President Obama has proposed that Congress create a new public
health plan to compete with private health plans in a national
health insurance exchange.
The President says that Congress can create a "level playing
field" nationwide to ensure a fair competition between the newly
created public plan and private health plans and that Americans who
like the private health insurance coverage that they have today
will be able to keep it and pay less. This claim is simply not
Loss of Coverage
In fact, independent analysis estimates that millions of
Americans would be crowded out of their private coverage through
the introduction of a public plan, depending on the level of
payment and the size of the pool for eligible enrollees in such a
Moreover, with an employer mandate--forcing employers to offer a
federally approved level or benefits or to pay a payroll tax--there
would be powerful incentives for employers to pay a tax and dump
employees into the public plan. The vast majority of working
Americans under 65, after all, get their health insurance through
employers. Those who do not have to buy health policies in the
individual market are subjected to tax and regulatory
Some Members of Congress, such as Senator Charles Schumer
(D-NY), are offering a compromise proposal to guarantee a "level
playing field" by making sure that all of the rules that apply to
insurance would apply equally to both the new public plan and the
private plans. It is not clear under Schumer's proposal, however,
that the new public plan would be permitted to fail without a
In a proposal by the New America Foundation, analysts say that
the experience of more than 30 state governments in fielding a
"public plan" for employees that competes with private health plans
for the premium dollars of state employees is the proof that public
plans can compete fairly and effectively.
State Examples: A Big Stretch
Strictly speaking, there is no existing federal model of a
"public" plan owned and operated by the government, with government
employees performing the functions of employees of a private
The Veterans Administration (VA) health program is, in fact, an
integrated single-payer health care system, funded and maintained
by special federal subsidies, where physicians are paid by the
government, the price of medical services is set by government
officials, and hospitals are owned and run by federal officials.
The VA does not compete for enrollees on anything like a "level
playing field"; it simply administers an entitlement for a special
class of American beneficiaries.
Medicare and Medicaid are not health insurance plans like
private health insurance plans. They are mostly bill-paying
entitlement programs with detailed regulations governing
eligibility and reimbursement.
The experience of state governments provides a good example of a
"public plan" only if one is willing to stretch the meaning of a
public plan well beyond all recognition. This is true for a variety
First, state employees do not buy state-sponsored health
insurance because it is a "public plan." So-called state "public
plans" are really private health plans under contract to the state
government. The simple fact that a government agency contracts
with a private firm does not transform that private firm into a
Like many private employers, state government can determine,
often in consultation or negotiation with public employee unions,
how rich or lean the benefits package may be, or the terms and
conditions of coverage. No state advertises the "public plan" to
its employees as anything like a special vehicle to keep the
private plans "honest" or provide uniquely accessible, affordable,
and guaranteed benefits in contradistinction to any other
health plan available to state employees.
In fact, the name of the health plan offered to employees is
always, or almost always, the trade name of the private insurance
company that is offering it. In some states, there is provision for
higher employer payments for certain favored health plan options.
Of course, this is the very opposite of a level playing field.
Second, no state owns or has state employees operate a health
insurance plan. State government agencies do notcarry out the
normal functions of a health insurance company--negotiating
contracts with doctors and hospitals, establishing provider
networks, or budgeting for marketing and administrative costs.
States do, of course, administer Medicaid. But like Medicare,
Medicaid is also not a health insurance plan but rather a
bill-paying and regulatory agency for a federal entitlement. The
Medicaid "managed care" plans that many Medicaid enrollees have
been forced into by government officials are also private
contractors for the government business and offer these special
plans, benefits, and artificially low provider payments as
authorized by government officials.
Third, merely because states offer self-insured plans to their
employees, like many private employers, that does not mean that
their plans are "public" plans in any normal sense of the word. Of
course, state governments routinely contract with private insurance
companies to provide coverage for their employees. They can bear as
much or as little risk as they desire, and if they wish to
self-insure, they can decide how much reinsurance they will secure
to cover unanticipated costs and cover losses.
Most large private companies self-insure, often to escape state
government insurance regulation, mandates, or premium taxes. Like
self-insured private companies that offer health coverage under the
Employees Retirement Income Security Act (ERISA) of 1974, a number
of state governments also self-insure. This means that the state
taxpayers, as the real employers of state civil servants, are
directly liable for state employee and retiree health benefits,
just as private employers are under ERISA. This simple fact of
self-insurance does not render the contractors' insurance plans
"public" health plans; it does mean that taxpayers as the
ultimate employers are on the hook for the losses and liabilities
of their employee coverage.
Big Taxpayer Burdens
States are also saddling their taxpayers with huge costs for
their health plans, not only in the provision of generous current
benefits but also in the form of growing unfunded liabilities.
In a number of states, such as California, New York, and
Maryland, these costs are large and growing. For retiree health
coverage alone, state officials are saddling current and future
taxpayers with unfunded health care liabilities upwards of $1.5
No Model to Follow
State employee health plans are really private health plans
under contract with state government, and the simple fact that they
are self-insured (like many private plans) does not make them
public entities. Moreover, state experience is hardly a
prescription for fiscal sanity at the national level, where current
and future taxpayers must somehow cope with the recent explosions
in federal spending and debt, as well as the trillions of dollars
in promised entitlement benefits that are not funded.
If Congress creates a public plan, it is likely to be too big to
fail, as is the case with so many other enterprises, thereby
guaranteeing even greater burdens on taxpayers who are already
faced with the seemingly insurmountable debt imposed by Social
Security, Medicare, and Medicaid.
Moffit, Ph.D., is Director of the Center for Health Policy
Studies at The Heritage Foundation.