The Obamacare Public Option: The Return of Sewer Socialism or Just Another Nudge?
The dream of some liberals arrived with slight modification rather than complete transformation. Maybe that was the original point?
When health care reform was being debated in the 2008 election and in Congress from 2009-2010, a key piece of reform was the public option. Aside from new regulations and subsidies to make insurance more comprehensive and affordable for Americans, the public option was intended to cater to liberals and guarantee that Americans could always default to a “Medicare-like” public option if they wanted it. But it was not to be, conservative Democrats like Senators Lieberman killed it as a condition of their support for the Affordable Care Act (ACA). After more than a decade, states have decided to stop waiting on the federal government to act and to create their own public options. But what many people thought would transform the private marketplace into a de facto public good over time has merely given shoppers another choice. And one they most often do not choose. Is this a failure, or was a public takeover never really the goal of the Obamacare public option in the first place? In what follows, I will discuss the origins behind the public option, its relationship to the ACA and the marketplace, and how these new state public options are shaping up.
The Idea, unrealized
Prior to the ACA, health insurance in the individual marketplace was a mess. Enrollees were subject to underwriting, or assessing health status to determine a fair price, just like car insurance. And if you were relatively sick, even if it was not because of anything you did, you would have to pay higher premiums or could even be denied coverage. And if there was anything you omitted in your application, your coverage could be denied even if you were deemed eligible. There were also often life-time limits on coverage, a lack of subsidies for people to help people afford coverage, no standard rules on what plans had to include, and no common platform to compare plans. The ACA planned to fix all of this with strict rules on minimum coverage requirements, bans on discriminating based on health status, standardization, subsidies to help people afford coverage, and a common marketplace to compare plans. To avoid issues where the sick may choose more generous plans than the healthy or certain insurers having relatively sicker enrollees on average, risk-adjustment came into play. Insurers would have the average complexity of their enrollees assessed based on their health status, the generosity of their coverage, the region of the country they are in, and more. If an insurer had a disproportionately healthy group of enrollees compared to other insurers, then they would have to compensate the insurers with less healthy enrollees to avoid gaining market share solely my finding the healthiest enrollees as had been done in the past. This removed the ability of insurers to discharge enrollees because they were more complex than they thought, and helped keep markets stable by sharing resources. The idea behind all of this was to create a better functioning individual marketplace.
However, rules setting, risk-adjustment, and subsidies alone do not ensure a well-functioning and competitive marketplace. Monopolies could exist, insurers could aim for the skimpiest benefits allowable or focus on a package the government may deem sub-optimal. That’s where the original idea for the ACA public option came into play. If the government always offered a public option, it would ensure market monopolies were impossible. If private plans tried to offer only the skimpiest benefits or offer a package that left many people in an area behind, then the public option could fulfill their needs. And if private insurers entered a “race to the top” or “race to the bottom” then the public option could be there to set the market right. It served primarily as a tool to keep the market honest, and redirect the market when it strayed from what the government determined was in the best interest of Americans.
Jacob Hacker, a political scientist, had the idea for this very specific type of public option. One that would compete everywhere, but be bound by the same rules, risk-adjustment, and regional marketplace as the private sector. Unlike Medicare, which operates with its own benefits package and design, this public option would be subject to the same rules and regulations as UnitedHealthcare, Blue Cross Blue Shield, Aetna, Cigna, et cetera. It would not get the benefit of a stacked deck with overly generous benefits or government subsidies. It would not offer private insurers a reprieve by placing sick enrollees solely on the government dole, nor would it create a package aimed at the healthy and wealthy to opt out of the private sector. And it would operate regionally just like private plans, rather than in a national framework like Medicare. This would allow the public option to force insurers to compete, but compete on a relatively level playing field. It would be an equivalent option, not a dominant one. And people would be free to select a private plan if it was right for them. And in concept, a public or private plan may well be better. And if private insurers left, then the public option would ensure that people always had an available plan. A true death spiral was not in the cards.
After establishing competition, the government may find itself with a decent chunk of the market share. If the government thought insurers were not doing enough to contain costs, the government could negotiate a narrower network to compete on cheaper premiums. This could incentivize private plans to do the same. If the government thought deductibles were too high or plans inadequate in some way, they could modify it to best meet the needs of a population. After all, people in Mississippi may not have the same healthcare needs as people in Nebraska or Massachusetts. If the government shouldered too much of the burden on sicker enrollees, private plans would have to pitch in via risk transfers and vice versa. This vision of the public option was fundamentally reciprocal.
Despite the best laid plans, the ACA public option was not to be. Senator Joe Lieberman of Connecticut threatened a veto of comprehensive health care reform over the inclusion of a public insurance option, and he was unmoved by other conceptions of it like a Medicare buy-in at 55, only allowing it in markets without more than one insurer, and more. Liberals like Howard Dean screamed that the health care reform should die rather than go forward without a public option, but some backed off of this pledge and enough votes were found to enact the ACA in 2010.
