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Reports show benefits, problems with public option

A leading proponent of creating a public insurance option recently released a 27-page report that serves as a blueprint for how the public plan could compete on a level playing field with private insurers. But another recent study suggested a public option could have a disastrous effect on private health insurers and cause physician payments to plummet.

Backed by President Obama, U.S. Department of Health and Human Services secretary Kathleen Sebelius, and Senate Finance Committee chair Max Baucus, the public insurance option would create a competing public plan that would allow Americans to choose between public and private insurance plans.

Supporters of the public option, such as Jacob Hacker, PhD, a UC Berkeley professor, who recently published a policy brief that highlighted how a public plan would work, says that creating a public insurance option would expand coverage, lower healthcare costs, and serve as a check for private insurers.

Hacker says a public option would cut costs by providing direct competition with insurers. Public insurance is better at containing costs because of lower administrative expenses and greater bargaining power than private plans, he says.

“What I’m arguing for is a system in which public and private plans, with their strengths and weaknesses, could coexist side by side so that all Americans, not just the elderly or the poor, have access to the distinctive strengths of a public health insurance plan as well as the strengths of private plans,” he says.

Although Hacker speaks positively about a public option, The Lewin Group presented a much more negative picture in its paper The Cost and Coverage Impacts of a Public Plan: Alternative Design Options.

John Sheils, senior vice president at The Lewin Group, a healthcare policy research and management consulting firm owned by Ingenix, which is a wholly owned subsidiary of UnitedHealth Group, says one public insurance scenario could push 70% of private insurance members into public plans.

Because proponents have not created a definitive public insurance plan, The Lewin Group looked at different public options, including one that would allow all private insurance members to switch to a public plan as well as an option that would allow only small employers, individuals, and the self-employed access to a public plan.

Private insurers could lose 70% of their business if the former option is implemented, which could force private insurers to cut a similar percentage of their work force, Sheils says.

Under that option, “private insurance would have trouble surviving,” he says. “Maybe there would be some consolidations, but I’m not sure if private health insurance plans would be the most valuable investment in the world at that point.”

If the public plan was available to all employees and the government paid at Medicare levels, The Lewin Group estimated that 131 million Americans would enroll in the public plan, with 119 million coming from private health plans. This would mean an exodus of two-thirds of currently enrolled private plan members. (See Figures 13–18 on pp. 20–22.)

If the public option was limited to small employers, individuals, and the self-employed, The Lewin Group estimated that the public plan would include nearly 43 million Americans, with 32 million coming from private insurance.

Because the feds have also not offered a payment structure for the public insurance plan, The Lewin Group evaluated the effect of two possible payment routes: the same payment level as Medicare and paying the same amount as private insurers.

Sheils says that if the federal government decides to use Medicare payment levels, public option premiums would be 30% less than comparable private coverage. This would mean a savings of about $200 per family per month on average.

Those lower premiums would woo many people with employer-based coverage to the public plan. However, if the public option paid at private insurance levels, which would lead to higher premiums, fewer insured Americans would be tempted to enroll in a private plan, according to The Lewin Group.

The Lewin Group also found that hospitals and physicians would see less money if a public option is open to all employer-based members. Hospitals would actually benefit financially if the public option is limited to small employers, self-insured, and individual plan members because uncompensated care cost savings would more than offset lower payments.

Physicians, on the other hand, would have more patients and get paid less under Medicare-level funding. Despite potentially lower payments in a public plan, many doctors support the option because it would cut down on administrative costs. Their offices would not have to perform as much utilization management or review, says Sheils. “That’s a very expensive thing for physicians to comply with. It takes up physician time,” he says. “They usually employ a nurse to handle a lot of that. It’s an expense and a headache that a lot of them feel they could do without and would be willing to live with the lower payment levels.”

Although The Lewin Group painted a potentially negative picture, Hacker’s proposal, which was published by the Berkeley Center on Health, Economic & Family Security and the Institute for America’s Future, suggested a public plan would cut healthcare costs and guarantee a quality and affordable system.

Hacker’s proposal would build on Medicare’s administrative infrastructure and basic coverage framework. One difference is that the government would make a self-sustaining public insurance option that would be separate from Medicare, says Hacker, who has written extensively about the public insurance option and the failures of other reform plans. Other healthcare reform proposals might expand coverage, such as individual and employer mandates, but they do not contain costs, he says.

Hacker says a public option is needed because the current healthcare system does not provide “healthy competition.” Having a public insurance option competing side-by-side with private insurers would allow individuals to choose between the plans based on their strengths and provide a safety net so Americans can stay insured.

A private insurer’s strengths include integrated systems and care management programs, Hacker says, whereas a public option’s strengths would be in the areas of stability, transparency, affordable premiums, and provider access. “These are hallmarks of public plans that private plans have inherent difficulties providing,” he says.

To establish a workable public/private competition, Hacker says a healthcare system needs three Rs:

  • Risk adjustment that protects plans from being at a disadvantage because they enroll people who are not as healthy as their competition
  • Regional pricing that allows plans to compete on a level playing field within regions
  • Rules that would make both types of plans work on a level playing field, such as offering subsidies for both plans to care for low-income and middle-class Americans

Hacker says a public option would be built on Medicare’s foundation, but suggests that the nation needs to broaden the benefit package, focus on value and efficiency, increase payments to primary care physicians, and move to a bundled payment model.

Another supporter of the public insurance option, Institute for America’s Future codirector Roger Hickey, says other attempts at major healthcare reform, most notably in Massachusetts, simply “subsidize people to buy private insurance” and don’t tackle spiraling healthcare costs.

“[The Massachusetts model] simply expands the number of people who are able to buy private insurance,” says Hickey. “Some people are under the impression by simply mandating individuals that buying insurance means comprehensive coverage.

“What it’s more likely to mean is either really lousy healthcare plans or a very unaffordable healthcare plan for many people and a lot of resentment if you don’t have the structures in place to ensure good health insurance at decent prices,” he says.