At first glance, I thought that blog coverage of the President’s letter to Sens. Max Baucus (D-MT) and Ted Kennedy (D-MA) seemed a bit overstated. While Obama may have “doubled down” on the public plan, he didn’t exactly endorse a muscular option. His support for Sen. John Rockefeller’ s (D-WV) proposal to give teeth to MedPAC’s payment reform recommendations is significant but not earth shattering. To me, the letter read as an effort to distance the White House, at least temporarily, from Baucus’ recent suggestion that the president supported capping the employer-sponsored health benefit exclusion.

But Obama’s recognition that we must finance health care reform — a good bulk of the $1.5 trillion over ten year estimate — from money already in the system is significant. The President has already identified about $300 billion in savings in his budget. Now, as Jonathan Cohn points out, he “is putting another $200 to $300 billion on the table” from additional savings in Medicare and Medicaid.

This makes the public plan all the more important. If MedPAC is identifying payment reforms that would lower health care spending, then the public health option could transfer those methods into the private insurance market by itself adopting these efficiencies and (through the miracle of competition) coax private insurers to do the same.

MedPAC’s recommendations will likely yield a good chunk of the change, as will the offsets Obama has already proposed. But if the President truly believes, as he states in the letter, that “without a serious, sustained effort to reduce the growth rate of health care costs, affordable health care coverage will remain out of reach” then he’ll likely have to add some teeth to his public option rhetoric. That means allowing the public option to use Medicare leverage to negotiate with providers.

The New York Times’ Reed Abelson authors a curious article about health insurance companies’ reluctance to accept greater regulation of the small business market:

Insurers, for example, have agreed to sell policies even to people with pre-existing medical conditions, and to stop basing prices on how healthy or sick someone is….But so far, the industry has made no such promises about another segment of the health insurance market, one responsible for many people being uninsured in the first place: the market for small employers… Some large insurers, like Aetna and Cigna, say they would generally support similar federal rules for both the individual and small-business markets. “We need to be relatively consistent,” said H. Edward Hanway, Cigna’s chief executive. But one of the biggest insurers, WellPoint, opposes changing the way coverage is sold to small employers.

It’s true that America’s Health Insurance Plan’s (AHIP) proposal for how to help small businesses afford health care coverage is rather uninspired. But then again, revamping the small business market — currently regulated by the states — isn’t up to Karen Ignagni or the nation’s insurers; it’s the responsibility of lawmakers to ensure that insurance companies can’t lure away healthier beneficiaries. And so far, most health care reformers have remained silent on how they would regulate the market outside of the Exchange.

Nationwide, only 42.6 percent of all small businesses offer coverage and those that do provide insurance, offer lower quality, porous policies that often exclude dental coverage and have higher deductibles. Generally, small businesses have three major disadvantages when purchasing insurance: (1) the costs of insurance is shared by a small group of workers, one sick worker could increase premiums for everyone in the group; (2) small businesses don’t have economies of scale and encounter higher administrative costs; and (3) premiums often vary from business to business and year to year, making premiums unpredictable and very expensive.

The president would allow small businesses to purchase coverage in a new national Exchange — a so-called “Orbitz for insurance” where individuals and small employers “could compare plans side by side, find options with a minimum benefits package and buy coverage.”

But what would happen to the existing market? After health reform, insurance could still be purchased as it is today — in the existing individual market, the small business market, from large employers — or in a new Exchange. Lawmakers, however, must avoid a situation where insurers outside of the Exchange attract healthier individuals and leave sicker (more expensive) patients to the Exchange. In other words, insurers should be required to issue coverage to everyone who applies and charge all applicants a similar rating in all markets.

During yesterday’s meeting with HELP and Senate Finance Committee members, President Obama expressed support for Sen. John Rockefeller’s (D-WV) legislation to transform MedPac — an independent agency advising Congress on issues affecting the Medicare program — into an independent executive agency. Here is how Rockefeller introduced his legislation last month:

Congress has proven itself to be inefficient and inconsistent in making decisions about provider reimbursement under Medicare. If we want serious improvements in our health care delivery system, then we need to reform MedPAC’s current authority to include fully establishing and implementing Medicare reimbursement rules. Congress should leave the reimbursement rules to the independent health care experts.

By giving MedPAC the power to implement its recommendations and revamping the board into an independent “but democratically accountable organization not unlike the Federal Reserve Board,” Rockefeller is freeing the panel from the constraints of congressional politics and allowing it to actually influence Medicare spending patterns. The goal is to adopt reforms that slow the growth of Medicare spending and modify payment methods — reforms that the private sector could then emulate.

MedPAC’s recommendations have synced well with the general tenor of cost-containment options. Here are just some of its proposals:

- Medicare change payment system incentives by basing a portion of provider payment on the quality of care they provide and recommended that the Congress establish a quality incentive for providers.

- Charge an independent entity to sponsor credible research on comparative effectiveness of health care services and disseminate this information to patients, providers, and public and private payers.

- Reducing preventable readmissions, increasing the use of bundled payments…

Over the last decade, Medicare has led the way in developing prospective payment systems — paying fixed payments on what efficient providers could be expected to do rather than on what they actually did — and bundling payments for certain conditions and treatments. Private insurers have systematically adopted Medicare’s efficiencies and Rockefeller believes that by giving MedPAC recommendations some teeth, we can first improve Medicare efficiency and also lower health care spending across the entire health care system.

Ezra Klein is reporting that the White House is also considering variant of the Rockefeller proposal. “This plan would package MedPAC’s yearly recommendation and fast track them through Congress for a simple, up-or-down vote. No filibuster. No changes to the package of recommendations. Health reform, under this scenario, would become a yearly legislative project,” Klein writes.

Both variations have merit — after all, why should we hold payment and efficiency reform hostage to the whims of politics/Congress? why not let independent experts make the decision? But as Jonathan Cohn notes, “In practice, controlling costs invites a lot political opposition. It means taking money out of somebody’s pockets–insurers, hospitals, device makers, etc. ”