The “public option,” a government-run health-insurance plan that competes with private plans, has been a big idea on the left in recent years. Matthew Fiedler of the Brookings Institution has a worthwhile new piece about what it would take to make this concept work.
This analysis considers how a public option would need to be designed to replicate Medicare’s ability to pay providers substantially less than private plans while still eliciting provider participation. In brief, I argue that a public option would likely need two key features. First, it would need to set prices administratively (as the Medicare program does) rather than through negotiations with providers (as private insurers do). Second, it would need to be impossible for a provider to serve patients covered by the public option’s private competitors without also serving patients covered by the public option.
Basically, the government would need to set rates by fiat and force health-care providers to take them. It couldn’t actually compete with private plans on equal terms.
The analysis then considers whether there is still a rationale for creating a public option if policymakers are unwilling to adopt these design features—or simply do not wish to reduce provider prices. I conclude that, without paying providers less, a public option likely could not set lower premiums than typical existing plans; its lower administrative costs and lack of a profit margin would likely be more than offset by disadvantages in utilization management, risk selection, and diagnosis coding. It might be able to offer lower premiums than existing plans that have broad networks and looser utilization controls, but at best only slightly lower. Thus, for this type of public option to create significant value, it would need to offer better coverage than existing plans (and convince consumers of that fact). A public option’s lack of a profit motive offers a reason it might offer better coverage, but far from a guarantee. In sum, while it is hard to envision this type of public option doing much harm, it also might not do much good.