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There's a simple fix for Obamacare's current woes: the public option

Javier Zarracina/Vox

This week, Aetna announced it would stop selling insurance plans in all but four Obamacare exchanges, the state-run markets set up under the 2010 Affordable Care Act. Aetna, which now covers more than 800,000 people in 15 exchanges, said it had been hemorrhaging money on the plans. (A fight with the government over an acquisition of the insurance company Humana may have played a role, too.)

Aetna’s exit, following similar departures by UnitedHealth and Humana, means that a growing number of US counties — 20 to 25 percent, according to the Kaiser Family Foundation — now have only a single private insurer offering coverage on the exchanges, a development that essentially eliminates consumer choice. One county in Arizona now has no insurers. Even before Aetna’s decision, more than half of state exchanges had four or fewer insurers, with DC, Vermont, Connecticut, and Rhode Island having only two.

It’s enough to make a frazzled health care consumer in one of those feeble markets wish there were another option — perhaps even (dare one say it?) a public option. Does the phrase ring a bell? That’s the health care policy that some policymakers pushed to include in the 2010 law.

I know the history well, because I was the guy reporters called the "father of the public option," and my intellectual offspring got slaughtered: After much debate and logrolling, it was left out of the bill that passed.

Since the early 2000s, I had been calling for letting the public sector compete with private insurers to sign up people younger than 65: not "Medicare for all," a dream of the left for decades, but "Medicare for more," a public insurance plan for working-age people that could compete with private insurers and use its bargaining power to push back against drugmakers, medical device manufacturers, hospital systems, and other health care providers.

During the 2008 presidential campaign, both Hillary Clinton and Barack Obama embraced the idea. When Obama took office and made health care reform a top priority, the fight was on.

The plan that passed out of the House in late 2009 had a public option. In the Senate, however, Joe Lieberman said he wouldn’t cast the 60th Democratic vote to end Republicans’ filibuster unless it was dropped. "Let’s give [the rest of the law] two or three years to see how it works," he said in his usual fair-minded way, "before we talk about creating another entitlement that will end up increasing the national debt and putting more of a burden on taxpayers."

Six years later, the issue is back on the Democratic agenda

Well, it’s taken more than "two or three years," but we’re talking about the public option again. Clinton embraced a vague version early in her campaign. But in the negotiations with Sen. Bernie Sanders that led up to his endorsement, the Clinton approach became significantly more specific. Now she says she will give "Americans in every state in the country the choice of a public-option insurance plan."

(Clinton has also said she would "expand Medicare by allowing people 55 years or older to opt in." Ironically, back in 2009, such a Medicare "buy-in" was an alternative to the public option floated by Sen. Sherrod Brown to get Lieberman on board. Lieberman rejected it. Now Clinton is calling for both a buy-in and a public option.)

President Obama is also reaffirming his support for the public option. In an article in the Journal of the American Medical Association, the "doctor in chief" extolled the health law’s achievements — which include a 43 percent reduction in the share of Americans lacking health insurance and no spike in health costs, but he also called for improving the law by adding a public option, albeit only in places where competition among private insurers is anemic.

In short, if you’ve forgotten what the great public option debate of 2009 was all about — or you weren’t really paying attention the first time around — it’s time for a refresher. The case hasn’t changed much since I first started making it more than a decade ago. But the evidence that we need a public option has gotten much stronger.

It emerged amid the rubble of Bill Clinton’s defeated health plan

I certainly wasn’t the only person arguing for a public option back in the 2000s, nor did I come up with the label, whose provenance remains hazy. But I did write some of the key briefs outlining what such a plan would look like and why it was needed.

For those who missed these scintillating analyses the first time around, I’ll start by explaining what we public option advocates wanted, move to what we ended up with, explain how an updated public option could improve our current system, and, finally, suggest how we might get there given political constraints.

