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The Public Option

insurance company supporters

Despite all the talk (and yelling) about the public option over the past few months, there’s still a lot of confusion and fear over what exactly it is.  Democratic leaders think that the problem is with the name.  They think the word “public” scares people- or at least implies that it’s a program that will cost taxpayers money, like “public housing” or “public works.”  Lately, Nancy Pelosi has started calling it the “consumer option”  (whatever that means) while others in the House, trying to capitalize on the popularity of Medicare, have started calling it Medicare Part E (“E” standing for “everyone”– clever but wrong.  Not everyone is eligible, as we’ll explain in a minute).

We don’t think that all these new labels for an idea that everyone already knows as the public option is going to make it any less confusing (and NPR has our back on this one).  Instead, we’ll just try to explain it…

What is the Public Option?
The health care reform bill would create a health insurance exchange, where people who aren’t covered through their job could buy health insurance.  The public option is simply one insurance plan run by the government that would be available on the exchange, along with all the other private plans.  That’s all it is.  And like any other insurance company, it would be totally funded by people who are enrolled in the plan– not by taxes.

Why do people want a public option?
We think there are really two reasons- one is philosophical, the other is practical.

1. The Philosophical: We’ve all heard from those people who feel that the federal government can’t do anything right (thank you Fox News).  Bill Clinton said that since Reagan, some people think government would screw up a two-car parade, and definitely couldn’t be trusted to run health care.  (Although, since Hurricane Katrina and the financial meltdown, the group of people who are against any government intervention has gotten a lot smaller.  It turns out that most Americans think that government is good for some things- for example, we like to be rescued during natural disasters and we prefer our economy a little less collapsible.)

And while there are a bunch of people that don’t trust government to run health care, there are also a huge number of people that don’t trust private insurance companies at all.

Health care reform should eliminate a lot of the worst practices- no more refusing coverage for preexisting conditions, for instance.  But it doesn’t change the way the insurance industry makes its profits- they get to keep all of the money we pay in premiums that DOESN’T go towards paying for our care.  Even with health care reform they still have a huge incentive to screw us over when we get sick.

We also see that a single payer system has the potential to cover everyone for way less money than we pay now for private insurance.

With the public option, everyone gets a choice:

  • People who think government health care will be a disaster can still get private insurance; and
  • Those of us who don’t trust private insurance can get covered by the government plan.  And if the public option turns out to be cheaper and better than private insurance, who knows– maybe it could evolve into a single payer system.

Oh, speaking of faster and better, that brings us to #2…

2. The Practical: The public option could save a bunch of money.

For one thing, administrative costs for public programs are way lower.  There is some disagreement about how to calculate administrative costs, but whatever method you use, Medicare’s administrative costs are between 2% and 6% of total revenue, while the administrative costs for private insurance are anywhere from 7% to 30%.  It makes sense- a public option wouldn’t have to spend money on things like million dollar executive salaries, advertising, lobbying to kill the public option, etc.  In other words, even if the public option paid doctors and hospitals the same rate as private insurance premiums would still be lower.

Well, premiums would be lower if the public plan worked like a normal insurance company.  The Congressional Budget Office believes that premiums for the public plan might actually be slightly higher than the average private plan.  They explain:

The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and attract a less healthy pool of enrollees. (The effects of that ‘adverse selection’ on the public plan’s premiums would be only partially offset by the ‘risk adjustment’ procedures that would apply to all plans operating in the exchanges.)”

Translated into English: The public plan would have higher rates because it probably wouldn’t cherry pick healthier people.  In other words, insurance plans might have lower rates compared to a public option, not because they’re more efficient or better at controlling costs, but because they’d be better at dumping sick people onto someone else.

But private insurance tends to overpay for medical services- hospitals charge private insurance nearly 30% more than cost.  If the public option could pay Medicare rates plus 5% or 10% as was originally proposed, it would get a much better deal than private insurance companies.

Who would be eligible?
Anyone who’s eligible for the exchange.  The way the bills are written now, that would mean that only small businesses and individuals who don’t get health insurance through their job.  The number that gets tossed around a lot is that only 10% of the population would be eligible, but Maggie Mahar points out that it could actually be as high as 20 to 25% in the first year.  And eventually, the exchanges may be opened to all citizens.

How much will this cost taxpayers?
Even some Senators seem confused on this point.  For example, when Joe Lieberman announced that he would filibuster a bill with a public option, he said:

“Let’s give that two or three years to see how [the exchanges work] before we talk about creating another entitlement that will end up increasing the national debt and putting more of a burden on taxpayers.”

This is just crazy wrong.  Lieberman is either knowingly lying, totally ignorant of how the public option would work, or has some secret information that he’s not sharing with the rest of us. (We’d bet on one of the first two.)

A small amount of money would come from taxes to get the public option started, but after that it’s on its own- it would be funded totally by premiums, just like any other insurance company.  (It would even have to pay back the start-up money.)  But if it’s a better deal, it could save the government a lot of money.  Under health care reform, federal money will go to subsidize people who can’t afford insurance– but if the insurance is less expensive, that means more people can afford it…..and less money being paid in subsidies.

Even if it doesn’t pay providers rates based on Medicare and has slightly higher premiums, it could still save money like Obama says- by keeping insurance companies honest.  More about that later.

{ 2 comments… add one }
  • Steve Hamm November 24, 2009, 1:39 pm

    I’ve just read your post on the public option (PO) dated November 6th, prior to the Senate’s vote, because Google listed your page as a place to find out how it works. However, your description essentially appears to be an overview and not specifics. So what I’d like to know is:

    1) How would one enroll in the PO?
    2) How would premiums be determined?
    3) Who’s actually eligible for coverage?
    4) What would be covered – and what wouldn’t be covered, e.g., are annual or periodic examines covered?
    6) What are the provider choices, i.e., can participants choose their own doctors?
    7) Is there prescribed drug coverage?
    8) When would it go into effect?

  • Rob November 27, 2009, 2:23 pm

    Steve-
    Those are good questions. I bet a lot of people would be interested in the details of the public option, so instead of replying here in the comments, I’ll answer those questions in a separate post. Look for it early next week.

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