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How Did The Concept Of A “Public Option” Originate?

“Public health insurance, in the form of Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), has existed in the United States for decades, as have proposals to expand those programs. However, the public option, which first surfaced in 2001–02, represented an entirely new idea. The concept was to offer a publicly insured plan in direct competition with other options for private health insurance coverage, in the hope of driving down both premiums and underlying health care costs.

“Birth In California

“The idea of a public option within a state-based health insurance exchange was initially set forth in a proposal known as CHOICE. This was part of California’s Health Care Options Project (HCOP),¹ an initiative to update and develop ideas and options on how to expand coverage in California, and was funded by a federal planning grant to the state Health and Human Services Agency. The CHOICE proposal² built on the model of managed competition, with its array of competing private managed care plans. However, it added a new option, the public option, to the exchange, to broaden the array of choices available to individuals and families. The public option was also designed to compete with private plans in the exchange and to serve as a policy compromise between a single-payer system and managed competition among private plans.”

Source: Helen A. Halpin and Peter Harbage, The Origins And Demise Of The Public Option, Health Affairs 2010 29:6, 1117-1124.

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What Is The “Public Option” And How Would It Work?

“Public-option plans would allow middle-income, working-age adults to choose a public insurance plan — like Medicare or Medicaid — instead of a private insurance plan. There are various ways this could work. Some proposals would allow individuals to pay a premium to buy a Medicare or Medicaid plan that would be the same as the insurance now available to older people, the disabled or the poor. Others would set up a new public plan, run by the government, that Americans could buy. Under most proposals, people who get federal help buying Obamacare coverage could use their government subsidies to help them buy either a private or public option.

“Most of the current proposals would limit access to the public option to certain groups of Americans. A bill from Senator Debbie Stabenow of Michigan and colleagues would allow only those older than 50 to buy a Medicare plan, for example. Some plans would allow only people who buy their own health insurance to choose Medicare or Medicaid as an option alongside those offered in the Obamacare exchanges.

“Others would also let employers choose Medicare, instead of a private health insurance company, when offering benefits to their workers. A plan from a liberal think tank, the Center for American Progress, would make the public Medicare option available to anyone who wanted to sign up.”

Source: Margot Sanger-Katz, “The Difference Between a ‘Public Option’ and ‘Medicare for All’? Let’s Define Our Terms,” New York Times, Feb. 19, 2019.

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“One idea, a variant of which Congress considered in the original debate over the ACA, would be to require a public plan option in the ACA marketplaces. Most plans currently under consideration would have the federal government offer a Medicare fee-for-service–based plan as an option in the marketplaces, available to those currently eligible for marketplace coverage (e.g., the CHOICE Act, HR 2085/S. 1033). These plans would cover the same essential health benefits and provide the same premium subsidies and cost-sharing subsidies as other marketplace plans. All providers participating in Medicare would be required to participate in the new public option at or near Medicare payment rates. Other variants on this design would have the federal government require Medicare Advantage plans to offer products in all marketplaces or require Medicare Advantage plans or a traditional Medicare option to participate only as a fallback if there was insufficient insurer competition or prices were too high.^15–18

“States could similarly mandate that Medicaid managed care plans offer plans in the marketplaces (as in the Medicaid state Public Option Act HR 1277/S489). Estimates suggest that including public plan options in the marketplace could reduce premiums by about 7% to 8% and hence could reduce federal subsidy costs.¹⁹ Although the public option approach seems modest and popular, the effort to incorporate it into the ACA failed and states have found this approach challenging. The difference between Medicare and private payment rates, an important feature of this proposal, has been a sticking point. This year, Washington State did succeed in passing a public option but, in the face of provider opposition, only by weakening its provisions—and potential effects—considerably.²⁰

“Offering a public option in the marketplaces under the existing ACA subsidy structure could also be a mechanism for implementing a broader public insurance buy-in program. Eligibility for such a plan could be limited to older adults, in effect lowering the eligibility age for Medicare (to 50 or 55 years), as proposed, for example, in the Medicare at 50 Act (S 470). Simply lowering the Medicare eligibility age has been under policy consideration for a long time, but passage of the ACA makes this option somewhat less attractive. The ACA offers more comprehensive benefits than does the combination of Medicare Parts A, B, and D, especially for those without supplemental Medigap coverage. Because of the limitations on age rating and because of the form of the ACA’s subsidy structure, benefits for older adults, especially those of modest incomes, are more generous under the ACA than in traditional Medicare. Proposals currently under consideration generally incorporate the ACA subsidy structure (while retaining the Medicare benefit package) and would operate through the marketplaces, an approach that is more desirable, especially for those with modest incomes, than extending eligibility to traditional Medicare through a stand-alone program. This approach, however, would leave older adults facing a complex choice between two quite different benefit designs.”

Source: Glied, Sherry. “Options for Dialing Down From Single Payer.” American journal of public health vol. 109,11 (2019): 1517-1520. doi:10.2105/AJPH.2019.305299.

