President Obama and congressional leaders are proposing the
creation of a new public health insurance plan to compete with
private insurance plans. The President first proposed a public
insurance option during the 2008 presidential campaign, but now the
details and design of this new option--like most other aspects of
the health reform legislation currently under development--have
been left almost entirely to Congress.
Many in Congress are looking to Medicare as a model for a new
public health plan, yet they fail to realize the consequences for
patients and providers alike, as millions of Americans would lose
the private coverage that they have today.
According to the Lewin Group, a nationally prominent
econometrics firm, the two most crucial design details of this new
option are the size of employers eligible to buy into the new plan
and the provider payment levels used for reimbursement under the
These key issues are bound to be contentious in the upcoming
debate over health care reform.
The Obama campaign proposal would have made individuals without
employer coverage, the self-employed, and small employers (defined
as fewer than 25 employees) eligible for the public plan. But the
President never specified provider payment levels or the method for
determining reimbursement rates for doctors, hospitals, and other
medical professionals for the thousands of medical services that
would be delivered.
Members of Congress and their staffs will thus have to hammer
out these crucial details in legislation if a public plan is to be
Unlevel Playing Field
If Congress creates a public plan modeled on Medicare--as some
have previously proposed--the result, of course, would be to
undercut any pretense of a promised "level playing field" for
competition with private health insurance.
Public plan premiums would be 25-40 percent lower than private
insurance premiums as the public plan would reimburse providers
less than private payers would--and often less than the cost of
Payment rates for doctors and hospitals under public programs
are set administratively, not by the market. They are, on average,
lower than private payment rates for similar care.
Medicare provider payments for hospital care are only 71 percent of
private rates, while Medicare provider payments for physician care
are only 81 percent of private rates.
In other words, Medicare payment levels are roughly 19-29 percent
lower than private levels.
Congress's ability to impose low provider payments and
artificially reduce the cost of the public option compared to
private insurance will increase enrollment in the public plan while
crowding out, or displacing, existing private coverage.
Loss of Private Coverage
When considering a public plan modeled after Medicare, Lewin
finds that the estimated reduction in the number of uninsured does
not vary greatly (observing a change of only 800,000 individuals)
as eligibility for the plan is extended beyond small employers to
employers of all sizes.
Instead, there is a substantial increase in enrollment in the
public plan and in the loss of private coverage.
If the public plan were opened to only small employers,
enrollment in the public plan would reach 42.9 million, and 32
million Americans would lose their private coverage.
However, if the public plan is opened to all employers, enrollment
in the public plan increases dramatically to 131.2 million, and
119.1 million Americans would lose their private coverage.
In this particular case, of the 171.6 million people who currently
have private coverage, about 70 percent of them would lose the
coverage that they have today.
More specifically, of the estimated 157.4 million Americans who
have private employer coverage, up to 107.6 million people could
lose their private employer coverage, even if they like it and
would prefer to keep it.
Imposing Higher Costs on Individuals
Increased enrollment in a new public plan would likely result in
higher premiums for those with private insurance.
Historically, public programs--specifically Medicare and
Medicaid--have reimbursed providers at levels below the costs of
their services. For example, in 2003, on average, Medicare paid
hospitals only 95 percent of the cost of providing services, while
Medicaid paid hospitals only 89 percent of the cost of providing
These below-cost payments in public programs are at least in part
offset by above-cost reimbursements to providers by private
payers--as evidenced by hospital reimbursements to the tune of 122
percent of costs in 2003.
This cost-shift, in turn, inflates private health insurance
premiums for individuals and families.
The cost-shift dynamic plays a prominent role in the health care
sector. A study by the actuarial firm Milliman calculated that
public programs currently shift $88.8 billion in costs onto private
payers per year, increasing the typical American family's annual
private health insurance premium by $1,512, or 10.6 percent.
Moreover, Lewin speculates that a new public plan could increase
the annual cost-shift per privately insured by as much as $526,
which will only serve to further perpetuate the crowd-out of
Lower Incomes for Physician and
A new public plan could also significantly reduce provider
incomes. As more people gain insurance, physicians and hospitals
would benefit from decreased levels of uncompensated care. However,
the increase in public coverage along with new demands to provide
services to the newly insured could outweigh any increased revenues
from reductions in uncompensated care.
If all employers become eligible for the public plan, the annual
net income of hospitals could fall by $36 billion while the annual
net income of physicians could drop by $33.1 billion. Increasing
demands on health care providers coupled with decreasing provider
incomes could compromise patients' access to high-quality care.
Faced with low reimbursement, doctors are already reportedly opting
out of Medicare--a problem that is likely to be exacerbated with
the creation of a new public plan.
Consider the Consequences
Discussions surrounding the creation of a new public plan, based
on Medicare and intended to compete with private health plans, have
not adequately considered the potential consequences for patients
Creating a new public health plan option is likely in direct
conflict with the many promises Congress and the Obama
Administration have made regarding health reform.
While many claim that a public plan would merely represent an
alternative choice to private health plans operating on "a level
playing field," the reality is that Congress will use the
government's power to artificially deflate the cost of the public
plan by lowering provider reimbursement rates.
It has been suggested repeatedly that if Americans like their
health plan they can keep it and that nothing would change except
that they would pay less. But the creation of a new public plan
modeled on Medicare could result in the loss of the private
coverage that millions have today by undermining the current system
of employer-sponsored insurance. Those who are actually able to
keeping their private insurance will likely be forced to pay
more--not less--to cross-subsidize the public plan.
While patients have been ensured their choice of doctor and care
without government interference, great uncertainties remain
regarding what the future holds for the doctor-patient relationship
as millions of Americans are pushed into a new public plan.
The Devil Is in the Details
It is unlikely that Congress and the President will be able
enact a major overhaul of the health care system that both includes
a new public health insurance option and meets their many
When it comes to health care policy, what politicians promise is
less important than the details of their policy prescriptions.
is Policy Analyst in the Center for Health Policy Studies at The