President Obama and congressional leaders are proposing the creation of a new public health insurance plan to compete with private insurance plans. The President first proposed a public insurance option during the 2008 presidential campaign, but now the details and design of this new option--like most other aspects of the health reform legislation currently under development--have been left almost entirely to Congress.

Many in Congress are looking to Medicare as a model for a new public health plan, yet they fail to realize the consequences for patients and providers alike, as millions of Americans would lose the private coverage that they have today.

Crucial Details

According to the Lewin Group, a nationally prominent econometrics firm, the two most crucial design details of this new option are the size of employers eligible to buy into the new plan and the provider payment levels used for reimbursement under the plan.[1]

These key issues are bound to be contentious in the upcoming debate over health care reform.[2] The Obama campaign proposal would have made individuals without employer coverage, the self-employed, and small employers (defined as fewer than 25 employees) eligible for the public plan. But the President never specified provider payment levels or the method for determining reimbursement rates for doctors, hospitals, and other medical professionals for the thousands of medical services that would be delivered.[3]

Members of Congress and their staffs will thus have to hammer out these crucial details in legislation if a public plan is to be introduced.

Unlevel Playing Field

If Congress creates a public plan modeled on Medicare--as some have previously proposed--the result, of course, would be to undercut any pretense of a promised "level playing field" for competition with private health insurance.[4] Public plan premiums would be 25-40 percent lower than private insurance premiums as the public plan would reimburse providers less than private payers would--and often less than the cost of care delivered.

Payment rates for doctors and hospitals under public programs are set administratively, not by the market. They are, on average, lower than private payment rates for similar care.[5] Medicare provider payments for hospital care are only 71 percent of private rates, while Medicare provider payments for physician care are only 81 percent of private rates.[6] In other words, Medicare payment levels are roughly 19-29 percent lower than private levels.

Congress's ability to impose low provider payments and artificially reduce the cost of the public option compared to private insurance will increase enrollment in the public plan while crowding out, or displacing, existing private coverage.

Loss of Private Coverage

When considering a public plan modeled after Medicare, Lewin finds that the estimated reduction in the number of uninsured does not vary greatly (observing a change of only 800,000 individuals) as eligibility for the plan is extended beyond small employers to employers of all sizes.[7] Instead, there is a substantial increase in enrollment in the public plan and in the loss of private coverage.

If the public plan were opened to only small employers, enrollment in the public plan would reach 42.9 million, and 32 million Americans would lose their private coverage.[8] However, if the public plan is opened to all employers, enrollment in the public plan increases dramatically to 131.2 million, and 119.1 million Americans would lose their private coverage.[9] In this particular case, of the 171.6 million people who currently have private coverage, about 70 percent of them would lose the coverage that they have today.[10]

More specifically, of the estimated 157.4 million Americans who have private employer coverage, up to 107.6 million people could lose their private employer coverage, even if they like it and would prefer to keep it.[11]

Imposing Higher Costs on Individuals and Families

Increased enrollment in a new public plan would likely result in higher premiums for those with private insurance.

Historically, public programs--specifically Medicare and Medicaid--have reimbursed providers at levels below the costs of their services. For example, in 2003, on average, Medicare paid hospitals only 95 percent of the cost of providing services, while Medicaid paid hospitals only 89 percent of the cost of providing services.[12] These below-cost payments in public programs are at least in part offset by above-cost reimbursements to providers by private payers--as evidenced by hospital reimbursements to the tune of 122 percent of costs in 2003.[13] This cost-shift, in turn, inflates private health insurance premiums for individuals and families.[14]

The cost-shift dynamic plays a prominent role in the health care sector. A study by the actuarial firm Milliman calculated that public programs currently shift $88.8 billion in costs onto private payers per year, increasing the typical American family's annual private health insurance premium by $1,512, or 10.6 percent.[15] Moreover, Lewin speculates that a new public plan could increase the annual cost-shift per privately insured by as much as $526, which will only serve to further perpetuate the crowd-out of private insurance.[16]

Lower Incomes for Physician and Hospitals

A new public plan could also significantly reduce provider incomes. As more people gain insurance, physicians and hospitals would benefit from decreased levels of uncompensated care. However, the increase in public coverage along with new demands to provide services to the newly insured could outweigh any increased revenues from reductions in uncompensated care.

If all employers become eligible for the public plan, the annual net income of hospitals could fall by $36 billion while the annual net income of physicians could drop by $33.1 billion. Increasing demands on health care providers coupled with decreasing provider incomes could compromise patients' access to high-quality care. Faced with low reimbursement, doctors are already reportedly opting out of Medicare--a problem that is likely to be exacerbated with the creation of a new public plan.[17]

Consider the Consequences

Discussions surrounding the creation of a new public plan, based on Medicare and intended to compete with private health plans, have not adequately considered the potential consequences for patients and providers.

Creating a new public health plan option is likely in direct conflict with the many promises Congress and the Obama Administration have made regarding health reform.

While many claim that a public plan would merely represent an alternative choice to private health plans operating on "a level playing field," the reality is that Congress will use the government's power to artificially deflate the cost of the public plan by lowering provider reimbursement rates.

It has been suggested repeatedly that if Americans like their health plan they can keep it and that nothing would change except that they would pay less. But the creation of a new public plan modeled on Medicare could result in the loss of the private coverage that millions have today by undermining the current system of employer-sponsored insurance. Those who are actually able to keeping their private insurance will likely be forced to pay more--not less--to cross-subsidize the public plan.

While patients have been ensured their choice of doctor and care without government interference, great uncertainties remain regarding what the future holds for the doctor-patient relationship as millions of Americans are pushed into a new public plan.

The Devil Is in the Details

It is unlikely that Congress and the President will be able enact a major overhaul of the health care system that both includes a new public health insurance option and meets their many oft-stated promises.

When it comes to health care policy, what politicians promise is less important than the details of their policy prescriptions. Watch carefully.

Greg D'Angelo is Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation.