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With Medicare for All shelved for the time being (due to President Biden’s opposition and lack of broad political support), the “public option” is seen by single-payer advocates as the next best alternative. Proponents in several states are taking the lead in pushing the concept forward, and, in one — Nevada — a combination of ambiguity and unabashed coercion allowed state officials to outmaneuver their opponents. Their strategy might work elsewhere too (there are eighteen states contemplating similar reforms), although the fights this approach causes with providers may yet prove debilitating.

Unlike the mandatory public insurance of Medicare for All, the public option promises a government-administered plan only for those who want it. The thinking is that creating another robust public insurance plan might make the transition to full single-payer easier when its political opening finally arrives (or so the thinking among advocates goes).

The “public option” has the potential to be popular because it may offer coverage with premiums below private insurance. This is a possibility because the government has the power to force hospitals and physicians to accept lower fees if it wants to, which is why these schemes are controversial. The usual comparison is with Medicare. Commercial insurance pays more than double what Medicare does for hospital services, and 20 percent more than Medicare for physician and other professional fees. Without coercion, public option plans either lose their premium advantage over private coverage (because their payments for services are comparable), or else the networks of providers willing to accept lower fees become too narrow to be appealing.

These tensions surfaced in Washington state when officials there initiated a public option scheme. The insurance plans now being sold in the market under the terms of the resulting law, which passed in 2019, look nothing like what was originally envisioned because of the concessions required to get it through the legislature.

For starters, the state isn’t offering a public option consistent with the plain meaning of that term. Washington officials abandoned the idea of a new, state-administered product because the government did not have the resources, or the operational capacity, to compete head-to-head with private companies. The state’s leaders chose instead to push existing private insurers to offer coverage meeting new regulatory requirements, which were then dubbed “public option” plans.

Washington officials also had difficulty corralling the state’s hospitals and physicians to accept fees in line with Medicare. Not surprisingly, the providers were not interested in seeing their incomes fall, and made their objections known to the state’s elected leaders. Many facilities also made it clear they would opt out of all public option provider networks.

Officials negotiating with the bill’s opponents had to compromise because otherwise it would not have passed. They agreed to a floor of payment for services, pegged to 160 percent of what Medicare would pay. Further, they removed provisions which would have required hospitals and physicians to participate.

These changes were consequential. The floor on payments eliminated most of the premium advantage that might otherwise have been possible. Private insurers thus felt safe to stay out of the market, as they did not anticipate losing substantial business. More importantly, several of the state’s prominent hospital systems and physician practices opted out of the emerging provider networks. The result has been anemic take-up by consumers. Public option plans are being sold in only 19 of Washington’s 39 counties, and just 0.8 percent of eligible enrollees have signed up for its coverage.

Nevada officials with public option ambitions watched what took place in Washington and decided to take a different approach. Their solution was to avoid specificity where possible by pledging to work out the details later. They also took a tougher line with the state’s insurers and providers. It seems to have worked, at least for now, as their public option plan passed and has more teeth than the version being implemented in Washington.

  • As was the case in Washington, the Nevada state government is not planning to administer a new public option directly (at least not initially). Instead, insurance companies with contracts to provide coverage for the state’s Medicaid population must submit competitive bids to participate in the public option program. The state has reserved the right to stand up its own public option plan if the private insurers drag their feet, but there are no details on how it would go about doing so. It might be an idle threat.
  • The public option plans will be offered starting in 2026 — nearly five years after the law was enacted — which leaves plenty of time for insurers and providers to mount a counterattack.
  • Premiums for public options plans must be at least 5 percent below the benchmark plans in every zip code in the state’s Affordable Care Act (ACA) exchange, and cannot escalate on an annual basis more than the Medicare economic index (MEI), which is a measure of input costs for physician services. These requirements can be relaxed if the statewide average for public option premiums is at least 15 percent below the benchmark rate.
  • Public option plans must pay hospitals and physicians rates that are, in the aggregate, in line with what Medicare would pay for the same services.
  • Crucially, the state is requiring providers that participate in the state’s Medicaid program, the insurance networks for state employees, or the workers’ compensation program to join at least one public option plan.

Many other details have not been settled. Among other things, it is not clear if private insurers will be able to satisfy the premium reduction requirement while also complying with the law’s minimum payment provisions.

Even so, what is clear enough is the determination among the officials currently in power to use whatever leverage they have to force cooperation with their effort, which is the surest path to cutting premiums even as it also ignites fierce resistance. The forced acceptance of lower fees may also undermine the financial wherewithal of facilities and practices with powerful political leverage of their own. What is certain is that the heavy-handed approach taken in Nevada will be, controversial, and may yet produce a political backlash with unknown repercussions.

Public option plans do not have a secret to cost control that eludes private insurance companies. Private plans must negotiate contracts with providers, while a public option can dictate the terms to providers if the government allows that to happen. Hospitals and physicians resent this coercion and will push back. The fate of the public option rests on how this battle plays out. In Nevada, state officials have the upper hand for now, but that might change well before 2026.

James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.

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