As the spotlight shifts from the Republican to Democratic convention, Hillary Clinton’s plans for health care reform, including a proposed new “public option” for health insurance for some Americans, may draw greater attention from voters.
This option would offer a government-run health insurance plan that would be in direct competition with other options offered by private health insurers. It would be provided through the federal and state health insurance exchanges operating under the Affordable Care Act. The public option could be structured similarly to the Medicare program, the federally funded health insurance program for senior citizens and persons with certain disabilities.
As health care policy experts who have studied and analyzed insurance coverage for over 20 years, we will explain the public option in greater detail.
Public option originally considered in ACA debates
The health insurance exchanges under the ACA provide a competitive marketplace in which individuals and families who have incomes above the poverty level, but no access to employer-sponsored insurance, can buy private insurance from companies. The exchanges also provide premium subsidies for households that earn between one and four times the federal poverty level if they are not eligible for Medicaid. The federal poverty level varies by family size. For an individual, this range is from US$11,880 to $47,520.
As part of the ACA, 31 states have expanded Medicaid to adults with annual incomes below 138 percent of the federal poverty level (less than $16,400 for an individual). Residents who fall below the poverty level in the 19 states that did not expand Medicaid are ineligible for subsidies.
In the debate leading up to the passage of the ACA in 2010, Congress considered whether to allow only private insurers to offer coverage or whether to also include a “public option” in each exchange. Ultimately, the public option was not included in the ACA. Concerns included the effect of the public option on competition with private insurers. Also, some worried that a public option would provide inadequate payments to physicians and hospitals.
Still others worried that the public option would accelerate a transition to a single-payer system. A single-payer system is one in which a government or quasi-government agency arranges for financing of health care for all eligible persons. Bernie Sanders' “Medicare for All” proposal is a recent example.
The public option would further the primary goal of the ACA by expanding health insurance to as many Americans as possible, by offering an additional coverage option not currently available. But given Congress' historical opposition to the public option and the ACA, the most likely route for public health insurance would be through states.
Expanding health insurance options for more Americans
Hillary Clinton has recently endorsed two forms of a public option. First, she has proposed adding a public insurance option in each exchange, much like the original proposal in the ACA.
Second, she has proposed allowing persons aged 55-64 to “buy in” to Medicare, meaning they could have the option to get health insurance that way. This was also considered but not included when Congress was developing the ACA. The details of these proposals, most importantly the level of public subsidies people would receive and how providers would be paid for their services, have not been specified.
The success of the exchanges is predicated on maintaining sufficient competition between insurers on premiums, provider networks, and other plan characteristics. Therefore, the primary rationale for a public option is to provide a “backstop” in markets where few insurers offer plans on the exchange. That is, if prices are high in certain areas because of a lack of competition among insurers, people could turn instead to a public option.
To gain enrollment, private plans would presumably have to offer premiums, cost-sharing, provider networks and service levels at least as desirable as those offered by the public option. Cost-sharing is the amount a person pays for certain services not covered by insurance, such as deductibles and co-payments.
Other provisions of the ACA were designed to mitigate some of the effects of inadequate competition on premiums. States must approve the premiums that exchange plans charge members. Also, the ACA’s provisions on medical loss ratios require plans to spend at least 80-85 percent of their premium revenue on medical care.
The ACA, however, doesn’t directly address other potential adverse consequences of limited market competition, such as poor customer service or inadequate provider networks. There have been complaints about both. Adding competition from a public option to markets where there’s little or none from private sources may produce desirable effects.
In addition to changing the dynamic in areas with little competition between insurers on the exchanges, a less recognized area in which a public option may be beneficial is in markets with little provider competition, such as those with one or two dominant health systems. Private insurers may not be able to negotiate favorable terms with doctors and hospitals in such markets, resulting in high premiums even if the insurance market is competitive.
