Heritage Foundation On Fair Public-Private Health Competition: ‘The Design Features Are Correct’

Len Nichols’ “modest proposal” for a competing public health plan requires the public plan to play by the same rules as private insurers. Operating within a new framework, both plans would offer standard benefit packages, “guaranteed issue, guaranteed renewal, no pre-existing condition exclusions, modified community rating, risk adjustment.”

The public plan would also adhere to the following conditions of fair competition: it would have to be actuarially sound, would not leverage Medicare to force providers to participate or use Medicare payment rates, and would have to adhere to the same rules regarding reserve funds.

Today, during a conference call with reporters, the Heritage Foundation’s Stuart Butler — a vocal critic of the public option — agreed with Nichols’ framework in theory, but argued that government would rig the system in practice:

The design features are correct, this theoretical model of what you would have to do … but what I’m very skeptical if one sees this on a number of states whether one sees the federal government giving up control of public plan or whether they will just feel the impulse to manipulate it. I just can’t imagine [Rep. Pete] Stark and [Rep. Henry] Waxman and others giving up the option of giving up that plan. … I think they will start relaxing requirements on the public plan… maybe you don’t have to finance yourself completely like private plans do.. We’ll just start rewriting the rules there…They will start relaxing them, in the public interest.

“In my view, the right answer is to push or require the private sector on the state level to come up with some arrangement through private plans which is the functional equivalent of the public plan model,” Butler explained on the call.

But Butler’s argument — let the marketplace handle it — kind of misses the point of the public option. The marketplace has contributed to skyrocketing premiums and huge cost-shifts to families through higher deductibles and copayments. It’s what needs reforming. In fact, even if the private market somehow self-designs a framework of regulation, it would likely not lower costs as quickly as public/private completion.

This is because the whole point of allowing a public plan option to compete with private insurers is that if you reform the way Medicare and the public option reimburses for services (move away from fee-for-service and towards bundled payment, primary care, and care coordination) and if those programs become more efficient, the private insurers — who are now competing directly with the new public plan — would also have to adopt more efficient payment practices.

By using the public plan as a vehicle for reforming the private insurance market, you can dramatically lower health care costs. My fear isn’t that the government won’t be able to keep its hands off the public plan; I fear that without a public plan we won’t be able to lower our skyrocketing health care costs and address the economic crisis.


Butler explains his opposition: “Let’s get real. The playing field can never be level with Congress setting the rules and taking responsibility for one of the competing plans. That is why it is a dealbreaker.”

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