Today’s Senate Finance Committee hearing on coverage options may have started with single-payer advocates loudly protesting the limited discussion of single-payer reforms, but the bulk of the conversation revolved around the public plan option.

Earlier today, Sen. Chuck Schumer (D-NY) released an outline (largely based on CAP’s report on the public plan) for how a new public health option could compete on an equal playing field with private insurers and Senate Democrats pressed representatives of the private insurance industry to reply to Schumer’s proposal.

Sen. Robert Menendez (D-NJ) asked BC/BS Association CEO Scott Serota to explain “what is the principle position in the opposition that the association has” to fair competition. Serota argued that health insurance markets are already overflowing with competition and stubbornly insisted that it would be impossible to design an equal playing field (Listen here).

America’s Health Insurance Plans (AHIP) President and CEO Karen Ignagni told Schumer that AHIP “appreciate[s] how thoughtful you are working to reconcile all these different views” but insisted that private insurers would be unable to fairly compete with a Medicare-like public plan that did not have the capital reserves of private insurers or the ability to build networks of providers:

There are a significant amount of Capital requirements that we need to meet, Medicare would have failed the capital test right now and so that is a very significant dollar figure that would have to be imbued into this plan and I know you’ve thought about that. The third issue is the payment issue…it would take a very long time, for government to develop the infrastructure to negotiate with physicians. Government doesn’t have networks, can’t put together networks, the Disease Management program failed in traditional Medicare and we all know why—because there’s no predictability with respect to who’s coming through the doors to the physicians’ offices, etc.

Listen:

But here, Ignagni’s sense of fair competition is itself unfair. Ignagni does not want a new public health insurance plan to have any inherent advantages, but she’s insisting that private insurers preserve their advantage to create provider networks and enter or exit markets as they wish, etc. As Schumer pointed out, “it’s sort of as if you’re saying well the public advantages we should get rid of, but the private advantages we should keep. Let them compete.” (Listen here).

Indeed, while Ignagni is seeking to clone the public model into a private plan, most public public plan advocates envision a system in which both private and public plans compliment each other and one in which each plan uses its inherent advantages to offer Americans a real choice of coverage. So, while the public plan does not have explicit capital reserves like private plans, it will not be able to enter and exit different markets like most private plans could. Public plans may not have different networks of providers but it is a reliable source of coverage that contracts with any provider who is willing to accept its reimbursement rates (like Medicare does). In other words, public and private plans are inherently different and will use those differences to compete and attract beneficiaries.

Ignagni also argued that if the new public health option reimbursed providers at a lower rate than private plans, hospitals and doctors would shift the cost difference onto Americans with private insurance. But this too assumes that private plans are always right in setting reimbursement rates. As it turns out, however, “high payments from private insurers do not result from low payments for Medicare patients.” As one recent MedPac study found, “claims of extensive cost shifting imply that hospital costs are largely fixed and that it is hospitals in the worst financial sate that will have the greatest need and incentive to shift costs onto private payers due to low Medicare payment.” But MedPAC concluded that “it is the most financially pressured hospitals that are most efficient and thus capable of earning money on Medicare patients.” In other words, over-paying providers, as some insurers do, will not slow the growth of health care.

As Schumer concluded, “the private sector will have some advantages and we can’t just get up and say public advantages we should just get rid of in this competition, but the private sector advantages we shouldn’t.”

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Editor’s note: Today, we are live-twittering the Senate Finance Committee’s roundtable on how to expand access to health insurance coverage.

The New York Times’ Robert Pear reports that Sen. Chuck Schumer (D-NY), who is spearheading the effort to include a public health care plan in the final health reform legislation, “has proposed that any new government-run insurance program comply with all the rules and standards that apply to private insurance”:

- The public plan must be self-sustaining. It should pay claims with money raised from premiums and co-payments. It should not receive tax revenue or appropriations from the government.

- The public plan should pay doctors and hospitals more than what Medicare pays.

- The government should not compel doctors and hospitals to participate in a public plan just because they participate in Medicare.

- The officials who manage a public plan should be different from those who regulate the insurance market.

- The public plan should be required to establish a reserve fund, just as private insurers must maintain reserves for the payment of anticipated claims.

- The public plan should be required to provide the same minimum benefits as private insurers.

All of these seem fair enough. Leveling the playing field to allow private insurers to compete head-to-head with a public model (whether it be a Medicare-like arrangement or something that more closely resembles self-insured states) is an important pre-requisite for putting the theory of lowering insurance costs through competition into practice. But the crux of the issue is reimbursement. What Schumer doesn’t really address here is how the public plan will reimburse providers. Yes, it may pay more than Medicare does (as it should), but how will it set its rates? If the plan builds on the Medicare infrastructure, will it be able to use its negotiating clout to extract bargains or will it be required to pay something close to what private insurers (which rarely negotiate on behalf of their beneficiaries) currently compensate?

What’s troubling here however is Pear’s assertion that “one way they propose to do that [level the playing field] is by requiring the public plan to resemble private insurance as much as possible.” Remember that leveling the playing field is one thing, striping the public plan of its inherent advantages (its ability to use its size to negotiate better prices and its lower administrative costs) is another. After all, if the public option is just a clone of a private plan, then it’s pretty useless.