(Article originally written for the New England Journal of Medicine )

As the prospects for health care reform ebb and flow by the day, one school of thought holds that making modest adjustments rather than enacting large-scale reform could help to avert controversy and command more broad support. Perhaps --but seemingly modest changes could also unleash huge pressures that would profoundly alter the system's future structure and function. Since perceptive lawmakers and congressional staff members recognize this fact, there may well be bitter debate over the enactment of certain apparently modest elements of a smaller reform package submitted to Congress.

History shows that changing even seemingly minor features of legislation or administrative decision making with regard to health care can have major -- and sometimes unintended-- consequences for the system's evolution. For instance,when President Lyndon Johnson made an apparently minor concession to the American Medical Association in 1965 by allowing "usual and customary charges" to become the basis of Medicare payments,he essentially permitted doctors to set their own fees simply by adding a charge on top of the costs they incurred. This triggered powerful inflationary pressure that has impeded spending control and frustrated payment reform for many years. Similarly, rulings exempting fringe benefits from taxation after World War II created a strong incentive for employers to expand tax-free health insurance relative to taxable cash compensation for their employees. Economists broadly agree that this move boosted employer-sponsored insurance in the United States and, unfortunately, blunted patients' incentives to seek out cost-effective health care. The current goal of"bending the cost curve" emerged largely in response to this unintended dynamic.

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

The OPM currently administers several nationwide private plan sand hundreds of local plans that are available to about 8 million federal employees and retirees and their dependents. The cultures in various government agencies are often quite different, and this can affect the ways in which the agencies operate; whereas the culture at the Centers for Medicare and Medicaid Services(CMS) might best be described as adversarial, with a strong focus on rule making and rate setting, the attitude at the OPM is more similar to that of a large private employer that negotiates benefits with private insurers. OPM officials conduct these negotiations with private plans in an atmosphere of cordial cooperation in an effort to provide employees with economical,high-quality benefits. The OPM actually has considerable latitude and 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 the OPM to administer a set of private plans designed to achieve what many key leaders in Congress really believe can be obtained only 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 percentage of premiums that insurers actually spend on medical care for enrollees), minimum benefits, profit margins, premiums, and"such other terms and conditions of coverage as are in the interests of enrollees in such plans." Crucially, the legislation also specifies that the OPM-administered plans would automatically be deemed to meet all the requirements for plans to be offered through the health exchanges created by the legislation.1 This means that OPM-administered plans could in practice operate free of many of the financial regulations that exchanges might impose on other plans, allowing the plans to operate under their own OPM-designed regulations.

How might the health care system evolve if this OPM feature were implemented as part of a modest reform package? Congress rarely gives an agency powers that it does not intend to be used. It also seems reasonable to assume that the people appointed to administer the new bureau within the OPM will be more likely to embrace the adversarial and regulatory philosophy of the leading congressional reformers and the CMS than the traditional"hands-off" culture of the OPM. Managed by such a transformed agency, the private plans that were part of an OPM alternative would probably come, over time, to look more and more like third-party administrators of a federally designed competitor plan, operating under rules significantly different from those governing competing private plans. The result in a few years could be functionally indistinguishable from a public option.

Now consider another design element that might be particularly influential -- the broadly supported idea of health insurance exchanges. The critical design issues are whether the exchanges would be primarily national or state-based and what the relationship would be between an exchange and the regulation of insurance.The House legislation would create a national exchange modeled on the federal employees' system, whereas the Senate has opted for a more state-centered approach. This is not a small distinction. Legislation calling for state exchanges could still set broad national guidelines, such as general criteria for the provision of consumer information or basic requirements for enrollment procedures. But a permissive state-led exchange system would trigger significant variation in the design of exchanges meeting the federal guidelines. This flexibility would make it easier to incorporate existing exchanges, such as the Health Connector in Massachusetts or the more recently created Utah Health Exchange.But more important, the state-centered approach would make it easier for states to be innovators in exchange design and to link their exchanges more closely with state reforms in insurance regulation and coverage innovations. Such an approach would therefore improve the likelihood that we would see both state diversity 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 probability of evolution toward a public-utility model of private insurance. A national exchange would reflect the more regulatory culture of the Department of Health and Human Services and congressional committees and would thus be more likely to be used in combination with federal insurance regulation to reshape the private market.As the Commonwealth Fund observes in its recent analysis of the health care reform bills, the House version's national exchange would have stronger regulatory and market power to control insurance premiums and companies, thanks to the federal government's ability to negotiate directly with insurers.2 These features would open up the possibility, if not probability, of a high degree of price regulation, especially if they were combined with greater standardization of benefits, restrictions on plan-provider relations, set minimums for medical-loss ratios, and federal review of premium rates. With these federal powers in place within a national exchange, insurance would essentially become a regulated utility. Although many people might applaud that result, it would be very different from the probable result of establishing state-based exchanges.

Examination of these two "minor" design features -- OPM-administered private 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, involves decisions that could have profound effects on the future of the U.S. health care system. Thus, it would be unwise to try to rush through a scaled-back bill on the assumption that minor changes do not require careful scrutiny. It is important to take the time to think through the implications of any new legislation.

Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.