Joe Lieberman, speaking during a Congressional hearing.
In 2009, President Obama couldn’t persuade Sen. Joe Lieberman to accept a public option.
Alex Wong/Getty Images

When Democrats started to recover from the abject defeat of the 1993 health plan proposed by Bill Clinton, they divided into two broad factions. The first recommitted itself to the party’s historical goal of a universal Medicare-like plan — although confusingly this was often called "single-payer," which is like selling a house by talking about its plumbing.

Advocates for this option, who tended to lean left, pointed to positive evidence from countries like Canada and France and to Medicare’s own history. They made the case that such public programs are more cost-effective than systems based on private insurance due to lower administrative costs and the greater ability of a broad public insurance program to bargain for lower prices.

The second group of advocates — chastened by their 1990s experience and generally more skeptical of government — wanted to start where the moderate Republicans of the 1990s had left off. Their plan offered a triple package of sorts.

The first item in the package was subsidies to defray the premiums of private insurance, so low- and middle-income people could afford it. The second was some kind of regulated marketplace for buying that insurance, so no one could be denied coverage or charged exorbitant rates. The last item in the package was a requirement on individuals to have coverage, so both healthy and sick people would be part of the same broad insurance pool.

Crucially, this was the direction Massachusetts went under Gov. Mitt Romney in 2006, with strong results. Unlike in Massachusetts, however, most Democrats in this more centrist group also wanted employers — at least the largest employers — to pay a significant penalty if they didn’t offer coverage, so they wouldn’t drop insurance and let their workers enroll through the new regulated marketplace.

The public option fixed a problem with the "Massachusetts model"

But there was a serious problem with the Massachusetts model: While the state had expanded coverage, it hadn’t really dented its high medical prices.

Here’s where the public option came in. If you create a regulated marketplace for people who don’t receive insurance at work, why not include a public plan in the mix? Same subsidies for low- and middle-income subscribers, same rules on coverage. But a public plan would hold down costs more through insisting on lower prices than through microregulation of patients and clinicians or extremely restrictive networks of providers

In my proposal, the public option would have built on Medicare’s payment system, and it would have been available to anyone who obtained coverage through the regulated marketplace. Medicare, I pointed out, had pioneered a system through which hospitals were paid on the basis of a patients’ initial diagnosis — "diagnosis-related groups" — rather than for every single service they delivered, an approach that private insurers soon emulated.

It also led the way in figuring out how to create regulated marketplaces for private insurance plans, opening up new private options for older Americans. And it had been moving gradually — too gradually, I argued — into doing effectiveness research, paying for better health outcomes, and "bundling" payments for entire episodes of care, such as a hip or knee replacement.

To the single-payer crowd, the public option wasn’t as large as they wanted. On the other hand, to the group that held up Massachusetts as a health reform model, it was overkill.

But it had three major things going for it. First, cost: The public option would be a large plan with the bargaining power to restrain prices. The Congressional Budget Office consistently "scored" it (and continues to score it) as producing significant savings relative to private insurance so long as the payment rates were pegged to Medicare’s. (I argued for rates 5 to 15 percent above Medicare’s.)

And although the public option would be government-run, a big part of its appeal was that it would create more competition in the system.

Much of the country doesn’t have a lot of insurers (and, no, one insurer offering lots of plans doesn’t count). Plus, it’s always easier for insurers to make money by trying to enroll healthy people or imposing sneaky limits on benefits than by innovating in all the other ways we might celebrate.

The public option wasn’t a cure-all for either problem. But it would reassure consumers that they didn’t have to rely solely on private insurers and set a benchmark for what a good basic plan should look like.

Which brings us to final merit of the public option: It softened the hard truth that Americans were going to be forced to buy private health insurance. The public option meant people had another choice: a nonprofit, democratically governed plan that would be modeled after a program most Americans love. Which helps explain why, from day one, it polled extremely well.