Other Types of Public Options
Medicare buy-in: One type of option we often talk about is the Medicare buy-in for people 50 to 64. These types of public options entered discussion in the 1990s, in the pre-ACA area. The idea was to allow people to voluntarily buy-in to Traditional Medicare Parts A, B, and D for a plan that covered roughly 85% of costs of the enrollees on it. These plans would use the ACA network and reimbursement rates, but have a risk pool separate from the rest of what would now be the ACA marketplace. In the post-ACA era, this plan was modified to give potential enrollees the same subsidy structure as the ACA. So, it could in theory give older enrollees access to more robust insurance at what should be a more affordable cost. And the buy-in nature should avoid threatening the Hospital Insurance Trust Fund.
However, this type of plan comes with some drawbacks. First, it was estimated only 2.1 million people would buy-in to a plan like this, and 1.9 million would be transfers from the ACA marketplace. It would add a lot of complexity to plan selection without expanding coverage to many middle-aged Americans. Furthermore, the separate risk pool creates further problems. Because the middle-aged Americans are healthier than may be expected, them leaving the ACA marketplace voluntarily means premiums would end up becoming more expensive for the remaining population. The Urban Institute estimated that 110,000 people below age 50 would leave the marketplace as a result of these more expensive premiums, meaning only 67,000 people would gain coverage on net. Quite mediocre as a policy for improving and expanding coverage. Plans that increased ACA subsidies at the same time as this like the Inflation Reduction Act would increase coverage by 700,000, but that’s still fairly small compared to the total uninsured population. And still hurts the remaining Americans below 50 on the ACA marketplace. The RAND Corporation similarly believed that a Medicare buy-in at 50 would lead to 400,000-1,600,000 Americans over 50 gaining coverage, and 100,000-800,000 Americans under 50 losing coverage for a net gain under one million. Add the confusion of comparing options on the ACA marketplace to the Medicare buy-in as another headache. A policy like this could have helped Americans over 50 in the ACA marketplace that were too high-income for subsidies, but the expanded subsidies in the Inflation Reduction Act already cover this without the added issues. And the Hacker public option would have avoided the risk pool issues and any unforeseen regional effects.
A Medicaid buy-in might work similarly to a Medicare buy-in. It would be more regional than a Medicare buy-in may be, but it would have a narrow network holding down costs significantly. A lack of risk-adjustment could still cause problems. However, Medicaid carries significant stigma for some, so it is possible its effects would be different than a Medicare buy-in with a national network.
Medicare for America: The public option that most resembles Medicare for All without actually forcing a single payer system is Medicare for America, though it works by effectively reforming Medicare until it’s hardly recognizable. At present, Medicare is split into Medicare Part A (Hospital Insurance), Part B (Medical Insurance), Part D (Prescriptions Drugs), and Medicare Advantage. Part A has no premiums, but comes with a $1,600 deductible, 80% coverage thereafter, and no out-of-pocket maximum. Part B comes with premiums set at just under $165/month and a $226 deductible. Again, without an out-of-pocket maximum. Part D is private drug coverage with an average premium of about $56/month; in a few years it will have a $2,000 out of pocket maximum. Then you can buy a supplemental Medigap plan for several hundred dollars a month depending on the plan, or you can get additional help from Medicaid if you are very low-income and lack assets. You cannot get dental, vision, hearing, or long-term care coverage from Traditional Medicare, Medigap, or Medicare Part D. Alternatively, you can bundle Parts A and B together in Medicare Advantage with the ability to add drug coverage, an out-of-pocket maximum of no more than $8,300, dental/vision/hearing coverage, free gym memberships, and other perks. In exchange, you accept being limited to a network like in the commercial sector; long-term care coverage not included.
Medicare for America takes an entirely different approach than the ACA public option or a Medicare buy-in. It merges Medicare Parts A, B, and D into a single benefit. It also added dental, vision, hearing, and long-term care coverage. It incorporates a subsidy structure such that people making below 200% poverty pay no premiums, and people pay the cheaper of current Medicare premiums or Medicare for All premiums; but never more than 9.69% of income. Deductibles would be set at $350 ($500 for families) and an out-of-pocket maximum at $3,500 ($5,000 for families). Medicare Advantage would be allowed to exist, but would need to charge an extra premium to add extra benefits. Uninsured Americans and newborns would be automatically added to the new plan. Current Medicare, Medicaid, CHIP, and ACA marketplace enrollees would be transferred to Medicare for America. Large employers would be allowed to offer plans provided they cover at least 80% of total costs (Gold-level coverage), but employees would not be obligated to take it and can elect Medicare for America instead. If employers choose not to offer a plan, they can be taxed a payroll tax for every employee on Medicare for America, and can also choose to help employees pay their premiums.
Medicare for America would be as close to single payer as possible with only modest opt out options for a large generous employer plan, or Medicare Advantage. And by eliminating most of the benefits of Medicare Advantage (added benefits, an out-of-pocket maximum, and one “all included plan”), it would likely dominate the non-employer market as well. As far as public options go, this is as strong as one could be without being single payer.
