Piercing the Fog of a Public Option

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A public option is only likely to expand overall health-insurance coverage to the extent that it is subsidized with additional funds.

Americans appear eager for more affordable health-insurance choices, but don’t want major middle-class tax increases or the government to ration their access to medical care. Whereas a November 2019 Quinnipiac poll found Americans opposed to single-payer proposals 36 percent to 52 percent, the same survey found them supporting the establishment of a public option by a margin of 58 percent to 27 percent.

The state of public opinion has caused Medicare for All advocates to repackage their preferred health-care reform as an ostensibly voluntary public option. The nature of a public option varies greatly depending on the extent to which it competes on a level playing field with private insurance. If it does, then it is unlikely to differ greatly from existing private plans in terms of costs or benefits. If a public option is greatly advantaged by subsidies, taxes, and regulations, relative to private options, then it would be likely to drive them out of existence altogether — leaving the country with a single-payer system, and the associated drawbacks.

A public option featured prominently in the 2009 debate over the Affordable Care Act, and was strongly supported by the AFL-CIO and the left wing of the Democratic party. It was included in versions of the legislation that passed the House, as well as the bill proposed by the Senate committee on Health, Education, Labor, and Pensions, before falling to a filibuster threat from Joe Lieberman.

Shopping for health-care plans can be a complicated experience laden with pitfalls, so there is something to be said for the government certifying a single specific option as trustworthy and the best value. However, plans on the exchange are already highly standardized by ACA regulations, and their premiums regulated by state insurance commissioners. The reason for their unpopularity is simply that their costs are so high.

Advocates of a public option, such as the Buttigieg campaign, argue that it could cut costs by eliminating administrative costs associated with private insurance. However, a public option would still need to bear most of the same expenses associated with advertising, enrollment of new members, and administration of claims that existing private options do. Indeed, the public option recently established by the state of Washington will do so simply by contracting with an existing private insurer. While a full single-payer system might trim some costs for hospitals dealing with multiple different payers, adding a public option alongside would not.

It is similarly argued, for example by the Biden-campaign website, that the “public option will reduce costs for patients by negotiating lower prices from hospitals and other health care providers.” For simple office visits, physicians fees paid by private insurers do not differ greatly from those paid by Medicare. But private insurers must often pay more than twice as much as Medicare for the same hospital services. This is because large fixed costs protect hospitals from being undercut by cheaper local competitors, while Medicare’s high patient volumes allow it to negotiate bearing a relatively small share of the overhead burden relative to other payers.

While a single-payer system might constrain the growth of costs by limiting the ability of hospitals to gain reimbursement to cover expanded capital investments and labor costs, a public option competing on level terms with private plans would not. Hospitals might simply focus on treating privately insured patients if a public option fails to pay market rates — making it the narrowest of narrow-network plans. To guarantee access to care, Washington state’s public option therefore establishes a payment floor and only proposes to cap payments to hospitals at 160 percent of Medicare rates — a level which does not differ greatly from the average currently paid by individual market plans, but which may yet be revised upwards.

Pete Buttigieg argues he is unwilling to “command people to abandon their private care” and advertises a preference to “trust the American people to make the right choice for them.” But the public-option proposals advanced by candidates Buttigieg and Warren do not advocate a level competitive playing field between private and private plans. Rather, they propose substantial subsidies and regulatory advantages for the public option — enabling it to offer better benefits at a lower cost to enrollees. As Warren’s public option is overtly advertised as a “transition” to single-payer, this ought to be no surprise.

Buttigieg’s proposal would allow individuals to opt out of coverage provided by their employer and use associated pre-tax funds to buy into a public option. It would also allow and encourage employers to force all their staff into the public option. With such options available, employers may seek to cut back health-care benefits so that sicker staff opt for the public option — causing employer-sponsored insurance (which currently covers 90 percent of privately insured Americans) to unravel. The absence of details of how Buttigieg would seek to avoid this eventuality suggests that he is as willing as Warren to induce the collapse of private insurance.

A public option is only likely to expand overall health-insurance coverage to the extent that it is subsidized with additional funds. The more a public option is able to achieve the increases in coverage and benefit generosity promised by single-payer, the more it is likely to yield the associated disadvantages of tax increases or cutbacks in access to quality medical services.

Chris Pope is a senior fellow at the Manhattan Institute.

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