The Heavy Hand of the Public Option
Medicare for All has become a litmus test in the Democratic Party, but some leaders — including House Speaker Nancy Pelosi and former vice president and current presidential candidate Joe Biden — are wary of the political consequences of stripping private insurance from the 180 million people enrolled in job-based coverage. They are pushing a “public option” as a less threatening alternative.
Like Medicare for All, a public option would expand the government’s control over the health system, albeit less visibly and more gradually. The rub: to work, physicians and hospitals must accept the government’s terms or face financial ruin.
The Medicare Exchange Health Plan (or Medicare-X) proposed by Senator Michael Bennet has the key features of a public option plan that could gain political traction during an election year. Sponsors of the legislation who are actively seeking the Democratic presidential nomination include Senators Bennet, Klobuchar, Harris, and Booker.
Federally-approved Medicare-X plans would be offered as an additional insurance option alongside private insurers through Affordable Care Act (ACA) exchanges. In a few years, Medicare-X plans would be offered to employees of small businesses.
Because the ACA requires uniform coverage of benefits, plans compete on the exchanges by offering lower premiums or wider networks of providers. With the addition of Medicare-X, the competition wouldn’t be fair. Medicare-X would use Medicare’s power to impose regulated prices on an expansive network of providers.
Private insurers don’t have the power to dictate prices. They must negotiate with hospitals, doctors, and other providers to build their preferred networks. Narrow networks limit patients’ choices but reduce the cost of coverage and lower premiums. Providers can — and often do — refuse to participate in an insurer’s network if payment rates or other terms of participation are not agreeable.
Medicare-X wouldn’t negotiate with hospitals and doctors. Instead, it would operate like Medicare and set payments through regulation. The Medicare-X plan would reimburse providers at Medicare rates. The Health and Human Services Secretary could increase payments by as much as 25 percent, but only for providers in rural areas.
Although providers can drop out of Medicare, few do. Medicare is the largest single purchaser of health care services, accounting for about one-fourth of the market. For many medical practices, Medicare is their primary source of revenue.
Private insurers typically pay well above Medicare’s rates to ensure enrollee access to an adequate provider network. In 2017, private insurers on average paid about 33 percent more than Medicare for physician services and about 66 percent more for inpatient hospital services.
Using Medicare’s payment rates rather than market-determined rates would allow Medicare-X to undercut private premiums. If providers were free to opt out of Medicare-X, many would do so. But they would not have that choice. The legislation requires all health care providers who participate in Medicare or Medicaid also to accept Medicare-X patients. Most providers could not afford to lose all of their Medicare and Medicaid revenue.
Consequently, Medicare-X plans would be able to offer lower premiums and broader provider networks than their private competitors — but only because the government put its thumb on the scales. Private insurers could try to match the public option’s premiums by lowering their payment rates, but hospitals and doctors could reject those terms. Private insurers who cut payments too low would be left with provider networks inadequate to meet the needs of patients.
Despite nearly universal participation by doctors in Medicare-X, patients would not be guaranteed ready access to care. About 20 percent of physicians who participate in Medicare do not accept new Medicare patients. Many doctors likely to be counted among participating providers in Medicare-X would limit the number of patients they are willing to see.
The gap between private payments and Medicare rates will widen in the future due to cuts enacted in the ACA. Medicare’s actuaries estimate that the program will pay doctors about half of what private insurers pay for the same services by 2040. Under Bennet’s legislation, cuts in traditional Medicare would flow through to Medicare-X payments.
Private insurance offered on the exchanges would be the first plans undercut by the advantages conferred on Medicare-X by the government. Once established, advocates would then push to make Medicare-X available to even more consumers. Employer coverage would then be vulnerable too. In time, the public option would crowd out the space available for private insurance and make hospitals and doctors even more dependent on payments controlled and regulated by the federal government.
A public option is sold as less disruptive than Medicare for All but it would have similar results, and a similar destination. If enacted, private insurance would wither, competition would decline, innovation would slow, and the costs of health coverage would be hidden inside ever-rising tax bills.
Joseph Antos, Ph.D. is the Wilson H. Taylor scholar in retirement and health policy at the American Enterprise Institute. James C. Capretta is a RealClearPolicy contributor and a resident fellow at the American Enterprise Institute.