(1) Credible cost containment. Medicare has actually restrained costs better than private health plans over the last quarter century, and especially the last decade. The savings from competition between a public health insurance plan and private insurance plans within a national pool has been repeatedly demonstrated by credible independent analyses, including one of my own proposal (http://www.sharedprosperity.org/hcfa/lewin.pdf; see also http://www.commonwealthfund.org/Content/Publications/Fund-Reports/2009/Feb/The-Path-to-a-High-Performance-U-S--Health-System.aspx).

(2) Guaranteed backup coverage. Many Americans will want a plan with predictable coverage and costs, and relatively free choice of providers that is transparent and simple—a guarantee of health and financial security. Private insurers have not and will not provide such a product for anything near the premium that the public sector can offer, as I note below. Without a public health insurance plan, we cannot guarantee that Americans have access to a plan that provides true health and financial security.

(3) Keeping private insurers in check. A public health insurance plan competing with private plans on a level playing field provides a crucial set of checks and balances, especially in two core areas: cost containment and quality improvement. I have already addressed the first area, and elaborate on it in my brief, “The Case for Public Plan Choice.” Quality improvement is equally crucial: Private plans have limited incentives to invest in long-run quality improvements, limited scope to implement reforms, and limited willingness to share essential data. Even with regulations, these problems—and the need for a public health insurance plan—will remain.

In addition, a fourth reason for a new public health insurance plan should not be missed:

(4) Improving Medicare. Now more than ever, we need a model for Medicare reform that involves improving and safeguarding, rather than dismantling, the program. If we take the route of having just private insurance plans within the new insurance pool for the nonelderly, the only model for Medicare reform will be replacement of the program with a system of competing private plans. Moreover, we will lose the ability to improve both Medicare and the new public health insurance plan over time, and to use the greater bargaining power and scope for quality improvement inherent in two complementary but distinct programs.

The central point is that we need to have a level playing field between the private plans and the new public health insurance plan. Everyone says they are for a level playing field, but what most critics of public plan choice really mean is that they do not want a new public health insurance plan to have any inherent advantages. But that is at odds with true competition, which does not require competitors be equal but that they have an equal chance to succeed if they are equally good at doing what consumers want.

A level playing field means, first and foremost, that the same rules apply to both public and private plans. The main purpose of these rules is to prevent plans from profiting by selecting healthy people rather than delivering value. These rules include:

1. community rating – all plans must charge the same rates to all subscribers.

2. guaranteed issue – all plans are required to take everyone who wants to be in them during a fixed enrollment period.

3. limits on marketing – people should choose among plans based on objective information provided by the administrator of the pool, not come-ons from the plans.

4. standardized benefits – at a minimum all plans should be required to offer a benefit package that meets at least some basic actuarial standard, covers the same full range of benefits as the public health insurance plan, and has the same overall limits on out-of-pocket spending. The benefits offered by the new public health insurance plan should certainly be broader than Medicare’s. They should include stronger limits on out-of-pocket costs, forgo the anachronistic Part A (hospital insurance) and Part B (physician insurance) distinction, and focus on the special needs of the nonelderly, especially children. In my “Health Care for America” proposal, for example, the public plan would offer all services provided by Medicare as well as comprehensive mental health, maternal and child health services, and comprehensive prescription drug coverage.

5. reserve requirements – private plans need to have adequate reserves. The public health insurance plan should be prevented from dipping into general revenues.

6. transparency – all plans should have to clearly state their terms, open their books for basic review of their spending and revenues, and make anonymous data on patients available to the pool and/or a higher-level administrator.

In addition to rules, there is also a need for risk adjustment. Plans need to be paid different amounts by the pool based on the risk of their enrollees. (This is distinct from the premiums that people pay, which should be community rated.) Enrollees and plans should not be penalized when a plan attracts less healthy enrollees; we want plans to focus on the care of the small proportion of the population that accounts for the bulk of health costs in any given year, not try to avoid these people. While risk adjustment technologies have come a long way, they are still imperfect. Thus any risk-adjustment system should probably mix prospective risk adjustment with a reconciliation process at the end of the year that redistributes funds among the plans to ensure that those with very unfavorable mixes of risk are protected. Of course, the public health insurance plan must be part of this arrangement. If it gets a highly unfavorable mix of risk that prospective risk adjustment does not adequately compensate for, it should receive additional funds.