Roughly speaking, you have three major choices in types of public options. The risk-adjusted “level playing field” public option as heard of in the original ACA debate, the Medicare buy-in that could siphon older enrollees from the commercial sector for better or worse, or the strong default public option that resembles more of a public default with a voluntary opt-out. The ACA public option could be modified to include an employer public option that may not come with risk-adjustment, but that would require consideration like a Medicare for America modification in that market to avoid selection issues as discussed with the Medicare buy-in. Of course, you can take the route of expanding public insurance like lowering the Medicare age or increasing the poverty threshold for Medicaid, but RAND showed simply lowering the Medicare age could increase costs for enrollees remaining on the ACA marketplace. Though people with employer coverage are helped and the less voluntary nature of Part A would make coverage expansion more likely.
State Public Option Plans
More than a decade after the ACA was passed, Washington, Nevada, and Colorado finally acted to pass their own “public options” to hold down consumer premiums and increase competition. States, so far, have sided with the ACA public option with slight modifications. Are these plans managed by the government? No. In all cases, these “public options” are private Obamacare plans that are slightly more regulated than the other private plans. The state may set reimbursement requirements, or require an insurer to target premiums that are a certain percentage cheaper than other plans or its own premiums the previous year. They are even in the same risk-adjustment as other Obamacare plans. It’s like a government sponsored private plan. Small targets to reduce premiums and lead competitors to do the same via competition are used instead. But that’s the only real difference, the government sponsored targets and sometimes defined design. Otherwise, these plans are sold along with other Obamacare plans and compete with them.
In Washington state, the government contracts with a private provider that must set the reimbursement rate for this plan at about 160% of Medicare rates, knowing that private providers in the state were reimbursing around 174% of Medicare rates on average. They must sell plans at multiple metal levels. They thought it would be 5%-10% cheaper than most plans, but the silver “public option” was 11% higher than the lowest cost silver plan in 2021. As a result, only 1% of individual market shoppers chose these plans in 2021.
In Colorado, the “public options” must follow strict design, pricing, and transparency regulations with an annual target to reduce their own premiums by 15% from 2021 levels, or about 5% a year for three years starting in 2023. If these sponsored plans fail to meet their target, then the state will investigate if they must set reimbursement rates. About 13% of individual market enrollees chose one of these options in the first year (so ~1% of Coloradoans), but 90% of these plans failed to meet their pricing benchmark. Part of the issue may be the plan design. If the plan design is too generous, that makes it difficult to lower prices for these plans over time, let along for non-sponsored plans in the marketplace.
In Nevada, the state is working to launch a similar series of “public options” by 2026. This set up requires insurers that hold Medicaid Managed Care contracts with the state to bid for a plan on the state’s individual marketplace that target premium reductions of 10%-20% each year to lower the uninsured rate. However, projections only anticipate this scheme lowering the uninsured rate in Nevada by 4,800 people at most when the uninsured rate is 350,000. Perhaps this option will do more to save money for the state and enrollees than expand coverage, but only time will tell.
Minnesota and New Mexico are also working to enact public options. Minnesota wants to extend a Basic Health Plan buy-in (MinnesotaCare) for enrollees past 200% poverty for people on the individual marketplace and for small employers, while New Mexico is following a plan more like Nevada’s Medicaid Managed Care buy-in using federal funds. This option should be available to people in the employer marketplace, which offers a greater chance to change New Mexico’s marketplaces.
These plans may not be single payer like Medicare for All, nor a pathway to single payer like Medicare for America. They aren’t even an off-ramp to get people onto a Medicare-like plan. Instead, they have an explicit goal to force competition in the market, prevent death spirals, and push insurers to compete for affordable coverage rather than create either overly generous plans, dominate the market with vertically integrated monopolies, or offer lackluster coverage. Considering these goals, the ACA public options can be a welcome tool. They’ll never truly overcome the commercial sector; in state “public” options they won’t truly displace them at all. So, they enter these markets with few noticing. And maybe that’s the point? Not to be the behemoth of public insurance seen in Canada or public health care like the British National Health Service, but simply a plan to keep commercial insurers honest. Just as they were intended to do in a more conservative political era.
However, many of these plans don’t offer small employer or employer market buy-ins, limiting their reach in an affordable or well-designed alternative. And with the ACA marketplace being a much smaller piece of the pie than the employer market than covers nearly half of Americans, the ACA public option is very limited in scope without an upgrade. Perhaps that’s the reason federal moderates like now President Biden or Transportation Secretary Pete Buttigieg offered the public option to the employer insurance market as well? And why Minnesota and New Mexico plan to do the same. The tool of their own design was too small to excite in a primary, yet still too large for state governments to chew. But perhaps if the national Congress is too paralyzed to replace large swaths of the commercial sector, then states opting for better management with a little “public” competition is what the doctor ordered? Not public management, but managed competition. Little excitement for sewer socialists imagining a progressive movement to public insurance, but modest savings trickling in over the years as state governments bend (or dent) the cost curve over the years.