'Public option' is not an easy fix for health care

Government insurance advocates who are skeptical of Medicare for All's prospects are placing their hopes on the "public option" as an easier-to-enact step in the same direction. All of the leading competitors to Bernie Sanders, who remains unyielding in his commitment to single-payer health care, have embraced some version of what Pete Buttigieg calls "Medicare for all who want it."

In general terms, with a public option, the federal government would run its own health plan in competition with private insurance. But for political and practical reasons, starting up a new public insurance plan is easier said than done. Recent efforts to establish public-option plans on a small scale — in Washington state and Colorado — demonstrate some of the challenges of trying to create a nationwide public offering.

In both states, officials were forced to scale back their ambitions because of financial concerns and industry opposition. They retreated from creating genuine public option plans — administered by the government — and chose instead to contract with existing private insurers to run "state-directed" offerings. Leveraging existing private plans avoids the expense and financial risk of replicating the functions of commercial insurance within a state bureaucracy.

Buttigieg and other candidates associate their public option proposals with Medicare, but those plans would likely have little to do with the actual program — with good reason.

The Medicare benefit falls short of what the candidates want to offer to voters. For instance, Medicare beneficiaries are not protected against catastrophic costs. They are not automatically covered for prescription drugs. And Medicare requires beneficiaries to pay substantial sums out of pocket for hospital admissions and other care.

A public option would operate alongside existing private plans, with consumers deciding which offering is best for them. That requires fair competition, with the public option subject to the same rules as private insurance. Politicians will be tempted to bend the rules for the public plan with special subsidies or other favors, but that runs the risk of taking choice away from the voters — and alienating powerful insurance companies.

Medicare is heavily subsidized, giving it an unfair advantage. Beneficiary premiums cover only one-fourth of the cost of physician services and do not include the cost of hospital care. Private plans have no choice but to charge premiums sufficient to cover all of their expenses. A public option that is an extension of Medicare could drive out private plans, but only because taxpayers would shoulder huge new costs.

Interest in the public option is predicated on lowering costs, which is where the link to Medicare is most informative. Buttigieg does not specify how the public option would pay hospitals and doctors, but similar plans tie payments to Medicare rates. A public option with payments set equal to Medicare rates would cut costs, but it would be highly controversial. Commercial insurers pay 2.4 times more than Medicare for hospital-based care. Medicare can pay lower rates only because the federal government does not negotiate prices with hospitals and physicians; it imposes take-it-or-leave-it fees through regulation. Because Medicare represents a large share of the overall market, health care providers have no real choice but to accept these terms.

Washington's initial plan was to cap payments to doctors and hospitals at 100 percent of Medicare prices. Opposition from providers forced the Legislature — run entirely by Democrats — to move the cap to 160 percent of Medicare payments, with insurers having the discretion to adjust pricing for individual services so long as they stay at or under an overall limit. Hospitals and doctors are not required to participate in the state-directed option — an important feature — which would make the plan unattractive to consumers whose physicians opt out.

Colorado is considering forcing hospitals to participate in its plan, with payments for services set between 175 percent and 225 percent of Medicare's rates. Legislation to start the planning process was signed in May of last year, but further legislation is needed before the reform can go into effect. It is far from certain that Colorado will be able to compel participation in its plan by hospitals or physicians.

Requiring hospitals and physicians to participate in a federally chartered public option would be difficult to pass even in a Democrat-controlled Congress, creating a dilemma for proponents. They could either take on the political challenge of forcing providers to participate, presumably with low payment rates, or their plan would have a narrow network that would be unattractive to many potential enrollees.

Although a public option stands a better chance of passing in Congress than Medicare for All, it won't be free of controversy. As in Washington and Colorado, what would be politically acceptable is unlikely to deliver the market transformation that some advocates predict.