The Cost and Coverage Impacts of a Public Plan: Alternative Design Options

Prepared by John Sheils Randy Haught
The Lewin Group
April 6, 2009

President Obama has proposed to create a “public plan” that would compete for enrollment with the private insurance industry.

The public plan is difficult to evaluate because no one has specified in legislation how it would work.

Consequently, in this paper, we present impact estimates under several variations on the public plan model.

If Medicare payment levels are used in the public plan, premiums would be up to 30 percent less than premiums for comparable private coverage. On average, the monthly premium in the public plan for a typical benefits package would be $761 per family compared with an average of $970 per family in the private market for the same coverage.

If the public plan is opened to all employers as proposed by Senators Clinton and Edwards, at Medicare payment levels we estimate that about 131.2 million people would enroll in the public plan. The number of people with private health insurance would decline by 119.1 million people.

Medicare premiums would be lower than private premiums because of the exceptional leverage Medicare has with providers. Medicare pays hospitals about 30 percent less than private insurers pay for the same service. Physician payments are about 20 percent less than under private coverage. Also, because Medicare has no allowance for insurer profits or broker/agent commissions, administrative costs for this population are about one-third of administrative costs in private health plans.

Assuming Medicare reimbursement rates and eligibility for all individuals and employers, provider net income would decline under this public plan proposal, even after accounting for reduced uncompensated care and increased utilization for the newly insured. Net hospital revenues would fall by $36 billion (4.6 percent), and physician net income would fall by $33 billion (6.8 percent).

No details have been released by either Congress or the administration about the specifics of a potential public insurance option that could be offered in competition within a market of private health plans. Nevertheless, to provide an analysis of how such a plan might work, The Lewin Group used certain assumptions to prepare this simulation.

Under this analysis, hospitals would be paid 30 percent less than the reimbursement rates of private insurers, and physicians would be paid 20 percent less. Using these and other assumptions, premiums for the public plan would be 30 percent less than comparable coverage by private plans.

Supporters of the public option are likely to claim that it is an essential component of reform since it will lower the cost of insurance while expanding coverage to over 100 million more people.

Opponents of the public option are already claiming that the government would be an unfair competitor to the private plans because of its ability to dictate rates that are lower than what the private plans must charge.

This simulation may very well also increase the opposition by physicians and hospital administrators because of concern about the possibility of shifting large numbers of patients from the private plans to the government plan with its considerably lower reimbursement rates. In the heat of the debate, it may be forgotten that these fee reductions were an assumption made by the authors of this report for simulation purposes, and not a feature of any actual legislative proposal.

Unfortunately, this study only fuels a debate that has diverted us from the discussion that we should be having. Instead of arguing over a controversial, yet-to-be-defined measure that cannot possibly lead to the efficiencies, equity and effectiveness of the single payer model, we should be discussing what actually would work – true single payer reform.