Is What I Hear True?

I heard that...

...a public health insurance plan will drive private insurance companies out of the market. Is that true?

Although we can’t say for sure this is true or not, there are instances where public options exist and have not driven private plans out of business. Rather, the public option provides competition and helps keep prices down.

The option to have a public health insurance plan is one element of some healthcare reform proposals. The public plan could be designed in a number of ways but in essence would be a health insurance plan offered by the U.S. government the way private plans are offered by health insurance companies. The public plan would compete with private plans for the business of individuals, families, and employers. This competition would be based on the health benefits covered, the providers who participate, and the prices of plan premiums.

Supporters believe that competition from a public plan will further the goals of healthcare reform by expanding access and reducing cost. Critics of the public plan believe that insurance companies will be unable or unwilling to compete with a government program and will therefore stop doing business in the health plan market.

The claim that a public plan will drive private insurers out of the market is based on the belief that a government plan will have certain, insurmountable advantages over any private plan. First, a government plan may be less expensive to administer and these savings can be put toward reducing the price of plan premiums (Reich, 2009). It is true that government health programs have lower administrative costs than private health insurance, in part because public programs do not have to pay profits to shareholders or high executive salaries, advertising, and lobbying expenses. Careful analysis has shown that all things considered, the government’s administrative costs for insurance are about half those of private insurers (Holahan and Blumberg, 2009).

A second possible advantage is that a federal plan will have a large enough subscriber base to negotiate lower prices for health-related goods and services (Reich, 2009) and, again, reduce premium prices accordingly. It is true that large buyers can negotiate better rates than small buyers, and this is an advantage currently enjoyed by large insurance companies over small ones. Critics of the public option are especially concerned that lower prices for the public plan will mean higher prices for the private plans (Moffitt, 2008). This might happen if the government plan sets prices so low that the real cost of health-related goods and services are shifted to other plans.

A third possible advantage would be if the government plan got to play by different rules. Critics of the public option fear that it would not have to remain solvent the way a business does and that it would receive subsidies from the taxpayers and other kinds of special treatment. Even if the government plan were set up independently, they argue, there would be political pressure to rescue it with public funds if that became necessary (Health Affairs/Robert Wood Johnson Foundation, 2009).

Supporters of a public plan point out that private health insurance companies have failed to insure all Americans and to hold down costs. (Elsewhere on this web site, you can read about the number of uninsured and underinsured Americans, the rise in healthcare costs in general and in health insurance premiums specifically, and the limits to employer-sponsored healthcare benefits.) Supporters also note that in many places, there are only a small number of private insurers offering health plans. These companies do not face much competition and therefore do not strive to offer a better product at a lower price (Holahan and Blumberg, 2009). Supporters of a public plan emphasize that not only would insurance be available to people who need it or want it, but also that it would motivate private insurers to do a better job of providing affordable plans. 

Supporters of a public plan do not agree that private insurance companies will experience insurmountable disadvantages if there is a public plan. First, the higher administrative costs associated with private insurance reflect business decisions that insurance companies make. Facing competition from a public plan with lower administrative costs, these companies could become more efficient and eliminate unnecessary administrative spending, including personnel and lobbying costs (Iglehart and Fleming, 2009). Furthermore, it is hard to argue that consumers should pay higher-than-necessary administrative costs because that is what the insurance industry requires.

Second, although a public plan will have a size advantage in price negotiations with healthcare providers, private plans have another advantage: the ability to restrict provider networks. By allowing only some providers into their plan networks, private insurance companies are able to negotiate prices downward (Iglehart and Fleming, 2009). Network providers face reduced competition for insured patients, so they can be paid less for each service and still recover their costs on volume. Private companies also have the advantage of being private: they can exercise greater flexibility than a government entity and are free to innovate while the public option waits for the policymaking process (Iglehart and Fleming, 2009). If private insurers offer better services and access to services, even at a slightly higher price, they will maintain a robust competitive position in the market (Holahan and Blumberg, 2009).

Third, proponents of a public plan believe that it can be designed to compete on a truly level playing field. They offer several design features to ensure that the public option stands on its own; for example, by building a firewall between the health insurance plan and all other government programs. Like private plans, the public option would run on the premiums it collects. All plans would be subjected to the same rules and regulations. Oversight of the public plan would fall to a department separate from the one regulating the insurance market as a whole (Nichols and Bertko, 2009). Other ideas to promote competition include risk adjustment, so that plans with sicker enrollees are not at a disadvantage, and regional pricing, so that the public plan faces the same market conditions as local private plans (Hacker, 2009).

Critics of the public plan doubt that public-private competition can work, but supporters point to instances where it clearly does. Currently, 34 states offer their employees a choice of several health insurance plans including private plans and a state self-insured plan. Some of these public alternatives have operated for as long as 15 years, and states have found that offering a plan of their own improves the quality of their workers’ private options (Iglehart and Fleming, 2009).

Sources:

Reich, Robert B. 2009. Why we need a public health plan. Wall Street Journal, June 24. http://online.wsj.com/article/SB124580516633344953.html.

Holahan, John, Linda J. Blumberg. 2009. Can a Public Plan Increase Competition and Lower the Costs of Health Reform? March 18. www.urban.org/url.cfm?ID=411762.

Moffit, Robert E. 2008. How a Public Health Plan Will Erode Private Care (Backgrounder #2224). December 22. www.heritage.org/research/healthcare/bg2224.cfm. 

Health Affairs/Robert Wood Johnson Foundation. 2009. Health Policy Brief: A Public Health Insurance Plan. June 19. www.rwjf.org/files/research/61809healthaffairs3.pdf.

Iglehart, John and Chris Fleming. 2009. The Public Plan Option: A Roundtable with Stuart Butler, Jacob Hacker, and Len Nichols. Health Affairs Blog, April 30. http://healthaffairs.org/blog/2009/04/30/the-public-plan-option-a-roundtable-with-stuart-butler-jacob-hacker-and-len-nichols.

Nichols, Len M., John M. Bertko. 2009. A Modest Proposal for a Competing Public Health Plan. March. www.newamerica.net/files/CompetingPublicHealthPlan.pdf.

Hacker, Jacob S. 2009. Policy Brief: Healthy Competition: How to Structure Public Health Insurance Plan Choice to Ensure Risk-Sharing, Cost Control, and Quality Improvement. April. www.ourfuture.org/files/Hacker_Healthy_Competition_FINAL.pdf.

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