One question not answered above is what happens if enrollees in the pool fail to enroll in a specific plan. I have argued elsewhere that the public health insurance plan should be the default source of coverage for enrollees who do not specify another option. Automatic enrollment in the public plan for those not choosing a specific plan would help the public plan to obtain a broad mix of risk. In addition, it would give those who did not choose a plan the broadest potential selection of providers.

2) I would love a public plan but I never see estimates on what a public plan would cost per policy. How much would the public plan cost if the government were not subsidizing it?

Estimates of my proposal show that the public health insurance plan’s premiums would be about 23 percent lower than comparable private insurance for the same set of benefits for the same population. These savings are principally due to the two unique features of a public plan: its simplified administrative structure, and its ability to bargain for better rates. The Lewin Group estimates that the savings would amount to nearly $1,000 per year, with average enrollee costs in the public plan totaling “$3,250 compared to $4,230 under a private insurance product in 2007.” Similar results are reported by the Lewin Group in its analysis of the Commonwealth Fund’s “Building Blocks” proposal for reform, which also includes a public plan option. Premiums for the public plan in the Commonwealth proposal “represent significant savings—more than 30 percent below average employer premiums.”

3) How do we know that Medicare isn't simply taking advantage of its monopsony hold over a major part of the health care market and paying health providers less than the cost of treatments, leaving them to recoup the balance by driving a harder bargain with other patients?

The only ways to save costs over the long term without simply cutting back coverage are to (1) lower how much is paid for individual goods and services, (2) slow the spread and intensity of medical technology, (3) improve population health, and (4) improve the cost-effectiveness of treatment in improving health, in part through the reduction of misuse and overuse of services. A public health insurance plan has substantial advantages in achieving all four of these goals.

One of its key advantages is related to (1): With a large pool, a public health insurance plan can be more of a price maker than many private plans, which must be price takers. However, as the question suggests, this is also perhaps the most controversial element of the new public health insurance plan. Critics charge that Medicare bargaining is at odds with market pricing and simply unfair.

The first charge—that Medicare prices are administered rather than set in the market—is true, but irrelevant. All health plans, public and private, use administered prices. A free market for health services is unrealistic, requiring that people shop around for individual treatments and pay the full cost themselves. In a world of insurance, administered prices are inevitable.

As for the unfairness of Medicare pricing, the evidence that Medicare underpays providers is much weaker than commonly believed. Access and participation measures do not suggest that Medicare is increasingly shortchanging providers—most data show stable access and participation, and none shows the dire picture that is sometimes painted. Studies of cost shifting by the public Medicare plan onto private payers have produced mixed results: The general conclusion is that there is some, albeit a much smaller amount than suggested by critics of Medicare pricing. A careful 2006 study of hospital cost-shifting in Medicare concludes that “a 1 percent relative decrease in the average Medicare price is associated with a 0.17 percent increase in the corresponding price paid by privately insured patients”—meaning that around 17 cents of every dollar in relative reductions in public Medicare plan payments to private hospitals are shifted onto private patients. If this estimate is correct, then cost shifting from the public Medicare plan amounted to less than 10 percent of the overall increase in hospital prices to private payers between 1997 and 2001—the period under study.

Providers do have legitimate complaints, but they mostly concern other aspects of American health insurance: Medicaid does grievously underpay providers in many states, and providers who deliver care to uninsured patients often collect just pennies on the dollar. This argues for upgrading Medicaid rates and broadening insurance coverage—not giving up on public-sector bargaining. In the context of these reforms, providers would be much more willing to accept a new public health insurance plan that had some bargaining leverage.

It is important to recognize that our current private-insurance system fails to create effective countervailing power to push back against the demands of providers to be paid more. Private insurers can save more by selecting healthy people than by jawboning providers, so they generally do not bargain as aggressively as they could. With the massive consolidation of the insurance market in recent years, private insurers are frequently acting as oligopolies, keeping premiums high rather than driving hard bargains with service providers, drug companies, or device manufacturers. Moreover, providers have also consolidated dramatically, making it very hard for private insurers to bargain for lower rates. Medicare has done better in providing countervailing power, but it has hardly been perfect. Specialty service providers and medical device manufacturers have often gamed the system—at the expense not just of rational payment policies, but also the relative standing of primary care physicians.

