Heritage Foundation Leadership for America

A sticking point in crafting major national health care reform legislation, according to media accounts, is whether or not Congress should create a new "public plan" as an alternative in competition with private insurance plans. The role of a public plan has become something of a litmus test in the debate over reform. The Washington Post correctly says the "fixation on a public plan is bizarre and counterproductive."

Key Questions. Little noticed in the debate by the media are the fundamental questions about the "public plan" option: Specifically what kind of pub­lic plan is proposed? What purposes is a public plan expected to serve? Would a public plan that com­petes with private plans achieve those purposes more effectively than competition among private plans alone, or would it subvert those purposes? Is there any reason to think that a public plan modeled on Medicare, and directed by the same congres­sional micro-management, can better deliver lower cost and higher quality care than private plans? Why should Medicare have to be doubled or tripled in size in order to lead health care innovation? Why should Americans believe that after 40 lethargic years the Medicare program, as run by Congress, will be transformed into an innovative, nimble pro­gram that can reform health care and reduce waste and overuse of health care services?

Four recent proposals for a public health plan— by Professor Jacob Hacker of the University of Cali­fornia at Berkeley; the Commonwealth Fund, a prominent liberal think tank in New York; John Holahan and Linda Blumberg of the Urban Insti­tute; and an innovative public plan option by Len Nichols and John Bertko of the New America Foun­dation—address these questions. These proposals vary, from a rigid Medicare model displacing most private insurance (Hacker) to a sincere attempt at a level playing field (New America Foundation). Unfortunately, they all fail to prescribe a feasible solution for the role of a public plan in health care reform.

Four Proposals for Public Plans

1) The "Healthy Competition" Plan. Professor Jacob Hacker, a political science professor at the University of California at Berkeley, has become vir­tually a one-man industry in favor of expanding a benefit-enriched variant of Original Medicare to Americans of all ages.

Under the conditions that Professor Hacker insists are essential—government price controls and virtually mandatory provider participation— "Original Medicare" would be modestly enriched as "Medicare Plus" and become the overwhelmingly dominant plan, with private plans tolerated as sec­ond-class alternatives to government-run health care.

2) The Commonwealth Fund Proposal. Under the Commonwealth proposal, developed by Dr. Karen Davis and her colleagues, Original Medicare benefits would also be enriched into "Medicare Extra," a program with a $5,000 ceiling on out-of-pocket expenses in which coinsurance would be reduced and preventive care would be free, pre­scription drugs would be covered, and hospital and physician deductibles would be unified and set at a combined level of $250 a year (compared to the current combined level of over $1,100 a year). However, like Professor's Hacker's plan, the basic structure of Original Medicare would stay in place and Medicare is intended to become the over­whelmingly dominant plan for Americans of all ages.

3) The Holahan–Blumberg Proposal. John Holahan and Linda Blumberg of the Urban Institute have written the provocative "Can a Public Insur­ance Plan Increase Competition and Lower the Costs of Health Reform?" in which they suggest that many variations of a public plan could be used, not only Medicare or a program expanding and chang­ing Medicare.

4) The Nichols–Bertko Proposal. Len Nichols and John Bertko have achieved a tour de force with their "Modest Proposal for a Competing Public Health Plan." They demonstrate that it would be theoreti­cally possible to create a competing public plan that would not crowd out private insurance or compete unfairly through mandatory provider participation and payment rules not available to private plans.

Nichols and Bertko argue that head-to-head competition is important to keep pressure on the public plan from "having financial incentives to stint on the quantity and quality of care." However, the model they propose has no proponents, would be unlikely to work, and would not meet advocates' underlying purpose of public domination of health insurance.

Conclusion

Members of Congress and other advocates of a coercive public plan should explain why they favor compulsory participation by health care providers accompanied by stringent wage and price controls. They should also explain why free-market language like "competition," "bargaining," and "level playing field" is used to—falsely—describe such a system.

Advocates of a public plan usually argue that Original Medicare's administrative costs are lower than those of private plans, and a major source of savings that could finance health reform. But this argument ignores the problem that one of the main reasons Medicare's administrative costs are low as a percentage of its overall spending is that it fails to control both wasteful spending—as much as one-third of all Medicare spending—and fraud. The worse Medicare performs, the better its ratio of administrative costs appears; and the less it spends on administration, the worse it performs. Some of Medicare's inability to control waste is inherent in its structure, and some is due to congressional deci­sions to reduce administrative spending below the prudent levels recommended by each Administra­tion. Why is this failure labeled a success, and why is this a management and oversight model to expand?

The real reason why a number of health policy analysts and politicians favor a public plan is because they see it as a way to crowd out private health care options, paving the way to a single-payer system. Members of Congress who support this agenda should be asked directly why they favor a "single-payer" system, and why some proponents of such a system cover it with a smoke screen of mis­leading rhetoric. Karen Ignagni, president and CEO of the America's Health Insurance Plans, the trade association for private plans, argues that if the goal of the public plan is to crowd out private insurers, "let's have a debate on a government-run system."

It is about time.

—Walton J. Francis is a self-employed economist and policy analyst, expert in analysis and evaluation of public programs. He pioneered the systematic compari­son of health insurance plans from a consumer perspec­tive as primary author of CHECKBOOK's Guide to Health Plans for Federal Employees. This annual online publication rates plans in the Federal Employees Health Benefits Program, which is often cited as a model for health reform. He has testified before Congress on Medicare reform and FEHBP reform, and has worked as a consultant to the Centers for Medicare and Medicaid Services. The views expressed in this article are his own.