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Getting to a Public Option that Contains Costs: Negotiations, Opt-Outs and Triggers

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Document date: November 25, 2009
Released online: November 25, 2009

Abstract

This paper argues that the debate over the public option has gotten lost in rhetoric over the size and role of government. It underscores the central argument that a public option would likely have lower premiums than current private plans, with savings resulting from lower administrative costs, and average provider payment rates that are lower than what private plans currently negotiate. The authors also assess two approaches being considered to improve the political feasibility of a public option: (1) allowing states to opt out of a public option; and (2) delaying implementation of a public option until a triggering event related to health care costs occurred.


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Summary

The debate over a public option has essentially become a debate over the size and role of government in the health care system. The central argument, as we see it, should be one of fiscal conservatism—that a public option should play a role in addressing the very serious problem of health care cost containment. The current debate between the left and the right on this issue is obscuring the fact that consolidation in both the insurance and provider markets is propelling a higher rate of growth in health care costs. The consolidation of power, particularly in provider markets, makes it extremely difficult for insurers to negotiate rates for their services and contributes to rapid growth in health care costs. A strong public option is one that ties provider rates in some way to Medicare rates (though set at likely higher levels), and that is open to any individual or firm regardless of firm size. It would thus provide countervailing power to providers and help control cost growth.

We argue that a strong version is necessary because there is little else in health reform that can be counted on to contribute significantly to cost containment in the short term. Capping tax-exempt employer contributions to health insurance has great support among many analysts (including us), but it faces considerable political opposition. Proposals such as comparative effectiveness research, new payment approaches, medical homes and accountable care organizations, all offer promise but could take years to provide savings. Thus, the use of a strong public option to reduce government subsidy costs and as a cost containment device should be an essential part of the health reform debate.

We recognize that there is opposition to a strong public option. Both the House and Senate proposals are considering relatively weak versions to make the public option more acceptable. Both proposals would have the public option negotiate rates with physicians and hospitals. We see two problems with this. One is that negotiating rates is not simple and it raises difficult implementation issues; for example, with whom would the government negotiate? Further, negotiations are most likely to be unsuccessful with providers who have substantial market power. Since this is at the heart of the cost problem, a strategy of negotiations seems unlikely to be effective, as has been affirmed by cost estimates from the Congressional Budget Office.

The Senate has proposed a public option with an opt-out provision. This has the advantage of recognizing regional diversity in political philosophy by allowing states to pass legislation to keep it from being offered in their states. A disadvantage of this proposal is that it would exclude many who would potentially benefit from a public option. The states likely to opt out are likely to be those with high shares of low-income people and many uninsured.

The other alternative is to establish a strong public option but not implement it unless a triggering event occurred. The goal would be to allow the private insurance system to prove that it can control costs with a new set of insurance rules and state exchanges. The triggering events could be the level of premiums exceeding a certain percentage of family incomes or the growth in health care spending exceeding certain benchmarks. Since the public option would only be triggered because of excessive costs, however measured, we assume that a relatively strong version of a public option would come into play.

We recognize that taking a strong public option off the table may be necessary to enact reform legislation. But this will mean, at a minimum, higher government subsidy costs by not permitting a payer with substantial market power to bring cost containment pressure on the system. The outcome is likely to be that costs will continue to spiral upward. In effect, the nation would be relying on the range of promising pilot approaches to cost containment that would take some time to be successful. If they are not, we may be left with increasingly regulatory approaches, such as rate setting or utilization controls that apply to all payers. This would mean much more government involvement than giving people a choice of a low-cost public option that would be required to compete with private insurers.

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



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