Jacob Hacker: Stripping Away ‘Inherent Advantages’ From A Public Plan ‘Is At Odds With True Competition’

Yesterday, University of California, Berkeley Professor Jacob Hacker released a report examining how to structure a public health insurance plan that competes alongside a menu of private insurers within an Exchange of different plans. Hacker argues, rather convincingly, for the establishment of a single national public option that builds on the existing Medicare infrastructure and negotiates with providers for the best health care prices.

Here is a graphical representation:


All of the major Democratic reform proposals contain a public option, but the idea has generated great debate in health policy circles. Critics charge that a public option would push private insurers out of the market and underpay providers. “With the government plan, taxpayers would presumably absorb all of the risks, losses, and liabilities of such an enterprise, while private health plans would absorb their own risks, losses, and liabilities,” the Heritage Foundation argues. “Consequently, from the beginning, such a competition could not possibly be fair in any meaningful sense.”

What these critics really mean, Hacker argues, is that “they do not want a new public health insurance plan to have any inherent advantages.” But that’s akin to criticizing Home Depot for out-competing other home improvement stores by using its market clout to negotiate for better prices with providers. Stripping a new public plan of “inherent advantages” — like the right to use its market share to bargain with providers — “is at odds with true competition, which does not require competitors to be equal but that they have an equal chance to succeed if they are equally good at doing what consumers want,” Hacker writes.

Giving all health care plans the same opportunities would require the following, Hacker argues:

1) Any subsidies for low income enrollees are available for any plan within the Exchange at the same level

2) The Exchange should be run by a separate entity from the administrators of the public health insurance plan.

3) All plans should play by the same rules: charge the same rates to all subscribers, take everyone who applies, provide objective information, offer the same basic package of benefits, hold adequate reserves, and clearly state their terms

4) The public plan cannot dip into general government reserves

5) Plans should be paid different amounts by the Exchange based on the risk of their enrollees. At the end of the year, funds could be redistributed among the plans to ensure that those with very sick people are protected.

6) Plans should bid to provide benefits within specific regions. “Once the premiums were set though competitive bidding, subsidies for low-income enrollees” “should be based on some weighted average of public and private premiums within the region.” This way, lower-income enrollees are not always stuck with the lowest-bid plan.

In the video below, Hacker frames the public plan as a moderate hybrid alternative to the current system and explains how private and public insurers could compete on an equal-playing field without sacrificing their “inherent advantages”:

Watch it:

During a press conference at the Institute for America’s Future, Hacker also assured critics that private plans would fill an important niche within the Exchange.

“I think the private insurers certainly will be have a great role in providing more integrated coverage options than the public plan would provide. So any types of network plans that involve the restricted network of providers, ranging from very tightly integrated staff-model HMOs to more loosely integrated practices, it strikes me as an area where private plans would have an enormous advantage,” Hacker explained.

Private plans would also have a “brand advantage” (in the same way that a lot of people rather have the branded drug than the generic) and “could play an important role” as fee-for-service alternatives that look like the public model but provide “better customer service, nicer marketing and better brochures, but they might also be doing other things in terms of quality improvement or care management that the public plan wasn’t.”

Read Hacker’s full report here.


Jonathan Cohn, Tim Foley, and Jason Rosenbaum of HCAN! have much more.

To read more Wonk Room coverage of the public health option, click here.

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