As the discussion
regarding health care reform comes to the fore, a central issue
raised by some in Congress and elsewhere is whether insurance
offered to the currently uninsured and others should be merely
private, or include a public plan – sponsored by the federal
government – along with private plans. It is essential that any
health care reform package include a public health care plan. A
public plan, standing alone or in combination with an offering of
private plans, offers many benefits to the public and to the overall
health care system in the United States. Any serious offering of a
workable and cost effective reform of health care must, therefore,
include a public plan.
What is a "Public Plan"
In very general terms, a public plan
means a plan that is available to all within the designated insured population;
that is administered by the federal government; that is affordable for its
enrollees and for taxpayers; that has a defined set of benefits that people can
count on; that has low administrative costs; that includes protections for its
participants; and that does not have marketing costs.
The Importance of Reducing Health
Care Costs as Part of Health Care Reform
As many scholars, the Obama
administration and others have stated, the key to fixing the health care system
in the United States is to control costs.
Lower prices for medical care are the major explanation for the much lower
medical costs in the health care systems of other economically developed Western
 Moreover, the U.S. public is increasingly concerned about health care
costs, and many are postponing obtaining care due to the high costs associated
Reduced Costs Associated With a
A public plan offers significant
savings in administrative costs, savings that private plans have been unable to
match. The dollars saved in administrative costs by a public plan can be used
for direct health care, or to offer a less costly overall health care package.
As an example, studies show that administrative costs in Traditional Medicare
(the "public plan" in Medicare) are around 2%.
Compare that with administrative costs of around 16.7% (6.6% for profits and
10.1% for nonmedical expenses) for private Medicare Advantage plans.
Because of the broad reach of a
public plan, it would be able to negotiate lower volume discounts from providers
and drug manufacturers. This would save overall costs to the public plan. Lower
(but not too low) payments must be met by greater efficiency. While some argue
that these lower payments require higher payments from other insurance plans,
the evidence demonstrates that higher payments – those often negotiated by
private plans - are not caused by lower payments from a public plan. Instead,
higher "costs" reported by providers are associated with higher payments.
Provider efficiency, therefore, leads to lower costs for all insurers.
A public plan does not earn profits
and has no imperative to do so, as most private plans do. This allows a public
plan to offer lower premiums. Estimates are that premiums in a public plan would
be 20-30% lower than those of private plans.
Lower premiums are better for the individuals who would be required to pay them,
and for the governments or employers who, depending upon the design of the
reform package, might be called upon to pay premiums on behalf of others.
A Public Plan Offers More
Stability and A Defined Set of Benefits that People Can Count On
A public plan would be available to
all persons in all parts of the country, regardless of the condition of their
health, thus providing medical coverage to a broad base of people. This would
permit a wide pooling of risks. Moreover, private plans can - and do - offer
benefits designed to attract less ill (and thus potentially less costly) people
by structuring their plans in certain ways. They do this even when a basic set
of benefits is required to be offered. A public plan would not do this, and
would offer a far more secure and stable source of health care coverage for
broad portions of the population.
In fact, many have wisely suggested
that any health care reform must require private plans to offer a basic set of
benefits, as opposed to some undefined "actuarial equivalent". "Actuarial
equivalent" means that the value of the package of benefits is the same,
although the package of benefits may exclude coverage of certain items.
This allows plans to avoid including benefits that best meet the needs of more
vulnerable people. This practice, sometimes known as "cherry-picking", has been
used by private plans in, for example, the Medicare Advantage program, to attract
healthier, less costly enrollees. The consequence of this is that a public plan
will end up with people who are more ill, and therefore will have to raise its
premiums. This must be avoided by establishing a level playing field for all
plans, public and private.
A public health option provides more
stability and continuity in health care than may be provided by private health
plans. Private insurance companies are free to enter and leave a market based on
their own business needs rather than the health care needs of their enrollees.
From 1996 to 2003, the number of what were then called "Medicare+Choice" plans
offered by private insurance companies went from 346 in to 151.
Analysts at the time attributed the insurance companies' decisions to stop
participating in Medicare to "local market considerations and corporate
considerations," including reductions in Medicare payment rates, pressure from
providers to be paid more, and markets that were not conducive for competition.
