Health Care Reform's Public Option: Everything You Need to Know

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Last Updated Nov 20, 2009 10:21 AM EST

This article was updated on November 20, 2009.


A scant month or two ago, the controversial "public
option" proposal of the health care reform debate seemed almost dead
after it was rejected by the Senate Finance Committee. But because the proposal
gained new life after the Congressional Budget Office (CBO) href="http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf">issued a favorable analysis of it and
opinion polls showed strong public support for it, a government-run plan was
included in the House bill that passed on November 7. While liberal Democrats
argue that a public plan would provide affordable coverage to millions of
uninsured Americans and help to spur competition, Republicans and some moderate
Democrats contend that it could drive private plans out of business, and lead
to a government takeover of health care.

As the Senate debate heats up, here's
a look at key elements of the public option, where the legislation stands now,
and what it all might mean for your pocketbook and your health care.


What exactly is the public option and what’s its purpose?


The public option would be a government-run health
insurance program available to two groups—those who lack
employer-provided health insurance, and employees of small businesses. The
public option would be sold alongside new plans from private health care
providers in a new Health Insurance Exchange. President Obama says that having
a public option would keep insurers honest by spurring price competition. Right
now, many regional markets are dominated by one or two plans. By widening
coverage choices, the public option could force private plans to cut costs and
keep premiums down to avoid losing customers. If approved, it would take effect
in 2013.


If health care reform passes and the public option is approved, what form
is it likely to take?


In both the House and Senate versions of the reform bill,
the government would negotiate pay rates with health care providers, instead of
unilaterally setting prices, as it does with Medicare. Most likely, this will
involve agreeing on fees with groups such as the American Hospital Association
and the American Medical Association. Rates would have to be adjusted by
location, however, since doctors and hospitals charge more in some cities than
others. Although the Senate plan is still evolving, one key difference from the
House bill is a provision introduced by Sen. Harry Reid, the Senate Majority
Leader, to let states opt out of offering the public plan. In addition, Sen.
Olympia Snowe, the sole Republican to support the bill during the committee
process, has proposed as a compromise a “trigger mechanism”
by which a public option would be launched only if overall reforms failed to
significantly expand the availability of affordable health care coverage.


How much would a public plan cost taxpayers?


The House bill mandates that the program be self-sustaining
and run without federal subsidies, which means it must pay administrative costs
and benefits out of premiums from its subscribers, rather than taxpayer
dollars. To launch the plan, the government would provide as much as $2 billion
for start-up costs, to be repaid from premiums in the first 10 years. Should
the public option ever go broke, the House bill would ban a bailout; the Senate
version is expected to do the same.


Who exactly would be eligible for the public option?


Initially, the public option would be offered to Americans
who lack employer-provided insurance and don’t qualify for Medicare
or Medicaid, as well as to employees of businesses with fewer than 25 workers. Under
the House bill, in 2014, the public option would be made available to
businesses with as many as 50 employees, and in 2015, to businesses with up to
100 employees. After that, it could be opened up to all businesses, subject to
the decision of a new Health Choices Commissioner. The CBO anticipates that
about 6 million citizens would be covered by the public option in 2019, and
that 24 million additional Americans would opt for private companies’
offerings in the new Health Insurance Exchange.


How would people enroll?


The public option would be sold alongside private plans in
the new insurance exchange. Comparing plans would be easy —in theory,
at least — because you’d be able to review the policies
side by side on the Internet, and enroll online. Both private and public
policies would have standardized benefits, such as no co-payments for preventive
care; a cap on out-of-pocket expenses to protect you from medical bankruptcy; and
comprehensive coverage, including hospitalization, prescription drugs, mental
health services, maternity care, and children’s dental, vision, and
hearing services. The basic plan would pay 70 percent of the cost for covered
benefits, with three additional tiers of service that increase the percentage
of covered costs.


Would a public option actually help reduce health care costs?


Two factors could limit the public option’s
ability to drive down costs through increasing competition. First, fees will be
negotiated rather than imposed, and second, the public option will have less
bargaining power than the massive Medicare system because it will likely have
far fewer participants. As a result, the CBO expects that under the House bill,
the government-run plan will end up paying providers the same rates as
comparable private plans. The public plan would likely have lower
administrative costs, though, because insurance would be sold directly to
individuals, and not through a broker.


But, the public plan could pay off in the long run.
Although providing care may cost more initially, if the public option becomes a
vehicle for a large number of currently uninsured people to gain coverage, it
could save money — and lives. Its enrollees could avoid becoming
chronically ill from a lack of medical attention. And instead of waiting until
they’re sick and turning to costly emergency rooms for treatment,
Americans insured through the public option could get preventive care to reduce
their risk of developing serious diseases.


I already have health coverage through my job. How will the public option affect
me?


The public option is unlikely to affect your premiums much
in the short term. Although the government option is intended to spark price
competition by offering cheaper coverage, the CBO projects that under the House
plan, the public option would initially have higher premiums than
private plans. That’s because the public option would draw a less
healthy pool of enrollees, many of them previously uninsured and needing
medical care. If you were laid off and lost your employer-provided coverage,
however, the public option would provide a safety net. Comprehensive insurance,
including Uncle Sam’s plan, would be available through the insurance exchange,
and government subsidies would be offered to those with low or moderate
incomes.


What are some potential downsides of the public option?


Instead of saving money, the public option could end up just
shifting health care costs around. In theory, if the public program could
negotiate lower reimbursements, doctors and hospitals might increase the prices
they charge to everyone else to recoup the lost income. This is an argument against
the public option being made by Sen. Joe Lieberman. However, most studies don’t
support this scenario, says Karen Davis, Ph.D., president of the Commonwealth
Fund, a nonprofit policy research group in New York City. “Health
care providers will have a new source of revenue when more people are insured,
while bad debts from patients who can’t pay their bills would be
virtually eliminated,” Davis says.




What are the next steps in the approval process?


Once the Senate unveils the details of its health care
overhaul, there will be a few weeks of debates and amendments before the vote.
If it passes, a House-Senate committee would work to merge the two chambers’
bills into unified legislation that would then require a full Congressional
vote to become law. Democratic leaders have said they want to deliver an
approved bill to President Obama by Christmas, but that target date could slip
into the new year because of expected opposition from
Republicans.


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