Here’s why we need it now

Of course, despite favorable polling — and the inspiring commitment of grassroots advocates — the public option didn’t make it into the health care law. But that doesn’t mean it’s not still a good idea —one that would remedy some of the weaknesses of the current, vastly improved, system.

Five years later, the 2010 law has been far more successful than its critics and even many of its supporters anticipated. Despite its shambolic launch and the refusal of 19 states to expand Medicaid, it has come close to achieving initial forecasted reductions in the number of uninsured. And it has come in well under budget, saving a projected $150 billion between 2016 and 2019 relative to initial estimates.

Amazingly, according to recent calculations from the Urban Institute, total health spending is expected to total $2.5 trillion less between 2014 and 2019 — an amount roughly equal to one-seventh of US GDP — than was projected in 2010.

So why is the public option back on the agenda? One reason, of course, is politics: Sanders’s challenge from the left pulled Clinton toward him on a number of issues, including health care. But as the full effects of the 2010 law have become clearer, the substantive case for the public option has also grown stronger. Indeed, every one of the original arguments for the public option looks more valid today than it did then.

Hillary Clinton and Bernie Sanders, together on stage. She appears to be about to pat him on the back.
Feeling pressure from the left on health care, Hillary Clinton finally embraced the public option.
Jewel Samad/AFP/Getty

Lack of insurance competition? The insurance market has actually grown more consolidated since the law reform passed. The big issue isn’t the number of insurers, much less the number of plans offered by each (in general, more plans add unnecessary complexity and increase risk segmentation). It’s the concentration of enrollment.

In 2014, the four largest insurers covered 83 percent of the market nationwide. In 2006, they covered 74 percent. Nationally, Blue Cross and its for-profit affiliate Anthem dominate more than half the market. In a lot of the country, we’re getting single-payer health care — it’s just a private insurer that’s doing the paying.

Private prices out of control? We certainly haven’t solved that problem. The International Federation of Health Plans publishes a list of prices for common drugs and services across the advanced industrial world. The data can be summed up quickly: Virtually everything — every procedure, every drug, every day in the hospital — costs much, much more in the United States.

Medical prices are even more ridiculous than you think

In fact, my Yale colleague Zack Cooper has recently offered shocking new details about America’s perverse pricing. Using the claims data of large private insurers, he’s shown that private prices are not only high but also unbelievably variable.

For example, hospitals' prices for knee replacements vary by a factor of more than 17 across the United States, from $3,274 to $55,825. In contrast, the hospital reimbursements paid by Medicare — which bases its rates on labor and supply costs in a particular region — vary by a factor of 3. What this means in practice is that if you live in Fort Worth, Texas, a knee replacement will set you back a whopping $43,720, on average. In St. Louis, Missouri, the average cost is a much more reasonable $14,851. Meanwhile, Medicare rates for knee replacements are around $12,00 in both cities.

These numbers explain why economists once believed, wrongly, that different levels of health care utilization drove regional cost differences. They were looking at Medicare’s spending patterns in their studies, and Medicare limits price variation. When you look at the private sector, however, what drives spending is prices, not volume — and not quality either. Across regions, prices have little or no relationship to the quality of care received.

Instead, they’re highest where hospital systems and doctors groups are consolidated. That may be a good reason for providers to charge more. It’s not a very good reason for patients to pay more.

Unfortunately, the concentration of health providers is increasing even faster than the concentration of health insurers. In the New Haven region where I live, for example, Yale’s medical system now owns essentially all the major hospital facilities. It doesn’t really matter how many insurers there are. Competition doesn’t work when there’s only one supplier.

All of this points to the relative strength of Medicare. Compared with other public programs (or other nations’ health systems), Medicare is an expensive program. But compared with American private insurance, it’s freakishly efficient. Its prices are more rational, generally lower, and growing less quickly. Looking at coverage for the same benefits, Medicare’s per-enrollee spending has grown substantially more slowly than private insurers'.

