The Public Option: Sorting Rhetoric from Reality

health care

President Obama and several Congressional leaders have recently expressed support for the idea of allowing citizens to buy into a public insurance program as part of any health reform legislation.

Outraged opponents claim that establishment of such a "public option" would lead to the end of the private health insurance industry. The intensity of the debate is fascinating given the lack of specifics that have been offered by either side.

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So, is a public option the end of private health insurance or the solution to our runaway cost problem? The odds are that it is neither. But it all depends on how the program is structured.

Let's consider the critical choices that Congress or the administration must face. First, who would be eligible to enroll in the public plan? One major point of dispute is the number of people who would sign up for the plan if it were offered. Congress (or the secretary of health and human services) could decide to allow anyone who wants to join to do so -- or it could restrict enrollment to people who have no other way to get health insurance. For example, Congress could exclude people who are eligible for Medicaid or who could purchase insurance through their employer. Together these two groups represent 44 percent of the uninsured. There is nothing magical about this decision, but it will determine the number of people who could enroll, the cost to the government of offering this option, and the degree to which the public plan would compete with private insurance providers.

Second, how would the public plan pay doctors and hospitals to care for its patients? If the public plan offers providers the fees already established by Medicare, it will not have to spend money to negotiate contracts with doctors and hospitals. This could reduce overhead expenses by about 1 percent. Medicare also pays doctors and hospitals less on average than private insurance companies do for the same service. The exact amount of the difference varies by community, but one study in Washington state found that Medicare paid 25 percent less for similar services than private insurers. So the public plan would have lower costs. And this is why insurance companies, doctors, and hospitals believe a public plan would represent unfair competition.

Questions Remain Over Public Plan Possibilities

But there is no requirement that a public plan be allowed to use the Medicare fee schedule.

Congress could require the public plan to negotiate contracts with doctors and hospitals rather than setting prices. If the public plan were allowed to be selective in contracting with hospital and doctors, this could also lower premiums. Restricted networks are cheaper because participating providers get more patients, and insurance companies can manage fewer providers more easily. If Congress requires doctors and hospitals to participate as a condition of being paid under Medicare, then the public plan won't be able to take advantage of restricted networks.

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