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Is a Public Option With Negotiated Rates Worthless?

October 31, 2009 - by Donny Shaw

After falling short on a whip count for the “robust” public option, Rep. Nancy Pelosi [D, CA-8] decided to put a watered-down version of the public option in the final health care bill. Unlike the “robust” version that would use Medicare reimbursement rates plus 5 percent, the version she included requires the federal government to negotiate rates with doctors and hospitals just like the private companies.

Conservative Democrats, mostly from rural districts, worried that the robust version, which would use the lower Medicare rates, wouldn’t be enough to sustain hospitals and providers in rural areas because Medicare’s geographically-adjusted rates are lower there.

The non-partisan Congressional Budget Office has done a preliminary analysis (PDF) of the public option with negotiated rates that Pelosi included in the bill and they have estimated that by removing the tie to Medicare rates, the public option loses its only advantage for competing with the private companies.

That estimate of enrollment reflects CBO’s assessment that a public plan paying negotiated rates would attract a broad network of providers but would typically have premiums that are somewhat higher than the average premiums for the private plans in the exchanges. The rates the public plan pays to providers would, on average, probably be comparable to the rates paid by private insurers participating in the exchanges. The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and attract a less healthy pool of enrollees. (The effects of that “adverse selection” on the public plan’s premiums would be only partially offset by the “risk adjustment” procedures that would apply to all plans operating in the exchanges.)

OK, so the public option in the bill that will be voted on next week by the House will have higher premiums than the private plans. That should pretty much put to rest any concerns that it will lead to a government take-over of the health insurance industry. The CBO figures that the government pan will go easier on sick people. The bill contains a number of consumer protections, like the ban on denying coverage based on pre-existing conditions, but the private companies are still for-profit and are still going to be looking out for their bottom lines when they set premiums. The public plan, on the other hand, will be not-for-profit will probably embody more of the general goals of the health care reform effort. But in order to be sustainable, they are going to have to spread out the relative costs of not gouging their less healthy enrollees.

Making insurance more affordable for sick people is, of course, a good thing, but it’s not really what the public option was meant to do in the greater health care reform picture. It’s supposed to offer cheaper insurance and encourage the private companies to find ways to lower their own prices in order to stay competitive. CBO has previously estimated (PDF) that the “robust” public option plan would be able to offer premiums that are about 10 percent cheaper than what private companies charge currently. But this new public option with negotiated rates is going mean that the health care bill, with its individual mandate, will be forcing healthy people that are currently choosing not to pay hundreds of dollars a month for insurance, to buy insurance without making any cheaper options available to them.

NOTE: The health care bill IS on the House schedule for next week. We have the full text posted online and much more information, including news and blog coverage, here.

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