President Barack Obama is insisting that health care "reform"
include an insurance plan operated by the federal government,
claiming that this "public option" is necessary to provide
competition against the private insurers. Senate Majority Leader
Harry Reid (D-NV) has said that the government plan would play a
role like that of the U.S. Post Office, which he apparently
believes is keeping Federal Express and UPS honest and efficient.
This upside-down rhetoric reflects a mindset stuck in the 1930s,
deriving its guiding political philosophy from the joy and relief
felt by John Steinbeck's Joads when they found shelter in a
government-run camp on their migration from Oklahoma to California.
It does not fit modern America.
Advocates of the government insurance plan assure us that it
would compete with private insurers on a level playing field. In
reality, the "competition" would be rigged, with the government
plan enjoying a number of advantages.
As a result, the government plan would likely capture a large
percentage of the insurance market, marginalizing and undermining
private insurance. For example, the Lewin Group estimates that the
America's Affordable Health Choices Act, the health reform bill
currently under consideration in the House of Representatives,
would reduce the number of Americans with private insurance by 83.4
million and that the new public plan would cover 103.4 million
people. Coupled with the federal regulatory system
that the legislation would impose on the remaining private plans,
this would clearly by itself constitute a government takeover of
Even worse, the federal takeover would accelerate. The private
plans' relatively small market share would likely render them
increasingly uneconomical and lead to a death spiral in which
private insurance would serve an ever-decreasing share of the
In short, the federal insurance plan is a giant step toward the
single-payer system that the President has admitted that he
prefers. The single payer would be the federal government. This
would create a nationalized health care system much like those in
Europe and Canada.
Tilting the Playing Field
The President and his allies in Congress have attempted to allay
fears about how the government plan would affect Americans' private
insurance system by saying that it would merely provide them an
additional choice and would compete on the same terms as the
private plans offered through the new Health Insurance Exchange. To
that end, the House bill even contains a section entitled "Ensuring
a Level Playing Field."
However, the actual terms of Section 221 do not live up to the
title. Private insurers and the government plan would not compete
on a level playing field. The provision that is touted as
"ensuring" a level playing field fails to do so in three
Tilt #1: Provisions for leveling the
playing field are limited to the requirements of the bill.
Most important, the scope of Section 221 is limited. It requires
the "public health insurance option [to] comply with requirements
that are applicable under" Title II of the bill to other insurance
plans offered through the Health Insurance Exchange, including
those that are related to consumer protections, benefits,
cost-sharing, notices, and provider networks.
Disregarding the grammatical conundrum of how an "option" can do
anything, Section 221 makes the government plan subject only to the
requirements that are imposed by Title II. It does not impose on
the government plan the broad variety of other federal and state
requirements with which private insurers must comply, such as
taxes, antitrust laws, and licensing requirements. Undoubtedly,
other requirements would quickly become apparent if the legislation
Depending on their tax status, private insurers must pay federal
and state taxes, including premium taxes, property taxes, and
income taxes. The government insurance plan, which would be run by
the U.S. Department of Health and Human Services (HHS), would not
pay these taxes, and Section 221 does not change this. Nor would
the government plan be subject to the federal and state antitrust
laws that regulate the operations of private insurers.
Moreover, the bill is unclear on whether the government plan
would be required to meet state licensing standards and obtain
state licenses. Section 204 contains a general requirement that a
plan offering insurance through the exchange must be licensed under
state law for each state in which it offers coverage, yet
state laws do not apply to the federal government unless federal
law provides that they do. The general language in Section 204 and
Section 221 may not be sufficiently explicit to require the
government plan to obtain state insurance licenses. If not, the
government plan would avoid state solvency and other requirements
that private plans must meet.
Similarly, the language is unclear on whether the government
plan must provide specific benefits and include providers as
required by state laws. Section 203 specifies that such state
mandates "shall continue to apply" to plans offered through the
exchange, but it is unclear whether this is a
"requirement" within the meaning of Section 221 that would apply to
the government plan. If not, the government plan would avoid the
expenses that private insurers incur in complying with the extra
benefit requirements imposed by the states.
