As the prospects for health care reform ebb and flow by theday, one school of thought holds that making modest adjustmentsrather than enacting large-scale reform could help to avertcontroversy and command more broad support. Perhaps -- but seemingly modest changes could also unleash huge pressuresthat would profoundly alter the system’s future structure andfunction. Since perceptive lawmakers and congressional staffmembers recognize this fact, there may well be bitter debateover the enactment of certain apparently modest elements ofa smaller reform package submitted to Congress.

History shows that changing even seemingly minor features oflegislation or administrative decision making with regard tohealth care can have major -- and sometimes unintended -- consequences for the system’s evolution. For instance,when President Lyndon Johnson made an apparently minor concessionto the American Medical Association in 1965 by allowing “usualand customary charges” to become the basis of Medicare payments,he essentially permitted doctors to set their own fees simplyby adding a charge on top of the costs they incurred. This triggeredpowerful inflationary pressure that has impeded spending controland frustrated payment reform for many years. Similarly, rulingsexempting fringe benefits from taxation after World War II createda strong incentive for employers to expand tax-free health insurancerelative to taxable cash compensation for their employees. Economistsbroadly agree that this move boosted employer-sponsored insurancein the United States and, unfortunately, blunted patients’ incentivesto seek out cost-effective health care. The current goal of“bending the cost curve” emerged largely in response to thisunintended dynamic.

Design decisions in a pared-down proposal or reconstituted Senatebill are also likely to create dynamics that will reshape thesystem in ways unforeseen by many lawmakers. Consider two possibledesign elements that might be particularly influential. Oneis the alternative to a public option in which the governmentwould offer a menu of nationwide private insurance plans tobe overseen by the federal Office of Personnel Management (OPM).The shift to this approach was seen as a major setback for supportersof a public option during the Senate–House negotiations,particularly for those who saw a public option as a crucialstep toward a single-payer system. But proponents of the publicoption might not be so disappointed in the long run if thisalternative becomes part of a smaller bill.

The OPM currently administers several nationwide private plansand hundreds of local plans that are available to about 8 millionfederal employees and retirees and their dependents. The culturesin various government agencies are often quite different, andthis can affect the ways in which the agencies operate; whereasthe culture at the Centers for Medicare and Medicaid Services(CMS) might best be described as adversarial, with a strongfocus on rule making and rate setting, the attitude at the OPMis more similar to that of a large private employer that negotiatesbenefits with private insurers. OPM officials conduct thesenegotiations with private plans in an atmosphere of cordialcooperation in an effort to provide employees with economical,high-quality benefits. The OPM actually has considerable latitudeand powers to set prices and demand specific benefit designs.But in practice, it chooses not to fully utilize these powers.

Now imagine that reform legislation is enacted requiring theOPM to administer a set of private plans designed to achievewhat many key leaders in Congress really believe can be obtainedonly through a strong public option or a single-payer system.The Senate legislation contains strong directives to the OPM,requiring it to negotiate medical-loss ratios (the percentageof premiums that insurers actually spend on medical care forenrollees), minimum benefits, profit margins, premiums, and“such other terms and conditions of coverage as are in the interestsof enrollees in such plans.” Crucially, the legislation alsospecifies that the OPM-administered plans would automaticallybe deemed to meet all the requirements for plans to be offeredthrough the health exchanges created by the legislation.¹ Thismeans that OPM-administered plans could in practice operatefree of many of the financial regulations that exchanges mightimpose on other plans, allowing the plans to operate under theirown OPM-designed regulations.

How might the health care system evolve if this OPM featurewere implemented as part of a modest reform package? Congressrarely gives an agency powers that it does not intend to beused. It also seems reasonable to assume that the people appointedto administer the new bureau within the OPM will be more likelyto embrace the adversarial and regulatory philosophy of theleading congressional reformers and the CMS than the traditional“hands-off” culture of the OPM. Managed by such a transformedagency, the private plans that were part of an OPM alternativewould probably come, over time, to look more and more like third-partyadministrators of a federally designed competitor plan, operatingunder rules significantly different from those governing competingprivate plans. The result in a few years could be functionallyindistinguishable from a public option.

Now consider another design element that might be particularlyinfluential -- the broadly supported idea of health insuranceexchanges. The critical design issues are whether the exchangeswould be primarily national or state-based and what the relationshipwould be between an exchange and the regulation of insurance.The House legislation would create a national exchange modeledon the federal employees’ system, whereas the Senate has optedfor a more state-centered approach. This is not a small distinction.Legislation calling for state exchanges could still set broadnational guidelines, such as general criteria for the provisionof consumer information or basic requirements for enrollmentprocedures. But a permissive state-led exchange system wouldtrigger significant variation in the design of exchanges meetingthe federal guidelines. This flexibility would make it easierto incorporate existing exchanges, such as the Health Connectorin Massachusetts or the more recently created Utah Health Exchange.But more important, the state-centered approach would make iteasier for states to be innovators in exchange design and tolink their exchanges more closely with state reforms in insurance regulation and coverage innovations. Such an approach wouldtherefore improve the likelihood that we would see both statediversity and continuous evolution in the U.S. health care system,at least in the private sector.

A national exchange, on the other hand, would increase the probabilityof evolution toward a public-utility model of private insurance.A national exchange would reflect the more regulatory cultureof the Department of Health and Human Services and congressionalcommittees and would thus be more likely to be used in combinationwith federal insurance regulation to reshape the private market.As the Commonwealth Fund observes in its recent analysis ofthe health care reform bills, the House version’s national exchangewould have stronger regulatory and market power to control insurancepremiums and companies, thanks to the federal government’s abilityto negotiate directly with insurers.² These features would openup the possibility, if not probability, of a high degree ofprice regulation, especially if they were combined with greaterstandardization of benefits, restrictions on plan–providerrelations, set minimums for medical-loss ratios, and federalreview of premium rates. With these federal powers in placewithin a national exchange, insurance would essentially becomea regulated utility. Although many people might applaud thatresult, it would be very different from the probable resultof establishing state-based exchanges.

Examination of these two “minor” design features -- OPM-administeredprivate plans and the choice of national or state-based exchanges -- underscores the complex nature of health care policymaking.Taking even small steps to improve coverage, it turns out, involvesdecisions that could have profound effects on the future ofthe U.S. health care system. Thus, it would be unwise to tryto rush through a scaled-back bill on the assumption that minorchanges do not require careful scrutiny. It is important totake the time to think through the implications of any new legislation.

Stuart M. Butler, Ph.D.