The “Public Plan” Puzzle: What Will It Mean for Your Organization?

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In the debate over how to provide affordable coverage to all, no issue has proven more contentious than the question of whether Congress should create a public health insurance plan. The “public plan,” as it is known, could take one of a number of forms and roles in a reformed health care system, depending on the outcome of the feverish political debate on the subject. In general, a public plan, as proposed by supporters, would serve as a public source of insurance coverage for those who do not desire or cannot obtain a private insurance plan. Democrats generally support the concept of a public plan, arguing that it would increase choice and lower costs, thereby introducing healthy competition to the health plan marketplace. Most Republicans oppose a public plan, expressing concern that it would not compete on a “level playing field” with private plans and ultimately drive private plans out of business through cost-shifting and other predicted effects. Some fear a public plan is a back door to a single payer system.

Beyond the rhetoric and competing claims, a full understanding of what a public plan might mean for a reformed system—and for your organization’s role in a reformed system—requires a closer look at the various elements of a public plan:

Administration. A single, national public plan could be administered through a “Medicare-like” entity within HHS; or, alternatively, multiple public plans could be created that would be administered by states or regional third-party administrators. Greater centralization in administration could yield greater administrative efficiencies, but would also invite concern that a single national public plan would have an unfair advantage in the health plan market. Proposals to level the playing field include introducing government firewalls, such as requiring that the public plan be run by a different entity than the entity that will administer the proposed new national insurance exchange; or creating multiple decentralized public plans.
Provider participation and reimbursement rates. Under a “Medicare-like” option, the public plan would likely be set up so that Medicare participating providers would be required to participate in the public option, and they would be paid rates set by the public plan. Payments could be set at the Medicare rates, or higher. Under other, more decentralized public plan models, provider participation in the public plan could be voluntary, and the public plans could be required to assemble provider networks and separately negotiate payment rates with participating providers. Concern is high among providers and suppliers that a public plan could drive down rates, with employers and insurers on guard against a structure that could force them to cross-subsidize public plan rates that are set below cost.
Rating rules and risk adjustment. To ensure a level playing field, most policy proposals would subject the public plan to the same rating rules that would apply to private plans. Rating rules, such as community rating and guaranteed issue rules, restrict efforts to vary the price of insurance according to the risk of the person or group seeking coverage. Payments to the public plan would also be subject to the same risk adjustment as payments to other non-group and small group plans offered through the national insurance exchange.
Solvency and reserve requirements and other federal subsidies. A “Medicare-like” public plan option has been criticized as reaping an unfair advantage for the government if it is exempted from the capitalization and reserve fund requirements that apply to private plans participating in the same market. Alternative proposals for decentralized public plans generally would apply solvency and reserve requirements to the plans. However, critics have noted that it is unrealistic to expect that the government would actually permit a public plan to fail, and the government advantage thus could never fully be overcome. Moreover, to the extent that a public plan receives government subsidies—i.e., its revenues do not fully cover its costs—the objection is that it would be even more difficult for private plans to compete effectively.
Eligibility rules, enrollment and minimum benefit requirements. Most public plan proposals would subject the public plan to the same eligibility rules, beneficiary enrollment and minimum benefit requirements as would apply to private plans. Critics have opposed the idea of a default enrollment mechanism—through which those who do not affirmatively select an insurance plan would be automatically enrolled in the public plan—as providing an unfair advantage to the public plan. It is also possible that adverse selection could undermine the stability of the public plan—while relieving the burden on the private market—if individuals with greater health problems were disproportionately enrolled in it.

The debate over a public plan is slippery not only because it implicates core political principles such as the respective roles of government and private industry, but also because the potential public plan options span a wide range of possibilities. Indeed, some public plan proposals currently on the table resemble existing state employee insurance coverage programs, which often have significant private sector involvement, and thus might serve as a potential basis for compromise. Other potential compromises include providing a public plan option during a transition period only and having a public plan option as a backstop for regions where there are fewer private plan options. As the legislative proposals start emerging in the next few weeks and months, Ropes & Gray is here to help you look beyond the grandstanding on this issue to see how any public plan option might affect your organization’s strategy and operations.