A Public Option Wouldn’t Just Compete With Private Insurance — It Would Destroy It

Congress is trying to chart a path forward on health reform. Some are pushing to expand Medicare’s benefits to include dental, vision, and hearing care. Others want to make generous subsidies for coverage sold through the Affordable Care Act’s exchanges permanent.

And recently, several congressional Democrats announced plans to draft a bill that would create a public health insurance option.

That’s bad news, given that a public option could destroy the private insurance market — and in the process, deprive the majority of Americans of the employer-sponsored coverage they’re comfortable with and like.

People like private insurance. According to polling data from March, two-thirds of Americans with employer-sponsored coverage are satisfied with their current plan. A similar share believes their employer-sponsored plan is high-quality.

Public option proponents don’t want to upset the more than 180 million people with employer-sponsored coverage. So they frame their offering as just another choice. Those who like their workplace plans can hold onto them if they want to. Those who don’t, or don’t have access to insurance coverage through work, can seek out the public option through the Affordable Care Act’s exchanges.

The public plan is also intended to check private insurers’ premiums. A government-run plan would have two distinct advantages over private plans.

First, a public option could simply offload its administrative costs onto federal taxpayers. Private insurers don’t have that luxury. So the public option would have a substantial structural cost advantage.

Second, it could dictate what it would pay healthcare providers. Most champions of a public option envision that it would pay rates similar to Medicare’s. Those rates are low. The American Hospital Association says hospitals receive just 87 cents from Medicare for every dollar in cost they incur caring for its beneficiaries. In 2019, those underpayments amounted to nearly $76 billion.

Private insurers can’t name their price. In fact, it’s healthcare providers who have insurers over a barrel. Private plans pay hospitals nearly two and a half times what Medicare does for the same service, according to a RAND Corporation study.

Because of its artificially low cost structure, the public option could permanently underprice private insurers. Over time, consumers would switch from more expensive private plans to the cheaper public plan. Private insurers would eventually have no one left to cover and would leave the market. By 2033, according to one study, there’d be no private plans available on the exchanges in 14 states.

So instead of enhancing competition in the individual insurance market, the public option would destroy it.

A cheap public plan would also prompt some employers, particularly smaller employers, to drop the plans they sponsor for their employees. Doing so could save them a significant amount of money. The chief reasons employers offer coverage is to compete for high-quality employees and to keep their workforce healthy.

They could use some of the savings to raise employees’ cash wages, but there’s no guarantee they will. And workers may be worse off, as they’ll have to use post-tax wages to pay for a public plan, rather than the pre-tax compensation they currently use for employer-sponsored coverage.

An analysis of one public option plan introduced in the House in 2019 found nearly one in four workers would lose their health coverage through work by 2023. By 2032, that figure would rise to one in three.

Some defenders of the public option claim it will give private plans, especially those sponsored by large employers, more leverage in their negotiations with doctors and hospitals. Private plans will be able to point to the low rates providers are accepting from the public option and say, “Hey — we want those rates, too.”

But only the largest employers have the kind of negotiating heft and sophistication to effectively haggle with doctors and hospitals over reimbursement rates, especially given that providers are rapidly consolidating.

Further, look at our existing public options — Medicare and Medicaid. Healthcare providers certainly haven’t proved willing to take government-style reimbursement rates from private plans. They’ve done just the opposite, as the RAND study illustrates.

The public option is back on Congress’ healthcare agenda. As of now, seven in 10 voters support it, according to a March Morning Consult poll. Those folks may change their mind when they realize that a public option could spell the end of private insurance.


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