Whether these general provisions would require the government
plan to comply with state law is complicated by Section 225, which
explicitly makes state law applicable to the government plan's
selection of providers. It specifies that the government plan can
include only providers that are licensed or certified by the state.
The absence of similarly explicit provisions in other sections
would suggest--according to the rules of statutory
construction--that the government plan would not be subject to
state laws in other aspects of its operation.
The government plan would be shielded from the high costs of
tort litigation that private plans face. Unless exempted by the
Employee Retirement Income Security Act as an employee benefits
plan, a private insurer can be sued for a variety of torts,
including actions for consequential and non-economic damages for
death and injury resulting from a wrongful denial of coverage. Yet
the government plan, as an arm of the federal government, would
probably be immune from tort liability. The federal government can
be sued under the Federal Tort Claims Act (FTCA), but not for
discretionary actions of its agents, and a coverage decision would
probably qualify as such a discretionary act.
Even if suit could be brought against the government plan under
the FTCA, it could not be heard in a state court or before a jury,
and the government plan would not be liable for punitive damages.
Furthermore, the FTCA imposes strict caps on attorneys' fees, which
significantly reduces economic incentives to stir up suits against
the government, which is certainly not the case in litigation
against private parties.
Tilt #2: Even with the requirements
imposed by the bill, the field is not level.
Becausethe bill does not spell out the scope of Section
221(b)(2), it is unclear precisely which "requirements...are
applicable under" Title II.
Title II requires plans to submit bids to the newly created
Health Choices Commissioner, who would review the adequacy of their
provider networks and presumably would make demands on price and
service before accepting a bid and entering into a contract.
Provider networks are briefly mentioned in Section 221 as one of
the applicable requirements, but the commissioner's
obligation to enter into contracts with plans and the process for
doing so are not mentioned. The bill is unclear on whether these
requirements are applicable under Title II and therefore whether
Section 221 gives the commissioner the authority to require bids
from the government plan and to negotiate contracts with it.
Even if the bill does give the commissioner this authority, the
structure of Title II makes it unclear what requirements the
commissioner could impose on the government plan. The commissioner
is required to develop standards on various aspects of plan
operations in order to carry out the requirements of Title I. Even
if the government plan is expected to negotiate with the
commissioner as other plans do, it is unclear whether a requirement
under Title I that is embodied in the commissioner's standards is a
requirement applicable under Title II with which the government
plan must comply.
The bill does not explicitly require the commissioner to treat
the government plan the same as it treats the other plans. In the
absence of such clear direction, it is unlikely that the government
plan would face the same bidding and contractual process (which, in
essence, will be the foundation of a costly regulatory regime) that
the private plans face.
In fact, despite the language of Section 221(b)(2), other
language in the bill leaves open to interpretation whether the
government plan must meet any of the requirements of Title II or
Title I. Section 100 states that the HHS Secretary, in connection
with the government plan, "shall be treated as" offering an
exchange-participating health benefits plan and that "the term
'qualified health benefits plan' means a health benefits plan that
meets the requirements for such a plan under title I and
includes the public health insurance option."
This language could be read as requiring private plans to meet
certain requirements under Title I but not requiring the government
to do so. Because "treated as" and "includes" are used to describe
the government plan's status, it might be argued that the
government plan is not required to meet those requirements through
the operation of Title II or even those requirements included in
Title II, notwithstanding Section 221(b)(2). This language could be
read as giving the government plan a free pass to
In addition to creating the illusion of a level playing field,
Section 221 is drafted craftily in other ways. It introduces the
ambiguous requirement, discussed above, that the government plan
comply with the provisions imposed by Title II with the qualifying
phrase "consistent with this subtitle [Subtitle B]." Importantly,
Section 221 also states that HHS's "primary responsibility" in
creating the government plan is to create "a low-cost insurance
The qualification that the level playing field must be
consistent with the subtitle could embolden the Secretary to claim
exemptions from costly requirements of the bill on the grounds that
the exemptions are needed to carry out the mandate for a low-cost
plan. These ambiguities could also support claims that the
government plan is not required to submit bids, have its premiums
approved by the commissioner, enter into a contract with the
commissioner, submit to state mandate laws, or obtain state
The bill also seems to give the government plan the ability to
obtain proprietary information about competing private plans. It
confers on the Health Choices Commissioner unspecified and
virtually unchecked authority to collect data from plans, including
the government plan. The commissioner is required to collect the
data needed for carrying out his or her duties, and plans are
required to report "such information as the Commissioner may
specify." The information collected could include
the health status of each person covered by insurance plans and
which services were obtained from which providers. It could also
include information on the terms of providers' participation in
plans, how much each provider is paid by the plan, the profits
earned by a plan, and other information relevant to plan
Disturbingly, the commissioner is authorized to "share" this
information with the HHS Secretary, the operator of the government
plan, without any restriction on the Secretary's use of the
information. Thus, the government plan may obtain
extensive data about the operations of competing private plans, but
private plans will not have access to this information about either
the government plan or each other.
