Would a Public Option Improve Obamacare?

Adding a government-run plan to Obamacare marketplaces could be less contentious today than it was six years ago. The bigger question is if it will work.

A series of recent developments show Democrats reviving their interest in a government-run “public option” for Obamacare.

In a much-discussed article for the Journal of the American Medical Association (JAMA), President Barack Obama endorsed the addition of a public option to the Affordable Care Act (ACA), while Democratic presidential candidate Hillary Clinton separately stated her support for a widely-available government-run health plan. Clinton also endorsed the idea of letting younger Americans enroll in Medicare starting at age 55, a position echoed in the 2016 Democratic Party platform.

The question of a public option was among the more fractious debates in 2010 when the ACA was first considered – one that almost derailed the entire legislation. While advocates argued a government-run plan would help keep premiums low, critics argued it would kill competition, not enhance it. Ultimately, the opponents won.

A renewed discussion of a public option could be less contentious this time around – particularly if it’s offered as a “fallback” in places where the ACA marketplaces are thin and private plans are struggling. This approach is what Obama suggested in JAMA. “[B]ased on experience with the ACA, I think Congress should revisit a public plan to compete alongside private insurers in areas of the country where competition is limited,” Obama wrote. “Adding a public plan in such areas would strengthen the Marketplace approach, giving consumers more affordable options while also creating savings for the federal government.”  In particular, Obama proposed a public option in places that now have fewer than three private plans for participants to choose from – roughly 12% of the country.

According to the Kaiser Family Foundation (KFF), as many as 664 counties could have just one issuer participating in the ACA marketplaces in 2017, up from 225 counties currently.  “Increasingly, there are regions, particularly in rural areas, where there are only one or two options, which isn’t sufficient for effective competition,” says Larry Levitt, Senior Vice President at KFF. In April, for example, insurance giant UnitedHealth Group announced it was dropping out of Obamacare in all but a handful of places because it was losing money – a projected $650 million this year.

In underserved areas like these, the introduction of a public plan might be less of a threat to private insurers as well as a boon to consumers.  “On the face of it, one benefit of [a public option] is that people will have a choice of plans no matter where you live, which is not the case currently,” says JoAnn Volk, a Senior Research Fellow and Project Director at the Georgetown University Center on Health Insurance Reforms.

As many as 664 counties may have only one insurer operating in the ACA marketplaces in 2017. These counties might be ideal for a public plan alternative.

A “fallback” public option also already exists under Medicare’s coverage of prescription drugs (“Part D”), which means Congress is no stranger to the concept. Under current law, Medicare has the authority to offer a government-run option where no prescription drug coverage options exist – although it has yet to exercise that power. As Obama noted in JAMA, Republicans supported the idea of a fallback in Medicare Part D, though they bitterly opposed one in the ACA.

But if the potential arguments in favor of a fallback public option are its limited geographical scope; its benefits to areas where choices are currently limited or non-existent; and the precedent set by Medicare Part D, a host of thorny details still remain. In fact, the same issues that defeated the public option the first time – such as the proper use of the government’s market power – are still potential minefields that could derail a public plan:

How would a public option be funded? 

“It’s not cheap to start an insurance company, which in effect is what a public option would be,” says Kaiser’s Levitt. “One of the challenges of a public option – assuming the Treasury would not be there to back it up – is how to create startup money to provide reserves so it can sustain any potential losses.”

The lack of sufficient reserves is what’s currently dooming the nonprofit health insurance “co-ops” authorized under the ACA as a compromise alternative to the public option. Of the 23 co-ops created, two-thirds have already failed, and the rest are in precarious financial condition. Any public option would require a substantial initial investment, plus plenty of reserves for absorbing losses until it can be self-sustaining.

Will doctors and hospitals participate? 

A second concern is how a public option would assemble its networks of doctors and hospitals to provide care – and how much it would pay them. If the plan doesn’t reimburse health care providers enough, they’ll have no incentive to join, and that means trouble attracting customers. “All health insurance is local,” says Georgetown’s Volk. “If I don’t have access to the doctors I want, it’s not going to be a viable plan for me.”

On the flip side, higher reimbursement rates could also mean higher premiums – also unattractive to potential consumers.  “The challenge of putting together a network is sort of a chicken and egg problem,” Volk says. “You want to be able to show providers that if they negotiate a certain rate with you, you’ll be able to steer a lot of patients to them to make it worth their while in volume. On the other hand, if you’re starting a plan and don’t have the patients, it’s a little hard to get a contract.”

The issues around creating provider networks and setting reimbursement rates could be especially acute in rural areas – the same places where private insurers are now struggling to survive. “The underlying health care market isn’t very competitive in rural areas,” says Kaiser’s Levitt. “There just aren’t very many doctors or hospitals. It’s very hard for insurers to create a narrower low-cost network of providers and be able to translate that into low premiums.”

Would a public option win over consumers? 

A third concern is whether enough Americans would find a public option appealing to sustain it financially.

One advantage a public option could have in comparison to a private plan is lower premiums. An analysis by the Congressional Budget Office estimates that a public option could potentially charge premiums that are 7% to 8% lower than that of private insurers, largely due to lower administrative costs. But this estimate also assumes that a public option wouldn’t have to spend much money marketing to find and woo consumers. Many private plans, for example, pay insurance brokers to help them recruit enrollees. If a public option needs to do the same, its expenses will also rise. Moreover, premiums might not be the only thing that matters to consumers in choosing a health plan.

“We don’t have a lot of analogies to a government competing head to head with a private company delivering the same product,” says Levitt. “I don’t think we know how consumers would behave. Would they see the government plan as somehow lower quality because it’s not a private sector product? Or would people feel better, safer, being insured by a government plan that’s not driven by profits?”

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Details such as these become especially salient – and far more controversial – if Congress were to consider a broadly available public option in every marketplace, rather than only as a fallback. On the one hand, too weak a plan could be ineffectual. “[I]f a public option is simply another health insurer, albeit run by the government… we shouldn’t expect such an option to have much impact,” said Michael Morrisey, who heads the department of health policy and management at Texas A&M University, in an email.

Morrissey, who also authored a report published by RAND and the Brookings Institution on the current state of ACA marketplace competition, said that unless a public option has some “comparative advantage” over private competitors, “it would probably be unsuccessful.”

That comparative advantage, for example, could take the form of subsidies from the Treasury to keep it solvent if it faces heavy claims, or the power to compel providers to join its network or accept its rates. “You could get very heavy-handed with the rules,” says Georgetown’s Volk.

But the exercise of governmental power to compel networks or set rates could also end up disrupting the markets where competition among private insurers is already currently robust. While some markets are seeing fewer choices, the Department of Health and Human Services (HHS) says the average consumer still sees an average of 10 insurers in their state, up from 8 in 2014. Moreover, roughly 20 million people have gained coverage since the launch of Obamacare, lowering the uninsured rate from 16% in 2010 to 9.1% in 2015.

“For most Americans in most places, the Marketplaces are working,” wrote Obama in JAMA.  In markets like these, a public plan that’s too aggressive could drive out private insurers and reduce the choices consumers currently have – thereby undermining a central achievement of Obamacare.

Proponents of a public option disappointed by its initial exclusion from the ACA may cheer the new progressive consensus in its favor. Nevertheless, advocates face a host of crucial decisions. Chief among these: How to design a public option that won’t also jeopardize what’s already the most significant health reform the country has seen.

Anne Kim

Anne Kim is Senior Writer at the Washington Monthly.