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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.[1] 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 democracies. [2] Moreover, the U.S. public is increasingly concerned about health care costs, and many are postponing obtaining care due to the high costs associated with it.[3]


Reduced Costs Associated With a Public Plan

  • Lower Administrative Costs

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%.[4] Compare that with administrative costs of around 16.7% (6.6% for profits and 10.1% for nonmedical expenses) for private Medicare Advantage plans.[5]

  • Ability to Negotiate Lower Prices From Health Care Providers and Drug Manufacturers

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.[6]  Provider efficiency, therefore, leads to lower costs for all insurers.

  • No Need to Turn Profits Means Lower Costs and Lower Premiums

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.[7] 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

  • Wide Availability of A Public Plan Results in Wide Pooling of Risks

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.

  • Standard, Stable Set of Benefits With Level Playing Field for All Plans

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.[8]  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.[9] 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.[10] 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.[11] 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.[12]


The Public Likes Current Public Plans

  • The American Public Is Very Satisfied with Medicare, the Best Known Public Plan

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.[13]  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 satisfaction.




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 profitable alternative.

CMA 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.

[1] 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) available at; 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

[2] 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.

[3] The Henry J. Kaiser Family Foundation,  Tracking Poll: Consequences of Health Care Costs, (February, 2009) , available at

[4] Kaiser Family Foundation;  Financing Medicare:  An Issue Brief (January 2008); available at  Medicare Payment Advisory Commission (MedPAC), "Report to the Congress: Medicare Payment Policy" (March, 2005), available at NOTE: some economists argue that these costs are actually too low, but even if they were to be increased significantly, they would still be far lower than those of private plans.

[5] Medicare Payment Advisory Commission (MedPAC), "Report to the Congress: Medicare Payment Policy" (March 2009), available at

[6] Medicare Payment Advisory Commission (MedPAC), "Report to the Congress: Medicare Payment Policy" (March, 2009), available at

[7] 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,; Karen Davis, “Public Programs:

Critical Building Blocks in Health Reform,” Testimony before the Senate Finance Committee, June 16, 2008.]

[8] Center on Budget and Policy Priorities,  Fact Sheet, “Using a Health-Insurance Exchange To Pool Risk and Protect Enrollees”, April 14, 2009, available at ; 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;

[9] Kaiser Family Foundation,  Fact Sheet:  Medicare Advantage (Sept. 2005); available at

[10] Mathematica Policy Research, Inc., Monitoring Medicare+Choice Fast Facts (January 2002), available at

[11] Kaiser Family Foundation, Fact Sheet:  Medicare Advantage (Sept. 2008),

[12] Health Net Producer Fact Sheets: Health Net Exits PFFS in 2010, available at

[13] 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), available at


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