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How a public health insurance option works

Health Care Reform and Policy
by John O'Dell
What options do people have when they lose health insurance?
What options do people have when they lose health insurance?

In recent months, there has been a lot of talk about the efficacy of various approaches to health care reform, and at the top of the list for a number of individual states is the use of a public health insurance option. Washington already passed such a measure, and states as disparate in population and economy as California, New Mexico, Connecticut and Colorado could follow suit in the months ahead.

The question many may have, then, is what a public option actually looks like and how it would work for the potentially millions of Americans who would be able to sign up for coverage when the platforms roll out.

A public option differs from "Medicare for All" plans because it is, effectively, an insurance plan like one that comes from an existing insurer, but administered by a government entity, sometimes in conjunction with private companies. It could be enacted at the state or federal level, but for now - with no such changes in the offing at the national level - it's wiser to focus on state-level plans.

Likely benefits
Effectively, under a state-run public option, a state would look at its individual health care market, then use whatever information it gathers to set premiums and pay claims. This is more or less what private insurers do now, but states would do so without the profit motive that can lead to much higher premiums from private insurers.

That, in turn, allows it to keep costs down by both removing the "middle man" extraction of capital from the health care system and also being able to negotiate with care providers and drug manufacturers with a huge base of enrolled residents - potentially numbering in the millions -  in much the same way Medicare or Medicaid does. There would be less marketing to pay for, fewer administrative costs and so on.

A recent study from the University of California-Berkeley School of Law found that the public option also ends up saving money at the federal level because it reduces the subsidies that need to be paid out to help people cover their premiums when they buy insurance through federal exchanges.

Such a plan also increases the tax base and introduces more competition into markets where there are relatively few insurers and care providers setting prices. Data suggests that private insurers pay care providers as much as 30% more than Medicare, and a public option would likely have the same kind of bargaining power, though likely not at the same level.

State-run public options could dramatically change the health insurance landscape.State-run public options could dramatically change the health insurance landscape.

Potential drawbacks
The negotiating power a public option allows any individual state government to wield is also seen as its largest possible disadvantage to the market as a whole. Put another way, introducing a new insurance provider with potentially millions of enrollees who either can't afford other coverage or simply prefer it to the more expensive options they get from employers or the individual market could create more competition, but also a competitive imbalance.

The issue in this particular instance - with individual states running their own unique public options, rather than via consortium or having the option available at the federal level - is states could suddenly gain the ability to dictate prices for care providers. The fear is they would go overboard to make the accounting work on the state side (since state governments are not allowed to operate at a budget deficit) and negatively impact not only care providers, but also other insurers that would possibly have to dramatically cut premiums just to keep up.

Another potential issue here is that, if there aren't enough enrollees, care providers might simply opt not to accept patients covered by the public option because of the lower payouts from the state-run insurer they would likely provide.

This is all theoretical, however, especially because it's projected that a relatively small number of people would sign up for public-option coverage, at least initially.

Different approaches
Of course, there is also the matter of how any individual states would run their health insurance options. Some could be set up to be self-sustaining, with only those who buy insurance through the systems paying the premiums. Washington - which will make enrollment in the public option available through its existing exchange late next year - will take this approach, partnering with private insurers to offer simplified plans at a discount even in comparison with subsidized coverage also available on the marketplace.

But other states could set up the program to be subsidized in other ways, such as via a tax on certain or all individuals or businesses, to help cover costs for those who do sign up. Typically, these taxes would be relatively small, as most of the funding for the public option would still come from those who buy into it.

These systems are unique from "Medicare for All," however. The issue associated with nailing down what Medicare for All means at this point is every politician pushing for it seems to have a different definition. Until lawmakers coalesce around a more cogent plan - which could take years to hammer out - it's probably a better idea for insurers operating in states where a public option is being considered to examine how such a move would impact their operations, and strategize accordingly.



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