The effects of any public option in health care reform will depend critically on details of how it is structured, and how well it is implemented over time. Consider how public option designs would affect the goals of universal insurance, cost control, efficiency, and choice:
1. Universal insurance: To tackle the uninsurance problem, a public option is not necessary. Many European countries have achieved near-universal insurance in the context of private insurance markets without a public option, e.g., Switzerland and the Netherlands. But if a public option reduced costs, then it could ease the budgetary strain of reducing uninsurance.
2. Cost Control: A key goal of a public option would be to slow cost growth. Savings would not happen from reducing insurer profits as some have assumed – insurer profits are a small part of health care costs, and already over half of the privately insured are with non-profit insurers. Rather, significant savings could come by lowering provider reimbursement prices. Is a public option necessary to do so? Again, other countries such as Switzerland have much lower costs than the U.S. even without a public option … but generally they employ other tools that we don’t to control costs. All-payer rate regulation is a key such tool, in which governments work with payers and providers to regulate provider prices, thus limiting the ability of providers to exploit market power. This approach has helped slow cost growth in Europe, and helped also in parts of the U.S. before it was largely abandoned during 1980s deregulation. But given that all-payer rate regulation is not politically feasible at this point in time in the United States, the public option is an indirect tool for reining in potentially excessive prices. This would require a strong version of a public option, in which government used its power to enforce lower prices.
3. Efficiency: But a strong version of a public option raises potential efficiency concerns. If the government undercut prices so much as to force out even relatively efficient private insurers such as Kaiser, then over time we could lose the dynamic efficiency benefits of innovation from these private firms. For example, Medicare has a poor history of providing preventive care and efficiently managing care of the chronically ill. Thus while under best-case scenarios a public option could reduce many inefficiencies in our current system, there is also a non-trivial danger of making things worse.
4. Choice: A public option could meaningfully expand insurance choice in parts of the country that currently have little insurance competition. But this will depend critically on how a public option is structured. In many markets insurance competition is robust, with substantial choice for people with middle or higher incomes. But low-income people are often ill-served by current private insurance markets, with low-premium choices requiring higher cost-sharing than may be appropriate. These low-income people could be better served by offering a public insurance option that offers low premiums with low cost-sharing by relying on lower-cost public and non-profit providers. Various counties operate this type of public option already, with our local Healthy San Francisco program being a prominent example, showing the substantial demand that exists for such programs already among low-income people. A version of this, albeit imperfect, could be quickly scaled-up by allowing near-poor individuals the option of buying into their state Medicaid plan. Regardless of how the debate turns out regarding the broader Medicare-like public options being discussed in Congress now, meaningful choice for low-income folks (i.e., groups disproportionately uninsured) could be well-served by offering choices for these types of low-cost public plans.