Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?

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Posted to Web: March 18, 2009
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Update, March 18,  2009:
Whether a public health insurance plan that competes with private plans makes sense is becoming a highly contentious issue in the health reform debate. Conservatives strongly oppose a public plan on grounds that it could lead eventually to a fully government run system. Many on the left have a strong distrust for private insurance plans and argue that all people should have access to a plan like Medicare.

We argue here that a public plan is probably essential to effective cost containment given the extensive provider consolidation of the past decade. A public plan would offer the promise of better control over hospital and other provider payments and would increase effective competition in the health care system without threatening high- quality efficient private insurers.
—John Holahan and Linda Blumberg


Senator Barack Obama, along with others, has proposed developing a public plan that would compete with private insurers within an organized health insurance marketplace. The argument is that a public plan would have lower administrative costs and more ability to control provider payment rates. This paper assesses these arguments concluding that there would be administrative cost savings and lower provider payment rates but not as much as is often asserted. Strong private insurers that offer good value for premiums charged would survive. But most important, the amount of real competition in both insurance and hospital markets would be enhanced.


Senator Barack Obama has proposed having a public plan available to those seeking coverage in a purchasing arrangement, such as the Federal Employees Health Benefits Plan. Senators Hillary Clinton and John Edwards had similar proposals.  In the academic world, Jacob Hacker of Yale University has articulated the same proposal in his Health Care for Americans plan. Likewise, the reform approach we (with Len Nichols of the New America Foundation) outlined in 2001, under the auspices of the Robert Wood Johnson Foundation’s Covering America project, would have required each participating state’s purchasing pool to include its own managed fee for service plan.

The basic idea behind this approach is to develop a government-funded plan that would follow the traditional Medicare program in many respects and would compete with private insurers for covered lives. It could be modeled after the traditional Medicare program, but that is not a necessity; other government self-funded plan models are possible. Using the Medicare example, the plan could use Medicare’s evolving systems of payment for hospitals, physicians, and other providers. The levels or rates of payment could be the same or perhaps somewhat higher than Medicare but lower than typical private payments today. The public plan could also use Medicare policies to determine what types of services, including new procedures and technologies, would be covered, and it could take advantage of Medicare research on medical homes, chronic care coordination programs, and health information technology and adopt them when cost-effective. Benefits would differ from Medicare in that they would be structured more like typical employer-based insurance, including pharmaceuticals, out-of-pocket maximums, and common levels of cost sharing. The expectation is that the administrative costs of the public plan would be below those of the private competitors.

The intent of the competing public plan is to use the administrative efficiencies of government-run health insurance plans, as well as the purchasing power of government to control costs. The underlying argument is that individual insurers do not have (or are unwilling to use) the market power to counter the pricing power of many hospital systems or physician specialties. This seems likely to remain true even if reforms lead to more aggressive competition in insurance/managed care markets. Thus, the power of a larger purchaser motivated to contain costs is needed to control rising health care expenditures.

The concerns over the use of a public plan are that its purchasing power will be overused and will lead to the elimination of the private market and to a government-run health care system. The overuse of monopsony power, seen by some as inevitable because of budgeting constraints, could then lead to reduced access, lower quality, and the explicit rationing of health care due to constraints on supply and financing. There is also concern that government plans have unfair advantages over private plans: they don’t need to maintain reserves, earn profits to attract capital, or pay premium taxes.

(End of excerpt. The entire report is available in PDF format.)

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