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“Most expansively, a state or the federal government could offer a public plan as a universal default option. Under this model, all residents would be autoenrolled into the public program, which could be waived or supplemented by an acceptable alternative source of coverage. The Medicare for America proposal (HR 2452) takes this approach; it would create a new, publicly operated coverage option, with ACA-like benefits and subsidies and payment rates determined by, but slightly higher than, current Medicare rates. Universal public default option models like Medicare for America build on earlier pay-or-play reform efforts that offered employers a choice between providing coverage directly or enrolling their employees in a government-established program and paying a payroll-based tax. Because coverage under this kind of model is intended to be attractive to those currently on Medicare, as well as those in the marketplaces and those with employer coverage, it would likely be more costly and comprehensive than are the more incremental models.

“Implementation of this kind of hybrid model can be complicated, because there is so much scope for individual and employer choice. Financing rules need to be calibrated to address the likelihood that employers with low-wage, high-cost employees will be more likely to join the public plan, whereas employers with high-wage, low-cost employees remain outside the system. Allowing individuals to opt into a public option raises concerns that employers will “dump” their sickest employees into such a plan or that the availability of the public option will destabilize employer coverage, making it unavailable to those who might prefer it. Opposition to a Medicare-based default plan is also likely to come from Medicare providers, who would object to shifting a substantial share of the population from paying at private insurance rates to paying at near Medicare rates. Nonetheless, there is precedent for such an approach: Australia currently operates a model of this sort.²¹“

Source: Glied, Sherry. “Options for Dialing Down From Single Payer.” American journal of public health vol. 109,11 (2019): 1517-1520. doi:10.2105/AJPH.2019.305299.

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“Several recent health reform proposals call for developing and introducing a public health insurance plan, an insurance option structured and administered by government or a government contractor.² The public option would offer a lower-cost insurance plan (or plans) in private insurance markets, which would reduce health care spending for consumers and government, lower overall spending growth, and catalyze greater competition among private insurers. Such a plan would pay health care providers lower rates than typical commercial plans pay, perhaps at Medicare rates or somewhere between such rates and those of commercial plans. Private insurers paying providers higher rates could compete with the public option on customer service, effective care management, or provider networks; however, the number of private insurers might decrease in at least some markets.”

Source: Linda J. Blumberg, John Holahan, Stacey McMorrow, and Michael Simpson, Estimating the Impact of a Public Option or Capping Provider Payment Rates, Urban Institute, March 2020.

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“For a public option to reduce exchange subsidies or increase the tax base, it must be structured so that it can compete with private insurers. To do so, it must appeal to enrollees and providers, each of which is necessary to attract the other. These twin requirements have design implications and demand a public option robust enough that a meaningful number of consumers and providers will want to participate in it, thereby leading to significant economic savings. A robust public option would provide competition in the exchange, decreasing the premiums of other insurers. The result would potentially look somewhat like the public-private hybrid model that exists in the American university system, in which competition from public universities keeps the prices of similar-caliber private universities lower than they otherwise would be, although unlike universities public health care would not receive a net government subsidy.

“How the public option is structured will have immense economic and fiscal consequences. In particular, the public sector can save money from adopting the following design features:

“Š Administering the public option so that the public option and Medicare
appear seamless to providers;

“Š Tying provider reimbursement rates in the public option to Medicare;

“Š Administering the public option at a national level;

“Š Mandating that Medicare providers accept public option enrollees, or at least creating strong incentives for providers to do so;

“Š Making provider enrollment in the public option the default;

“Š Making the public option available to all Americans rather than restricting it to those without the possibility of employment-based coverage and small businesses;

“Š Placing caps on the premium differentials that insurance companies can
charge for the same plan to different groups of consumers; and

“Š Allowing individuals to purchase health insurance through the exchange with pre-tax dollars (or eliminating the employer tax subsidy for health insurance).”

Source: Ethan Kaplan, Ph.D., and Melissa A. Rodgers, J.D., The Costs and Benefits of a Pubic Option In Health Care Reform: An Economic Analysis. Berkeley Center on Health, Economic & Family Security, UC Berkeley School of Law, October 2009.

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“The government’s low administrative costs and ability to negotiate provider reimbursement rates would reduce the price of health insurance. By offering insurance at lower prices, the public option would introduce greater competition into the exchange and thereby lower the premiums of private health insurers. Since the government would be subsidizing health insurance purchased in the exchange for those between 133% and 400% of the federal poverty level, lower overall premiums translate into lower overall governmental health expenditures. The July 2009 estimates from the Congressional Budget Office project that low-income health care subsidies in H.R. 3200 would amount to approximately $160 billion per year by 2019.4 The mechanism for reducing fiscal expenditures, emphasized by the Urban Institute model, is what this brief calls the subsidy reduction effect.

“The Lewin Group highlights another mechanism for generating savings. The Lewin Group projects costs for two different scenarios rather than focusing explicitly on the costs and savings that the public option would generate. Comparing two of the Lewin Group scenarios—one in which uninsured individuals and small businesses have access to a public option, the other in which large firms would have access to a public option as well—shows that the more broadly available public option would generate $45 billion in extra savings in the year 2011 alone. The largest portion of these additional savings comes from additional income tax revenue: employers who purchase coverage through the public option spend substantially less on medical premiums and can therefore afford to pay their employees higher wages. Since wages are taxed but medical premiums are not, this would generate increased government revenue from income taxes.”