But public insurance programs generally pay providers based upon an administratively determined fee schedule. As long as that fee schedule is sufficiently generous to ensure high participation by providers, as it is with Medicare, a public option may provide a means of controlling prices in markets where providers would otherwise have great leverage in negotiations.
As insurers exit some markets, a public option could be important
Since we now have several years of experience under the exchanges, we can assess the potential value of a public option a bit more concretely than when the ACA was being drafted and debated.
In 2016, 12.7 million Americans were enrolled in private insurance plans through ACA exchanges. Two percent of them lived in counties in which only a single private insurer offered plans on the exchange, and another 13 percent resided in counties in which only two insurers were available.
Given developments such as the recent announcement by United Healthcare of its intent to exit from some or all of the state exchanges in which they had operated, the share of the population covered through the exchanges facing a choice of plans from only one or two insurers could rise to 11 percent and 18 percent, respectively, in 2017.
Given what we now know about insurer participation, a more limited version of the public option is possible, where the public option is used as a fallback only in areas where private competition is deemed inadequate or costs are unusually high.
This experience stands in contrast to the Medicare Part D drug benefit program in which a large number of private plans are offered by multiple competing insurers, ranging from 19 to 29 plans in all regions of the country.
What’s the price tag?
Because the details of Hillary Clinton’s proposals for a public option and Medicare buy-in have not been released, precise estimates of the cost to the Federal budget and the level of take-up by the public cannot be made.
However, we can draw some tentative conclusions if we assume that a politically acceptable proposal would try to create a relatively level playing field. That would be one that neither strongly favors nor disfavors the public option relative to private plans.
Under a level playing field proposal, the premium subsidy received by any household would be independent of whether they chose the public option or a private plan. Therefore, the primary cost to the federal budget would be similar to that under a system with only private insurers. For 2016, the federal government is projected to spend $300 billion in subsidies for health insurance.
However, secondary effects could occur if a public option influences premiums or enrollment. To the extent that a public option enhances competition in areas with only one or two private insurers, premiums would be expected to decrease on average. This would also reduce the federal premium subsidy per enrollee, which is based on the second least expensive “silver” plan on the exchange. With a decrease in premiums or increase in choice with a public option available, overall exchange enrollment might also increase as some households that did not previously opt for coverage join a plan.
While that would undoubtedly raise federal outlays, it would also improve the attainment of the ACA’s primary objective of increasing coverage.
Why add a Medicare buy-in?
A Medicare buy-in, in which 55- to 64-year-olds can choose Medicare, may seem unnecessary in conjunction with a public option being added to the exchanges. The public option might even be structured largely along the lines of the Medicare program, effectively turning it into a Medicare buy-in available to all ages.
The public option, however, doesn’t necessarily have to be be structured similarly to Medicare. For example, it may feature narrow provider networks like those of many lower cost, private plans offered on the exchanges. If it is not structured like Medicare, with plenty of options, a Medicare buy-in may appeal to older adults with established care relationships.
In addition, the 55-64 year old age group is more expensive to insure than younger exchange customers. If the public subsidy for the Medicare buy-in was set at the same level as the premium subsidy for plans purchased on the exchange, that would imply that older adults who select the Medicare buy-in would face higher premiums out-of-pocket than they would pay for an exchange plan. Therefore, a Medicare buy-in may not be attractive to many potential enrollees unless premium subsidies exceed those offered on the exchanges. Larger subsidies, of course, would add to the cost to the government.
Can a public option actually be enacted?
While a public option could have financial benefits for consumers seeking coverage, the prospect of Congressional approval does not appear favorable even if Hillary Clinton is elected this fall. Unless Democrats regain comfortable majorities in both the Senate and the House, they are unlikely to marshal sufficient votes for a public option in the insurance exchanges or a Medicare buy-in option for 55- to 64-year-old adults.
A more likely opportunity would be for an individual state, such as California or Vermont, to propose its own public option and seek federal approval to implement it in its state-based exchange. Thus, the best prospect for a public option may reside with state proposals to a receptive executive branch to test this approach.