Tilt #3: A government-operated plan
has other inherent advantages.
The government plan would have a number of other advantages. It
would be marketed with the imprimatur of the federal government,
and that status itself would be persuasive to many potential
enrollees. In addition, the government could use its ongoing
contacts with the citizenry to market its insurance plan. Nothing
in the bill would explicitly prohibit the government from including
promotional materials in mailings or as an electronic message
accompanying automatic deposit of government benefits, such as
Social Security checks and tax refunds.
The bill requires the Health Choices Commissioner to set
"uniform marketing standards" for all insurance plans selling
through the exchange. Whether these standards would apply to
the government plan is unclear. Nor is it clear whether the
government plan would be subject to the same information-disclosure
requirements as private plans. These provisions are
contained in Title I of the bill, and, as discussed, Section 221
explicitly imposes only the Title II requirements on the government
The government plan would also have the advantage of having
law-making authority behind it. The bill would make reimbursement
rates for doctors and hospitals under Medicare applicable to the
government plan. These are unilaterally imposed by the
government--a power that no private plan would have--and are lower
than what private plans have been able to negotiate in the market.
Even if this is changed to require the government plan to
"negotiate" reimbursement rates, its larger size and clout would
give it bargaining advantages that no private plan could match.
In any event, neither of these reimbursement methodologies would
likely be the last word. The bill gives the government plan blanket
authority to establish reimbursement rates for providers
unilaterally as long as they are "innovative."
Finally, in competing with private plans, the government plan
will enjoy one overriding advantage: Because the government can
force the taxpayer to make up any shortfalls, the government plan
can charge premiums that do not cover its costs. The bill requires
the government plan to charge premiums as necessary to meet its
costs, plus a margin for contingencies. However, political
realities and the pressure to provide "affordable" insurance could
result in this being disregarded or fudged.
How costs are calculated will undoubtedly be complex and
controversial. The government plan could charge less than its costs
because the U.S. taxpayer--initially, lenders to the federal
government--could be tapped. Private plans do not have the ability
to lower prices below cost and tax the taxpayer to make up the
difference. The resulting taxpayer subsidies to the government plan
could easily make Fannie Mae and Freddie Mac look like careful and
disciplined actors in the mortgage market. Furthermore,
unlike the proposed government plan, they were not even government
agencies when they were bailed out.
In a number of ways, the America's Affordable Health Choices Act
would fail to "ensur[e] a level playing field." It is unclear
whether the government plan would be subject to a number of
requirements that the private plans would be required to meet. It
would appear to give the HHS Secretary and the Health Choices
Commissioner the discretion to decide these ambiguities in favor of
the government plan and to find that various requirements do not
apply to the government plan because of its overriding mission to
offer a low-cost plan. However, even without including these
potential advantages,the government plan would clearly be free of a
number of requirements and expenses that private plans face.
Happy talk of creating a level playing field between the
government insurance plan and private plans should be viewed with
strong skepticism and even disbelief. The government plan would be
heavily favored, leading to the marginalization of the private
insurance market and the creation of a de facto single-payer
system--a nationalized health system.
John S. Hoff is a Trustee and
founding Board Member of the Galen Institute. He served as a Deputy
Assistant Secretary for Planning and Evaluation in the U.S.
Department of Health and Human Services from 2001 to 2005.