The option has limits

DURHAM --Senate Majority Leader Harry Reid has included a public insurance option in the Senate reform bill that has been submitted to the CBO for its assessment of the bills' impact on the federal budget. There has been far more heat than light in the debate about this development, as supporters and detractors are both overstating the importance of the version of public option that has been described.

The general idea behind the Senate bill is familiar. It involves creation of state-based insurance markets (exchanges) in which the uninsured and employees of small businesses can purchase policies sold with new consumer protections (no pre-existing conditions, guaranteed renewability, limitations in how much premiums can vary). Only one in 10 Americans would be eligible to purchase insurance through the exchanges, which will be provided by private insurance companies. The uninsured will receive subsidies to defray the cost of insurance that are based on their income; individuals are mandated to purchase coverage. And competition among insurers is hoped to reduce premiums, slowing cost inflation.

For competition to take place, consumers need choices, and in many states there is one dominant insurance provider, or a few. In North Carolina, the Department of Insurance says that Blue Cross and Blue Shield of North Carolina writes around seven in 10 group policies and virtually all of the individual policies. The argument is that a public insurance option will simply provide another choice to consumers.

The addition of the public option to the bill is garnering a great deal of attention, in part because the idea seemed dead just a few weeks ago. I support the inclusion of a public option in principle. However, I doubt whether the public option being considered will have much effect.

Deleting a Tax Subsidy from the EquationWhile the text of the bill is not public as I am writing this, the following seems reasonably clear. The envisioned public option would be a national insurance plan run by the federal government. States will be allowed to opt out, which would mean that this government insurance plan would not be available for purchase by the residents of any state opting out.

The public plan would have to sink or swim based on the choices of consumers; no subsidy of the public plan is allowed beyond premiums paid by consumers. The most important detail is this: the government insurance plan will have to set up provider networks and negotiate payment rates for doctors and hospitals, just as private insurance companies do.

The CBO has scored public insurance options that pay providers Medicare rates as reducing costs in other bills. However, Reid has rejected using Medicare payment rates. Requiring the public plan to negotiate rates removes its primary means of bringing about savings: paying providers rates already set by Medicare, and requiring those taking Medicare to take the public option, reducing the overhead associated with negotiation. It is unclear whether reasonable networks can be set up. Without a good network of provider options, few consumers will sign up for such a plan.

Both supporters and opponents of public option are being disingenuous. It is hard to argue with a straight face that if a subset of the 30 million Americans who can purchase insurance through the exchanges choose a government insurance plan, it will fatally wound the private insurance industry, free enterprise generally and (insert your biggest fear here). Especially when there are 105 million Americans today covered by Medicare and Medicaid.

But it is equally hard to argue that a government insurance plan that has to set up networks and negotiate payment rates from scratch will manage to compete effectively for customers. Medicare has no experience in doing this. States could be involved, and have some experience with Medicaid, but the point of the public option is to benefit from existing Medicare rates.

The inclusion of this public option (or not) is mostly symbolic. I don't think this watered-down version can pass the Senate. But even if it did, I suspect it would amount to much ado about nothing.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog www.donaldhtaylorjr.blogspot.com is available for discussion of this article and health care reform in general. This is part of a series of articles by Donald Taylor exploring aspects of the health care reform issue originally published in the News & Observer.