Health Care Reform for Beginners: The Many Flavors of the Public Plan

For most of you, this is the big one. The inclusion of a strong public insurance option has become, for most observers I know, the single most recognizable marker for victory. If the public plan exists, liberals have won. If it's eliminated, or neutered, then conservatives have triumphed.

The public plan has a very particular political lineage: The lesson liberals took from the 1994 health reform fight was that you couldn't threaten the insurance coverage individuals already had. For many policy wonks, the central problem in health care was the existence of private insurance coverage. For most Americans, however, the central problem was that they could lose their private insurance coverage, and be left with something they didn't like, or nothing at all. This effectively ruled out something like single-payer, or even Bill Clinton's managed-care-within-managed-competition model. It ruled out anything that began by changing the health care coverage of those who wanted to keep their current policies.

But that political insight didn't cancel out the policy insight: The private insurance market is a mess. It's supposed to cover the sick and instead competes to insure the well. It employs platoons of adjusters whose sole job is to get out of paying for needed health care services that members thought were covered.

Moreover, public insurance is simply more efficient. Medicare holds costs down better than private health insurance. The substantially public systems employed by every other industrialized nation cost less and cover more than the American model. So the question became how to marry the policy need for public insurance with the political need to preserve the status quo.

Enter the public insurance option. It doesn't replace the insurance individuals already rely on. But it provides an alternative. It lets them make the decision. It's the health care equivalent of being pro-choice. And it thus serves two purposes. The first is to act as a public insurer. To use market share to bargain down the prices of services, much as Medicare does. To lower administrative costs. To operate outside the need for profit, and quarterly results. The Commonwealth Fund estimated that this would result in savings of 20%-30% over traditional private insurance:

The second is to apply competitive pressure to the rest of the insurance industry. If the public plan is ruthlessly lowering its administrative costs and garnering a reputation for decent, good-faith service, it will take market share from the private insurers. The private insurers will have to respond in kind to retain their customers. If they fail to adapt, the system could become something resembling a single-payer structure.

But that's not the most likely outcome. Rather, the theory here is simple: If you can't replace them, convert them. If the public plan works, then private insurance will work better as well. In this telling, the simple existence of the public plan forces a more honest insurance market: Private insurers need to offer premiums closer to their marginal cost, and they have to cut administrative costs, and they have to work on their reputation for cruelty and capriciousness. The existence of another option changes the market. Individuals will have access to private insurers, but they'll no longer be stuck with them.

Private insurers, of course, don't want to face that kind of competition. And they have enlisted many members of Congress to help protect them from the public insurer. In recent weeks, however, the Obama administration has put some muscle into the preservation of the public option. Most observers now think that some form of public plan will survive in the final bill. The question is what form of private plan? There are three options:

• The "Trigger" Plan: Olympia Snowe is pushing this compromise, as are some conservative Democrats. The basic idea is that the public plan would act as an invisible threat: It would be "triggered" into existence if the private insurance market was unable to offer, say, enough options in a particular region, or enough cost control. In addition, the public plan would only come into existence in this or that region, or this or that state. It would be effectively useless as an insurer. It could potentially have some competitive effect in that private insurers would still work to avoid its existence. Some have argued, however, that the conditions being mentioned in the "trigger" proposals have already been met.

• The Weak Public Plan: This is what people are talking about when they refer to a "level-playing field." This incarnation of the public plan -- first proposed by Len Nichols at the New America Foundation and later echoed by Peter Harbage and Karen Davenport at the Center for American Progress -- would have no special advantages over private insurers. It couldn't use the low rates that Medicare sets or access taxpayer subsidies. It couldn't force its way into networks. It would simply be another insurer, albeit with different incentives than traditional insurers.

• The Strong Public Plan: This would be like Medicare for the rest of us. It could throw the federal government's weight around. It could negotiate deep discounts with providers. It could muscle its way into networks. Outside groups like the Commonwealth Fund estimate that it would save the average consumer 20 percent to 30 percent. That would give it a massive competitive advantage over private insurers, and would probably result in tens of millions of Americans dropping their current coverage and entering the public plan to save money. A variant of this was in the draft of Ted Kennedy's bill that was leaked last week.

As someone who thinks cost control and efficiency are important in health reform, I'm most interested in the strong public plan. Folks who are more interested in preserving something that looks like the current private insurance market tend to fall behind the trigger public plan, largely under the theory that it would be pretty much the same as no public plan at all.

Further reading: "A Modest Proposal for a Competing Public Health Plan" by Len Nichols.

• "The Case for Public Plan Choice" by Jacob Hacker.

• "Competitive Health Care: A Public Plan that Delivers Market Discipline" by Peter Harbage and Karen Davenport.

• Have the conditions for a "trigger" already been met? By Health Care for America Now.