Source: Ethan Kaplan, Ph.D., and Melissa A. Rodgers, J.D., The Costs and Benefits of a Pubic Option In Health Care Reform: An Economic Analysis. Berkeley Center on Health, Economic & Family Security, UC Berkeley School of Law, October 2009.

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“Lower provider payment rates would result in public option plans having lower premiums than private options. However, the impact on enrollees depends on changes both to premiums and tax credits. Because of the Affordable Care Act’s tax credit structure, a public option would be less likely to benefit people with lower incomes than those with higher incomes. This is because lower-income people may receive smaller tax credits when a lower-cost public option is available, whereas higher-income people who pay the full cost of insurance can save a substantial amount when the public option is available.

“Federal and state policymakers considering a public option should consider how the introduction of a low-cost public option on the Marketplaces could affect tax credits that are based on benchmark premiums. The researchers suggest that one possibility for improving the benefit of a public option would be to reinvest federal savings in tax credits or other incentives to reduce consumer costs and increase health insurance enrollment. Reinvesting federal savings in larger tax credits for people with incomes below 400 percent of FPL would make the public option more beneficial to those with lower incomes.”

Source: Liu, Jodi L., Asa Wilks, Sarah A. Nowak, Preethi Rao, and Christine Eibner, Effects of a Public Option on Health Insurance Costs and Coverage. Santa Monica, CA: RAND Corporation, 2020.

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“The number of people enrolled in employer coverage is more than nine times the number in nongroup coverage. Plus, employer-based plans tend to pay health care providers at rates higher than those of nongroup insurers, particularly in the more competitive nongroup Marketplaces. Consequently, introducing the public option or capping provider payment rates in both the nongroup and employer markets has the potential to reach many more consumers and to substantially affect premiums, overall spending, health care provider revenues (e.g., for hospitals, physicians, and prescription drug manufacturers), and the federal deficit.”

Source: Linda J. Blumberg, John Holahan, Stacey McMorrow, and Michael Simpson, Estimating the Impact of a Public Option or Capping Provider Payment Rates, Urban Institute, March 2020.

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Washington State’s Quasi-Public Hybrid Option

“Washington State made history recently with passage of Chapter 364 – a new law that is poised to revolutionize the state’s individual insurance market. The law takes a multi-pronged approach to its market redesign by:

• “Creating a quasi-public option product for Washington’s individual market;
• “Requiring standard plan design for plans sold on its exchange; and
• “Developing a plan to implement and fund subsidies for individuals earning less than 500 percent of the federal poverty level (FPL).

“Washington’s quasi-public option is the first-in-the-nation requirement that a state agency – Washington’s Health Care Authority (HCA) – contracts directly with at least one private insurance carrier to offer individual market coverage on the exchange. Through these contracts, the state will require health plans to meet a series of goals and requirements including:

• “Reimbursements capped at 160 percent of Medicare rates;*
• “Standard plan design (see details below);
• “Population health improvement;
• “Alignment with state value-based purchasing models; and
• “Incorporation of recommendations from Washington’s Bree Collaborative, a multi-stakeholder group tasked with improving health care quality, outcomes and affordability, and the health technology assessment program.

“The carrier that contracts to sell these plans must make the plans available in at least one county in the state, and must offer at least one bronze, one silver, and one gold value plan. The intent is that the quasi-public plans will cost less and be higher-value to entice consumers to purchase these plans.”

Source: Christina Cousart, How Washington State Is Reducing Costs and Improving Coverage Value – A Q&A with its Health Benefit Exchange CEO. National Academy for State Health Policy. August 5, 2019. Last accessed Jan. 18, 2020.

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“The innovation of the Washington bill relates to its requirement that the state Authority contract with at least one insurance carrier to offer a Bronze, Silver, and Gold standard plan in at least one county, with the goal of ensuring at least one of these state-contracted plan options is available in each county in 2021.

“These plans are really where the “public” aspect of this policy comes more explicitly into play. While they must meet all requirements of other Exchange plans, the bill holds these them to a much higher standard than for those otherwise offered, including a robust contracting process that will include direct negotiation with the state Authority.

“In those negotiations, the state may consider the plan’s rates, utilization management techniques, pharmaceutical costs, and other factors in determining whether or not to approve its participation in the Exchange market. These state-contracted plans – I’m going to go ahead and call them the “public option” – are also held to higher standards of transparency, reducing administrative burden, aligning with state value-based purchasing programs, etc., that befit a more publicly-interested plan.”

Source: “Public Option 1.0: Washington State Takes An Important Step Forward,” Health Affairs Blog, May 1, 2019. DOI: 10.1377/hblog20190430.353036.

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World Health Systems Facts is a project of the Real Reporting Foundation. We provide reliable statistics and other data from authoritative sources regarding health systems in the US and sixteen other nations.

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Page last updated May 25, 2023 by Doug McVay, Editor.