If Congress creates a new national insurance exchange as part of health reform legislation, should a public plan be included as one of the options? That is the subject Jacob Hacker, Len Nichols, and Stuart Butler explored in a recent Health Affairs Blog roundtable. The full roundtable is posted here, and some of the highlights of the conversation are discussed below.

Hacker, a professor of political science at UC Berkeley, has been one of the leading proponents of the public-plan option. He has advocated creating a single national public plan that, while separate from Medicare, would be modeled on that program and would use its infrastructure.

In the roundtable, Hacker argued that a public-plan option would ensure “that Americans without insurance from their place of work [could] find a plan that offers quality affordable care through a broad choice of providers in all parts of the country. The central premise of having such a plan is that the private insurance market, even if regulated, is not going to have enough pressure on it to provide such affordable quality care without a public plan competing with it.” Hacker also said he sees the public plan as providing “a benchmark for private plans, showing them how to provide good coverage at a reasonable cost with transparency and stability.”

Nichols, the director at the Health Policy Program at the New America Foundation, also has been a leading advocate of a public-plan option, although the structure he sets forth differs significantly from Hacker’s proposal. Nichols has suggested creating a number of regional public plans modeled on the self-insured plans that many states offer their employees.

During the Roundtable, Nichols pointed to the skepticism many consumers have regarding the private insurance market. “Whatever those of us who have always had good insurance, and advanced degrees, and good employers think, there are a lot of people who don’t trust private insurance to follow the new rules that I think all of us would agree are going to be necessary to make insurance markets both efficient and fair. That lack of trust is a real phenomenon, and the public plan provides a kind of a safety valve, if you will, for people who are mistrustful of private insurance,” Nichols said. “In the long run if the rules are enforced appropriately as I expect them to be, the need for such a safety valve may diminish, but in the short run it’s real, and we have to take it very seriously,” he added.

Butler, vice president, domestic and economic studies, at the Heritage Foundation,  has been a prominent opponent of a public-plan option. He argued that a public-plan option was both unnecessary and counterproductive: “I view the emergence of the public-plan idea as a nuclear minefield on the road to getting agreement on universal coverage. I think there’s been a lot of progress already made in ways of assuring people there will be available plans. They’re looking at risk-adjustment mechanisms, they’re looking at an insurance exchange with certain rules, and so on. I think progress has been made with insurance companies towards guaranteed issue,” he said.

Will There Be A Level Playing Field?

Butler also expressed concern that, through subsidies and other mechanisms, the government would unfairly favor a public plan over private plans.  “When we have a situation where the federal government feels that a company like GM has to be supported to maintain competition, and to reflect political necessities, could we imagine that Congress would ever set up a public plan that is truly on a level playing field competing with other plans? I just can’t imagine that. And if that doesn’t happen, then it opens up the prospect of a public plan of the kind that Jacob envisions — more like Medicare — over time systematically pushing out the other plans in the so-called competition,” he said.

Hacker, however, pointed to Medicare Advantage as an example of an existing area of competition betwen public and private health plans that was, if anything, tilted in favor of the private sector. He suggested that the public and private plans would offer consumers a richer choice by bringing different advantages to the table. The public plan “will have very low administrative costs” and “will likely be one of the few plans available that will offer a broad choice of providers. It won’t have to pay profits.” Private plans, on the other hand, “will have the advantage of being able to construct tight networks of providers, and they’ll have the advantage of greater ability to innovate” and greater flexibility than the public plan.

Nichols also maintained that Butler was being too pessimistic about the possibility of a level playing field between public and private plans. He pointed to the public-private competition that exists in the 34 states where state-funded health plans for state employees compete directly with commercial plans in which insurers bear the risk.

Butler said he was impressed by Nichols’ proposal but suggested that the public plans it envisioned were public “in name only.” Nichols disagreed. The idea of a public plan “has political resonance because a lot of people fear that private insurance managers have an incentive to stint on care, and deny them care on the margin, and they fear this less when the government holds the insurance risk,” he said.

Cost Shifting And Cost Containment

Butler expressed concern that a Medicare-like public plan, as envisioned by Hacker, would impose low payments on providers that would force them to shift costs to other plans. Hacker disagreed. “I am not convinced that there is as much cost shifting from Medicare onto to private plans as many critics say, and I think there’s a real need for countervailing power in the market vis-à-vis providers who have grown much more consolidated over the last 10 or 15 years and have been able to keep rates very high, especially for specialty care,” he said.

Nichols offered a different cost-containment model, one based not on using short-run pricing power but instead on using Medicare as a catalyst, “like we did when we switched to paying hospitals through diagnosis-related groups (DRGs) in the mid-1980s.” Nichols said this decreased costs and increased quality, both inside and outside Medicare. 

“It turned out that we changed incentives sufficiently that hospitals got better at delivering care more efficiently to the under-65 population, so you had a large spillover effect in the private sector,” he explained. “I’m talking about kind of taking that lesson and applying it health system-wide, but starting within the Medicare program, and not starting with using the pricing power or leverage in the short run.”