This is all the more notable for two reasons. First, Medicare initially just paid whatever providers charged; it only started to bargain for lower prices in the early 1980s. Second, as it stepped up its game, private plans adopted many of its innovations (and they will surely continue to do so as Medicare pursues more efficient payment methods, such as its current experiment "bundling" payment for extended episodes of care like hip replacements — an alternative to a pure fee-for-procedures approach).

Private plans have borrowed Medicare’s payment methods. What they lack is its enormous bargaining power.

Some critics of Medicare say the program’s prices are lower only because it shifts costs onto the private sector. But that’s at odds with the evidence. Efficient doctors and hospitals make money by serving Medicare patients, and the share of providers taking such patients has remained stable — not what you’d expect if the program were bankrupting providers.

It’s true that providers want to be paid more than Medicare pays. No surprise there. And it’s true that where providers are consolidating, the price gap between Medicare and private plans is growing. But that’s because private rates are too high, not because Medicare rates are too low. This growing gap poses political and policy questions. But it certainly doesn’t mean we should give up on price restraint.

The public option remedies flaws in the public exchanges

In one way, the case for the public plan has changed — in a way that makes the case stronger. The health care marketplaces set up under the 2010 law haven’t enrolled as many people as expected. That’s in part because Medicaid has enrolled a greater share of lower-income Americans than anticipated (again, despite red-state recalcitrance), mostly due to higher-than-expected unmet need.

It’s also because enrollment in private employment-based coverage has remained more stable than anticipated, mostly due to lower-than-expected cost growth. Neither is a bad outcome, of course, but the result is that the state-based marketplaces are smaller and the insurance plans within them less stable than would be ideal.

In addition, these plans have generally underestimated how much they need to spend on their enrollees, and are either abandoning ship (Aetna, UnitedHealth) or scrambling to hold down costs. The main way they’re doing so is by limiting their provider networks — that is, who you can go to for care.

In principle, smaller networks can be higher-quality when care is closely coordinated and only high-value providers are selected, as in some HMOs. In practice, it’s mostly meant restricting participating providers to those willing to give big discounts and leaving patients to manage the inconvenience of dealing with small networks.

Patients have often ended up holding the bag when they (sometimes unwittingly) receive so-called out-of-network care. There’s nothing particularly efficient or appealing about this, and it’s going to get worse.

Enter the public option. Health care markets will inevitably differ from region to region, but there’s no reason every one of the existing marketplaces couldn’t offer a Medicare-like plan — a plan that’s stable; a plan with predictable costs; a plan that gives patients a broad choice of providers just as Medicare does.

Here again, there are important questions: How should the public plan be priced? What should it pay doctors and hospitals? But in the face of all these private market developments, the case for the public option is stronger, not weaker.

How we get there

The public option is about as simple as health policy gets. Thanks to the Affordable Care Act, we already have a system for subsidizing coverage for low- and middle-income Americans and a set of regulated portals for enrolling those Americans in private insurance plans that meet minimum standards. These could easily be adapted to incorporate a national public option.

(The same approach would work for enrolling 55-to-65-year-olds in Medicare, though here a special issue is how to make such a buy-in affordable for subscribers and taxpayers, given that higher-cost patients are most likely to enroll.)

Moreover, this national plan could easily build on Medicare’s existing infrastructure. Medicare is a going concern, with established systems for patient management and provider reimbursement (which actually use private insurers as intermediaries). Why come up with some fancy new system when there’s already one that people know and like?

That said, the public option will need to be distinct from Medicare in several key respects. As already noted, it should pay providers slightly more to entice them into the system. It should also cover a broader set of benefits. (Medicare should cover some of these benefits too — it’s high time it started insuring prescription drugs directly.)

Also, Medicare currently offers enrollees the option to sign up for several private plans. Since the public option will be offered alongside private plans within the regulated marketplaces, there’s no reason enrollees in it should get access to those private Medicare plans.