The comparative and historical evidence is strong that bargaining for better rates is a critical way in which U.S. public programs and other national health systems have controlled costs, with little evidence that this cost control has reduced access or impaired health. But this is a controversial power, and any new public health insurance plan will have to include some safeguards to ensure that the public health insurance plan’s bargaining power is not abused.

What might those safeguards look like?

1. A better payment system than currently exists in Medicare. The current fee-for-service structure inevitably focused attention on the blunt instrument of cutting service prices when the goal should be greater efficiency.

2. An expanded Payment Advisory Commission. There should be much more and much better information collected about the adequacy of provider payments.

3. A new stakeholder advisory group. Doctors and hospitals should have a regular seat at the table in the discussion of payments. In other countries, negotiation is regularized between providers and national policy administrators, and this creates both greater transparency and greater scope for over-time tradeoffs.

4. Soft and hard triggers. The new data collected by the expanded Payment Advisory Commission should create automatic review procedures and eventually force action when provider participation, payment adequacy, or care quality measures drop.

4) Why haven't insurers been forced to release some kind of scrubbed claims data? All sorts of other industries are forced to release data that could be called proprietary. Why not insurers? Or has nobody ever tried?

Insurers operate in something of a netherworld between federal and state regulation. States have generally lacked the skill, will, resources and power to regulate them appropriately with regard to transparency (and a host of other issues). To date, the federal government has lacked the political will to do so. Moreover, insurers have been able to raise concerns about privacy that are not as prominent or compelling in other industries.

Nonetheless, the need for greater transparency is pressing, and this is an argument not just for fairer regulation of private plans but also for a public health insurance plan. Indeed, it is crucial that the public health insurance plan be seen not just a cost-containment mechanism, but as a means of improving how care is delivered. As Glenn M. Hackbarth, chair of the Medicare Payment Advisory Commission, argues, “We need better information to inform physician and patient decisions, as well as insurer decisions about coverage, pricing, benefit structure, and pay-for-performance programs." The public plan is essential for collecting such information and informing the decisions of both public and private payers. Already, Medicare shapes many of the most important decisions of the private sector regarding coverage and payment. Yet it does so without the scope of investments in data collection and comparative-effectiveness research that is desperately needed. A new public health insurance plan for the nonelderly (and Medicare, through its association with the new public health insurance plan) can and should be centrally involved in monitoring and improving quality.

The simple truth is that private insurance has few incentives to conduct comparative-effectiveness research, and limited scope to influence the practices of providers and other insurers even when they do. Comparing the clinical effectiveness of tests, procedures, and drugs with their alternatives is critical to increasing effectiveness and reducing costs. But for insurance companies, it is expensive and the benefits, if made public, are not theirs alone. Because of its broad and national reach, the stability of its enrollment, and the unparalleled opportunity for data collection and use, the new public health insurance plan is the player in the system that will have the largest incentives to make these investments. The new plan should have a budget for these activities (Medicare now must do everything on a cost-neutral basis), and it should have much more freedom to consider costs in coverage decisions and set up trials to test new treatment and payment modalities. The goal should be simple: pay for what is effective, reducing overuse and misuse of services. And only a public health insurance plan at the center of reform efforts can effectively do that.

5 Would a private plan limit provider payments below market (by requiring providers to take public plan members if they take Medicare) and subsidize from general tax revenues? Or is the idea to compete on a level-playing field?

The idea is of course to compete on a level playing field, which means that there should be no specific subsidies from general revenues. The public health insurance plan should not be able to draw on general revenues to cover its expenses in the same way that Medicare Part B does: Any subsidies for coverage are available for any plan within the national pool at the same level, however they are financed (general revenues, payroll contributions, etc.). I am less sure that linking provider participation in the new public health insurance plan to participation in Medicare would illegitimately tilt the playing field. Since I envision the public health insurance plan as a program buit on the Medicare infrastructure and hope that the two will move toward a similar (better) approach to paying providers over time, I believe it would make sense to have providers simultaneously sign up for treating both the elderly and nonelderly who are receiving federal health insurance—at least eventually.