Indeed, private insurance companies continue to make decisions about their
participation in the Medicare program based on the same factors. As a result of
Congress’s decision to increase payment rates to Medicare Advantage plans in the
Medicare Modernization Act of 2003, the number of plans offered, and the number
of beneficiaries enrolled in those plans, has grown dramatically.
The enactment in 2008 of additional requirements for one type of Medicare
Advantage plan, however, has caused one major company to announce it will stop
offering that type of plan to Medicare beneficiaries in 2010. The company also
cites anticipated payment reductions as a factor in its decision.
The Public Likes Current Public
The AARP has found that 80% of people
with Medicare are either "extremely" or "very satisfied" with their health care
coverage and with access to their physicians.
This is a higher rate than that for 50 to 64 year olds with private insurance.
There is no reason to believe that a public plan, as part of national health
care reform, would not fair equally as well as Medicare in levels of customer
A public plan option offers many
advantages to a health care reform package in terms of cost control, stability
and customer satisfaction. Those who favor health care choice and competition,
but who oppose a public plan option, are not really in favor of free
competition: they are merely in favor of a limited choice that does not include
a public option, and which will ultimately cost patients and taxpayers more.
Americans are entitled to be offered and to decide what kind of health insurance
they want. If they do not want or like the public plan, they need not choose it.
But, given high levels of satisfaction with the current national public plan,
Medicare, no doubt many would choose a public plan. Perhaps this is the real
source of objection by some to a public plan: that it will be too good at
lowering costs and providing quality care to permit private plans to offer a
Health Policy Consultants' contacts in DC
indicate that a public option in health care reform is in jeopardy.
Is it possible that after all the problems Medicare has had with
private plans, and the plans' exorbitant additional costs, that we
will actually let corporate greed trump the interests of sick people
and taxpayers once again?
Read more on our blog.
 Marmor,T. et al., ‘The
Obama Administration’s Options for Health Care Cost Control: Hope Versus
Reality”, Annals of Internal Medicine, 150:7 (April 7, 2009)
Hacker, J., “Healthy Competition: How To Structure
Public Health Insurance Plan Choice to Ensure Risk-Sharing,
Cost-Control, and Quality Improvement”, UC Berkeley School of Law and
Institute for America’s Future, Policy Brief April 2009; available at
 For example, health care
expenditures in the United States in 2006 were 16% of gross domestic
product, as compared with Great Britain’s 8.4%. Numerous studies show
that the U.S. population is not sicker than the population of other
industrialized Western democracies, and that health outcomes in the U.S
are mediocre, as compared with the outcomes in those Western
democracies. See, Marmor, supra.
 Hacker, J., “Healthy
Competition: How To Structure Public Health Insurance Plan Choice to
Ensure Risk-Sharing, Cost-Control, and Quality Improvement”, supra.,
[citing The Lewin Group, “Cost Impact Analysis for the ’Health Care For
America’ Proposal,” February 15, 2008.
Accessed April 7, 2009,
http://www.sharedprosperity.org/hcfa/lewin.pdf; Karen Davis, “Public
Building Blocks in Health Reform,” Testimony before the Senate Finance
Committee, June 16, 2008.]
 Center on Budget and
Policy Priorities, Fact Sheet, “Using a Health-Insurance Exchange To
Pool Risk and Protect Enrollees”, April 14, 2009, available at
www.cbpp.org/cms/index.cfm?fa=view&id=2754 ; Hacker, J., “Healthy
Competition: How To Structure Public Health Insurance Plan Choice to
Ensure Risk-Sharing, Cost-Control, and Quality Improvement”, UC Berkeley
School of Law and Institute for America’s Future, Policy Brief April
Family Foundation, Fact Sheet: Medicare Advantage (Sept. 2005);
Mathematica Policy Research, Inc., Monitoring Medicare+Choice Fast
Facts (January 2002), available at
 AARP, “Access to
Physicians Survey,” Feb. 2007, 3. (cited in Hacker, J., “The Case for
Public Plan Choice in National Health Reform”, UC Berkeley School of Law
and Institute for America’s Future, Policy Brief (December 2008),