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

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.2 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.3

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 selffunded 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 overused4 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. In this brief, we argue that using a public plan is a good idea and will likely contribute to cost containment but is probably not a panacea. It’s likely to have lower administrative costs and to exert more control over provider payment rates. But there are clear limits on the use of government power as a payer. As aresult, concerns that it will drive out strong private competitors are misplaced.