marketplaces have skyrocketed over the past several years, burdening newly insured, low-income Americans. Meanwhile, many Republicans have used these premium increas­es as evidence that the ACA is not working and ought to be repealed.

A public plan, however, could save money by set­ting lower reimbursement rates for physicians than the rates set by private plans. We’ve seen this happen with Medicare and Medicaid, pub­licly administered insurance programs that pay doctors less because they have the market power and government-granted leverage to do so. This means that as things stand today, doctors prof­it more from their privately insured patients than from their Medicare beneficiaries. Since the fed­eral government can drive harder bargains with providers than private companies can, the health care system, its patients, and taxpayers all save when more patients are publicly insured as op­posed to privately.

A public plan option would also save money be­cause it would incur far lower administrative costs than private insurance companies. This is evidenced by comparing the administrative costs of Medicare or Medicaid with those of mega-insurers like Anthem, United, Blue Cross/ Blue Shield. It could also drive down premiums for those with private plans. A public plan with cheaper premiums would increase competition in ACA marketplaces, making it difficult for pri­vate insurers to retain their consumers without decreasing their premiums as well. In this way, a public option could generate systemwide cost savings for Americans, whether they choose public or private health insurance plans.

The Congressional Budget Office projected in 2013 that the federal government could save al­most $160 billion by introducing a public plan that offered premiums 7 to 8 percent lower than private plans’. For many, that would amount to thousands of dollars in savings each year.

While the public option sounds great in theory, it also poses important risks that ought to be tak­en seriously by policymakers. These risks should also be understood by voters who are likely to hear Clinton and others tout the public option as a cure-all for the toll that health insurance premi­ums are taking on pocketbooks nationwide.

First, the public option plan threatens provid­ers and insurers in ways that could then affect patients’ access to care. By setting its rates for provider reimbursement lower than those of private plans, a public plan would reduce rev­enue for any physician seeing a patient who is on the public plan. This matters because often, physicians rely on the higher reimbursement rates from private insurers in order to cover the lower reimbursement rates from Medicare and Medicaid. But if their revenue streams were to take a significant hit, we would likely to see an uptick in the number of physicians refusing to see Medicaid patients. This would reduce access for the most vulnerable patients, as Medicaid covers citizens with income near or below the federal poverty line. Access to care ought to be an imperative in this country and one of the main goals of the ACA, but we cannot blame providers who need to stay in the black in order to see any patients at all. Rather, we need to protect against those systemic chang­es, like the creation of a public plan, that might decrease access as an unintended consequence.

Another risk of the public option is that it might destabilize local markets and drive private insur­ers out of a business in which they are already struggling to make a profit. This is detrimental for consumer choice and could impact the cost of insurance in the long run. An even worse sce­nario would be that the public plan, which would likely lack the advanced care management tech­nologies used by private plans, could actually be more expensive to manage than private plans, but would drive them out anyway because its consumer-facing costs are lower. This might even increase health care costs in the short run.

It is difficult to assess if and where the risks of the public plan might materialize. The existing health insurance markets worldwide are com­plex and have been around for only a few years, so it is extremely challenging to use them to construct strong economic models with good predictive power. We’re testing new waters, and although we can look to Europe for examples, we will have to find a uniquely American solu­tion that maximizes the benefits of a public plan while mitigating its risks and negative impacts.

As such, we should tread carefully. Instead of pursuing a federal-level public option to com­pete in every state-based exchange, we should embrace incremental reforms that are informed by real-world experiments in single states or re­gions prior to nationwide adoption.