Health Care Activists Conduct Sit In At An Aetna Insurance Office
In 2009, health care reform supporters occupied the lobby of a building housing an Aetna insurance office.
Photo by Mario Tama/Getty Images

Other questions surround the operation of the public option within the regulated marketplaces. How should its price be set, for example? Private plans lobbied aggressively against the public option in 2009 on the grounds that it would amount to unfair competition. But insurers don’t want a level playing field; they want the field tilted in their favor.

Historically, private insurers have effectively lobbied for special subsidies for private plans that are offered within Medicare. We shouldn’t give the public option special breaks, but we shouldn’t give them to private plans either.

If the goal is to create serious competition for private plans, the public option should be priced so it breaks even nationally, and its premium should vary with the regional variation in Medicare reimbursement rates. That’s going to mean tough sledding for private plans that pay doctors and hospitals like Medicare does, only more generously. But private plans that truly coordinate care — again, such as well-run HMOs — should be able to offer a distinct and valuable product. Indeed, coordinated private plans that operate within Medicare are able to provide Medicare's core benefits at least as efficiently as Medicare does, and they've remained an integral part of the program for years.

This experience also offers reassurances to those who worry that private plans would flee even more markets if they were forced to compete with a public plan, as a timely new report by the Georgetown University Center on Health Insurance Reforms points out. Medicare’s own history provides some good ideas about how to stabilize regulated private plans offered alongside a public option.

Everyone thinks of Medicare as one big public insurer, but — as already noted — it lets beneficiaries in most parts of the country choose among private plans. These plans have proved generally stable and popular, thanks to a combination of federal policies — including special protections for plans that end up enrolling high-cost patients. These policies could be adapted to tackle the problems faced by the Obamacare exchanges today.

In the end, the tough nut to crack is the politics. Republicans have effectively used the alleged threat that the Affordable Care Act poses to Medicare (which the ACA in fact made more generous) to appeal to senior voters and increase negative perceptions of the law. They would surely make similar claims about a public option that builds on Medicare. And the most consolidated parts of our private health industry aren’t going to let a strong countervailing power set up shop without a fight.

Still, the public option is one of those policy ideas that hits the trifecta: simultaneously simple, popular, and effective. It’s not the be-all and end-all of reform, but it would make a big positive difference. And its reemergence on the national stage suggests that so long as private plans and providers are consolidating and health insurance networks are contracting — and so long as there are lots of progressives who want to do more to make affordable universal health care a reality — it’s going to be a leading element of the national debate.

Closing the deal will require a Democratic president and a Democratic majority in Congress. It can probably be done, however, without the filibuster-proof majority that President Obama briefly had in 2009.

Under the budget reconciliation process — which Republicans have sought to use to roll back the Medicaid expansion in the ACA — policy changes that don’t add to the deficit and that involve existing mandatory programs can be passed with a simple majority vote. A public option will reduce the deficit, and as an extension of Medicare, it shouldn’t be subject to a filibuster.

When the Affordable Care Act passed in 2010, Sen. Tom Harkin of Iowa memorably called it "a starter home." Now the home has been built, and it’s in need of some additions. One set of additions relates to getting more people signed up — fighting to ensure that Medicaid expands in all 50 states, creating auto-enrollment features so people who don’t have coverage don’t fall through the cracks, making the subsidies for coverage more generous.

The second set of additions relates to keeping costs down, so the first set of additions is affordable and our nation’s economy and budget are stronger. The public option should be the centerpiece of this second set of improvements to our health care starter home. Think of it as a stronger foundation for a structure that’s already survived stiff partisan winds — and could, in time, make affordable quality health care for everyone a central part of the American promise.

Jacob S. Hacker is a professor of political science and director of the Institution for Social and Policy Studies at Yale University. He is the co-author of American Amnesia: How the War on Government Led Us to Forget What Made America Prosper.

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