The Strange Career of the Public Option

For all the fury it has provoked on both sides of the health-care debate, it's easy to forget that the idea of a public option was something of an afterthought when presidential candidate Barack Obama first designed his health-care-reform plan. It didn't merit so much as a mention in the 3,636-word speech he gave laying out his vision on health care in May 2007, and it rarely came up in the primary and general-election battles that followed.

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The public option had been kicking around for a while, however, in policy-wonk circles. Giving the uninsured an opportunity to purchase coverage through a Medicare-like health plan was seen as a useful means of putting competitive pressure on private insurers to provide decent coverage at low prices.

But as the debate has progressed, the public option has become an ideological flash point, igniting fears on the right that it will be the precursor to a government-run system like Canada's and some European countries'. Which is the same reason that many on the left like the public option so much.

What is getting lost in all the shouting, though, is that its effects would be limited. The vast majority of Americans--those who get their coverage through larger employers--would not even be eligible to participate at first. And it wouldn't be free: those who enrolled would have to pay premiums, just as they would to a private insurance company.

Over the course of the health-care debate, the public option has come to assume many shapes. And as politicians oversell it as either the destruction or the salvation of the American health-care system, they rarely bother to specify which of its many incarnations they are talking about.

The most liberal and far-reaching version, passed by two House committees, would tie the rates the public plan pays health-care providers to what Medicare reimburses. Given that Medicare reimbursement rates can be 30% lower than those paid by private insurers, such a system could be a powerful one at holding down costs and could save the Federal Government $110 billion over 10 years, according to the most recent estimates by the Congressional Budget Office (CBO). (The Federal Government's costs here would primarily be the subsidies it gives low- and middle-income people to help pay their premiums.) Not surprisingly, that robust public option faces strong opposition from doctors and hospitals, who complain they are already underpaid by Medicare, as well as from insurance companies, who say they would not be able to compete. So while this version of the public option is House Speaker Nancy Pelosi's preferred one, she acknowledges she has yet to garner enough votes to pass it in the House.

What she can probably pass is a different version, approved by the House Energy and Commerce Committee, that would establish a public option that operates more like a traditional insurance company, with the Health and Human Services Secretary negotiating with health-care providers to determine how much it would reimburse them. That wouldn't raise as many objections from health-care providers and insurers, but it wouldn't save all that much money either. The CBO estimates it would trim federal spending by about $25 billion over 10 years.