The recent trickle of so-called consumer-driven health care “principles and recommendations” are a preview of the likely Republican alternative to comprehensive health care reform. Earlier this month, the Health Policy Consensus Group, headed by the conservative Galen Institute, published “a vision for consumer-driven health care reform” and today, Ramesh Ponnuru of the National Review pens a New York Times editorial in which he explains that the quest for “universal coverage” is “misguided.” Policy makers should focus on giving Americans “more control” of their coverage instead:

The existing tax break for employer-provided insurance could be replaced with a tax credit that applies to insurance purchased either inside or outside the workplace….Insurance would be more affordable, especially for people who cannot get it through an employer…More important, people would own their insurance policies and thus be able to take them from job to job.

Sen. John McCain (R-AZ) proposed a similar plan during the campaign, but he never convinced Americans to abandon their employer-provided insurance for the promise of cheaper coverage in the individual market. Part of the problem rests in the fallacy of the theory and the other is the burden of experience. After all, Americans are routinely denied coverage in the unregulated individual health insurance market and small businesses are “frequently finding health policies too expensive and are dropping coverage, sending even more people shopping for insurance.” Healthy Americans who do find coverage enroll in bare-bone plans that offer little substantive protection.

As the Miami Herald recently reported, insurers deny coverage for patients with “diabetes, hepatitis C, multiple sclerosis, schizophrenia, quadriplegia, Parkinson’s disease and AIDS/HIV.” Moreover, “some insurers will automatically reject applicants who are using certain prescription drugs. Wellpoint denies anyone who within the past year has taken Abilify and Zyprexa for mental disorders as well as Neupogen, which is used to treat the side effects of chemotherapy. Vista lists the anticoagulant Warfarin and the pain medication Oxycontin. Both companies list insulin.”

And why not? Competition without meaningful regulations incentivizes companies to only offer insurance to the healthiest Americans. How else could they beat the insurer across the street? Offering coverage to sicker Americans would attract a sicker pool of enrollees and serve as a competitive disadvantage. In fact, free market health care fits the definition of a failed market. A market fails if:

1. Monopoly — occurs if a single buyer or seller can exert significant influence over prices or output: In health care, “insurer and hospital markets are increasingly dominated by large insurers and provider systems.” “The increased concentration has made it difficult for the nation to reap the benefits usually associated with competitive markets.”

2. Negative Externalities — occur if the market does not take into account the impact of an economic activity on outsiders: In the ‘wild west’ environment of the individual health market place, companies leave the sickest patients without coverage. Health care costs increase for everyone when patients are forced to forgo early and appropriate care or visit the emergency room once a condition becomes unbearable.

3. Asymmetric Information — occurs when one party has more or better information than the other party: Americans looking for coverage in the individual market have no way of comparing different policies or rarely know what the plans actually cover.

Conservative health proposals double-down on this broken marketplace. They: 1) eliminate the employer tax exemption for health benefits, 2) provide everyone with a refundable tax credit to go out and purchase individual coverage, and 3) loosen the already lax insurer regulations. The results are predictable. Not only will Americans with pre-existing conditions go without coverage — or, at best, be offered very expensive plans — but as healthy Americans with bare-bones policies fall ill, they’ll discover that their insurer has little enthusiasm for paying claims.

James Roosevelt Jr., president and CEO of Tufts Health Plan and co-chair of the policy committee of America’s Health Insurance Plans, hijacks Atul Gawande’s argument that national health reform must build on the fundamentals of existing programs to argue that we can’t afford a public health option:

[E]ven if a government-run plan could be designed in a way that preserves choice for most Americans, it would delay the start of universal coverage for years. As a nation, we simply cannot afford to wait for the kind of accessible, portable, universal healthcare coverage that we have available to us today in Massachusetts, or to employees eligible for coverage through the Federal Employees Health Benefits Plan, which was touted during President Obama’s campaign.

Jacob Hacker’s plan addresses this argument: his public plan proposal builds on the existing infrastructure of Medicare while simultaneously “safeguarding and improving the Medicare model.”

Rather than delaying health care reform, a program that builds on the Medicare system guarantees patient familiarity with the plan, simplifies the enrollment process, “ensure[s] continued enrollment across state lines, facilitate[s] interactions with multi-state employers, and build[s] on what already exists.” By pioneering new payment methods — paying primary physicians more, moving way from fee-for-service and towards bundled payments for episodes of care — the new public plan could lower health care costs (encouraging its competitors to adopt similar efforts) and ensure that ‘the best laid plans’ of health care reform are sustainable over the long-term.

In fact, a new Medicare-like model is likely no more disruptive than the Massachusetts Exchange of regulated private ensurers. As Atul Gawande himself explained during an interview with Charlie Rose, “we will have to take the solutions we’ve got and we will build off of them. We won’t blow up the system. We are going to ask ourselves, are we going to build on a program like Medicare or Medicaid or are we going to build on our private insurers and try to subsidize more people to have more private insurance. And that’s actually achievable turf”:

On January 1, 2011 we can have an online choice of four or five private insurers, or we can have a Medicare option, or maybe we’ll have both. But there is no reason we can’t create that within weeks.

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.