Public option: Is it crucial to health-care overhaul?

WASHINGTON — As Congress breaks for its August recess, the debate back home will center on Democratic proposals to create a government-run insurance option, which insurers and Republicans are casting as a step toward socialized medicine.

The more relevant debate is the one occurring among Democrats, who will have the most say in the outcome: Even if one believes the public option is a good thing, should everything be staked on its inclusion?

President Obama supports the creation of a public-insurance plan that would compete with insurers on "exchanges," state or regional marketplaces where the uninsured and small businesses could buy coverage with the help of income-based subsidies. This competition would be "keeping insurers honest," as Obama says, and reduce the cost of universal coverage.

Most Republicans in Congress are against a public option, saying it would drive insurers out of business. Some key centrist Democrats in Congress, notably Finance Committee Chairman Max Baucus, of Montana, say Democrats must give up on the public option if they want to win a filibuster-proof 60 votes in the Senate, and instead are proposing insurance cooperatives, nonprofits owned by their members. Obama recently expressed openness to this alternative.

"The hard reality is ... that a public option does not have enough support in the Senate to pass," said Sen. Kent Conrad, D-N.D.

Other Democrats disagree, saying a health-care overhaul without a strong public option is doomed to fail, with private insurers reaping a bonanza of new customers while costs continue to escalate.

"Health insurance by its very nature is a rapacious industry. [Insurance companies] want to make a lot of money," said Sen. John Rockefeller, D-W.Va. "We have to have a strong counterbalance to them."

The debate over whether to fight for a public option spans Capitol Hill cloakrooms and the premier progressive think tanks.

Many experts, such as Linda Blumberg and John Holohan at the Urban Institute, say a public plan is essential to fiscal responsibility in a country where health-care spending has soared to $2.4 trillion a year.

Below private rates

A public option such as that proposed by House Democrats, with prices initially set at 5 percent above Medicare rates but well below private insurer rates, would inject competition into markets that are oligopolies: An American Medical Association study found that a single insurer controls more than half the market in 16 states and one-third of it in 38 states.

This competition, the thinking goes, would drive insurers to demand that medical providers find more cost-effective ways to deliver care, leading to innovations and the spread of well-integrated networks of salaried physicians in the place of the fee-for-service approach.

As it stands, insurers can pass on rising medical costs in higher premiums.

But with a public option in the mix, providers would work with insurers to lower costs, to keep private insurers from going out of business; providers likely would have little choice but to accept the public option but would not want it to gain too much of the market.

Medicare does not offer this competitive dynamic because it covers only people 65 or older and the disabled.

"We know [insurers and providers] have the ability to lower costs, but if there's no incentive, what motivates them?" Blumberg said.

Economists in this camp say a public option would not underprice insurers so as to drive them out of business; political pressures from medical providers would restrain Congress just as it is restrained today from limiting Medicare rates too much. Private insurers could compete on service and would benefit from their ties in local markets.

But the public plan would produce savings, they say. The Congressional Budget Office estimates the House's public option would save $150 billion over the first 10 years. Without it, these economists say, the government would have to save money by cutting subsidies to where people are unable to afford the coverage they will be required to buy.

"If you say we're not going to fight over this, then where is the cost containment?" Holohan asked.

Other reformers see it the other way around: Universal health care is too important to risk it foundering on the public option. They say the critical element is the exchange; with or without a public option, it will create competition among private insurers. Tough new regulations will ban practices such as denying people coverage because of pre-existing conditions.

These experts note that Massachusetts has achieved near-universal coverage without a real public option. And they say that, if costs continue to rise to where subsidies fail to make coverage affordable, the government could require insurers participating in the exchange to change the way they reimburse providers to encourage more cost-effective care.

A public plan would be welcome, people in this camp agree. But its impact would be limited.

Limited at first

The House plan envisions only about 10 million people joining the public option at the outset, because access to the exchange would be limited, at least initially, to about 30 million uninsured and small-business employees, to prevent the unraveling of employer-based insurance. And the option's pricing powers would be limited by political pressures against driving too hard a bargain on providers.

"I would put up a bold front of wanting a public option and at the end of the day would say, 'Mr. Grassley, Mr. Enzi, in the name of unity and Republican support, I will give it up if you climb on board,' " said Henry Aaron of the center-left Brookings Institution, referring to two key GOP senators. "I'm not denying a public option would force quickly changes that might otherwise take longer. But insisting on a public plan reduces the likelihood there's going to be any plan."

Public-plan proponents counter that imposing cost controls via exchange regulations would be more intrusive than the competition offered by a public option. Even with tougher standards, they say, insurers would seek to avoid covering the sick, creating the need for a public option.

They also dispute that Massachusetts is an argument against a public option; before its reforms, it had well-regulated insurers and few uninsured, and several of its lower-priced options are functioning as quasi-public plans.

For now, the debate is playing out on the margins. Fiscally conservative Blue Dog Democrats pushed last week in one House committee to separate the public plan from Medicare rates and instead require the government to negotiate rates with providers, which liberal House members say would result in higher rates and smaller savings.

Co-op proposal

Joining the resistance against the public option have been providers held up as models by Obama, such as the Mayo Clinic, which argues that rates linked to Medicare would be too low.

Reformers say the Medicare link is needed at the outset to get the new public option off the ground quickly but that the House bill would allow the government to set public-option reimbursements in a way that rewards high-quality care instead of on a fee-for-service basis.

Meanwhile, Conrad and his Finance Committee colleagues are hashing out their proposal for the co-ops, which would be seeded with $6 billion in federal money. Critics say the co-ops would lack the leverage to take on insurers.

Jacob Hacker, a Yale political scientist who helped develop the public-option concept, calls co-ops a "fig leaf to cover up a lack of commitment to a public plan."