Sen. John Rockefeller (D-WV) — who is a member of the Senate Finance Committee — is circulating draft legislation for a new public health care plan. Rockefeller’s Consumer Choice Health Plan would compete on a level playing field with private insurers:

The Consumer Choice Health Plan [CCHP] will be financially self-sustaining… The Administrator will establish and fund a contingency reserve for CCHP in a manner similar to that of the contingency reserve established by OPM for the Federal Employees Health Benefits Plan. Funds to operate the plan shall be derived from premiums for individuals enrolled under the plan and from contributions by employers not providing private health benefit plans.

On the controversial question of provider reimbursement rates — the actual question is: should the public plan reimburse providers Medicare rates or the prevailing market rates of private insurers — Rockefeller lands somewhere in the middle. He argues that “the provider payment rates for the first two years of the Consumer Choice Health Plan will be based on Medicare provider payment rates.” A significant lesson learned from Medicare Advantage is that private plans do not have strong tools, or incentives, for controlling costs relative to traditional Medicare,” Rockefeller explains. “Private plans consistently pass higher costs onto consumers while simultaneously increasing their profits.”

A public plan that uses Medicare-like prices could, in an environment of head-to-head competition, push private insurance companies to negotiate more aggressively with providers and dramatically lower health care spending. Still, critics charge that Medicare rates underpay providers (doctors and hospitals), forcing them to “make up the shortfall in the prices they charge private insurers, effectively subsidizing Medicare.”

But during recent testimony in front of the House Ways and Means Committee, Glenn Hackbarth, chairman of the Medicare Payment Advisory Commission (MedPAC) said that Medicare — which pays providers approximately 14 percent lower than private insurers — “doesn’t underpay doctors and hospitals.” It promotes system efficiency. As the WSJ reported:

Hackbarth largely dismissed complaints about Medicare payment rates. “We think that Medicare rates are adequate and consistent with the efficient delivery of services,” Hackbarth said. One exception, according to Hackbarth, is that Medicare pays too little to primary care physicians. Hackbarth said “overly generous” payments by private insurers to health-care providers drives up overall costs, eventually affecting Medicare payment rates. He said research showed that hospitals which didn’t rely on high payment rates from private insurers “are able, in fact, to control their costs and reduce their costs when they need to” and “combine low costs with quality.”

Moreover, a recent Commonwealth Fund survey found that elderly Medicare beneficiaries “reported greater overall satisfaction with their health coverage, better access to care, and fewer problems paying medical bills than people covered by employer-sponsored plans.” This is partly due to Medicare’s market power — the program is so large that doctors can’t afford to deny treatment to Medicare patients.

Medicare rates aren’t all bad, but it’s unclear if doctors would be willing to accept lower fees from the new public option. In a competitive environment, a public plan that can’t attract providers will rot at the vine; in other words, to attract patients any plan would have to retain doctors its enrolless would want to see. But if Congress requires all providers who accept Medicare to also accept patients with the new public option, then the new public plan would serve as a robust option that could lead to lower health care spending.

In a closed-door meeting yesterday with members of the Senate Finance Committee, Sen. Kent Conrad (D-ND) proposed replacing a public health care plan with a non-profit cooperative “that would have the same plans and would be subject to the same standards [as private plans].” “That would provide an alternative to for-profit insurance companies, so that there’s a different delivery model for competition,” Conrad explained.

The New York Times’ Robert Pear writes, “the public plan might take the form of an insurance cooperative, owned and operated for the benefit of its members — individuals and businesses with fewer than 10 employees. This proposal, floated as a compromise, seemed to intrigue Republicans who were familiar with cooperatives that market electric power, telephone service, milk, wheat and other commodities”:

“The strength of this proposal is that it accomplishes much of what those who want a public option are calling for — that is, something to compete with private for-profit insurance companies,” Mr. Conrad said. “On the other hand, it meets the objections of many Republicans and some Democrats as well. The co-op is not government-controlled.”

According to an outline of Conrad’s proposal, obtained by the Wonk Room, the “consumer health cooperatives (co-ops)” would operate “at the state level or regionally” to “provide a non-profit, non-government, consumer-driven coverage option in every state to deliver maximum value for consumers.” “The democratic nature of co-ops could encourage increased quality and appropriate utilization and could help foster care integration and other delivery system reforms,” the outline states:

- Co-ops would be required to be non-profit

- Co-ops would provide a coverage option for individuals and micro-businesses (< 10 employees)

- All exchange rules and state laws that apply to other plans also would apply to co-ops

- Strong governance standards would be required to ensure a strong consumer focus and democratic structure.

Generally, cooperatives allow small businesses and individuals to “realize the advantages that large employers enjoy because of their size and bargaining power.”

Small businesses and individuals could purchase health coverage collectively and “strike a better deal than they would by acting separately.” But as a Commonwealth brief points out, most co-ops have difficulty fulfilling their goal of offering small employers and individuals a choice in health plans and reducing costs. That’s because to attract a wide array of health plans and exert purchasing power (bargain on behalf of its members), co-ops must enroll large numbers of employers. But without the ability to “offer substantial choice among well-known health plans, it is difficult for co-ops to attract enrolless, who are drawn to co-ops in part because of their ability to offer such choice.” In other words, it’s the classic “chicken-or-egg” dilemma.

Presumably, Conrad’s co-ops would act more like health care plans and less like health insurance exchanges. Unlike the traditional co-op which strives to give its members a choice of plans, Conrad’s co-op might either self-insure or contract out to a third-party administrator. But state-based or regional co-op health plans would be unable to exert the purchasing power of a Medicare-like public option. Whereas a public health care plan could use Medicare’s leverage and Medicare-like prices to negotiate lower prices and — through the miracle of head-to-head competition with private plans — push insurance companies to negotiate more aggressively with providers and dramatically lower health care spending, a cooperative will likely lack the clout to demand lower prices.

Yesterday, the House Committees on Ways and Means, Energy and Commerce, and Education and Labor released their “Tri-Committee Health Reform Draft Proposal,” an outline of essential components for a health care reform legislation.

Like the HELP bill, the House plan establishes a “new national health Exchange” to enroll Americans in affordable coverage, gives Americans the choice to enroll in a new public health insurance options, prohibits private insurers from excluding Americans with pre-existing conditions from coverage and offers sliding scale “affordability” credits to help middle class families afford health insurance. (Jonathan Cohn and Karen Tumulty break down the details here and here.)

The measure would also “replace Medicare’s ‘sustainable growth rate’ method of paying physicians, who face a 21 percent cut in January unless Congress takes action.” Congress created the so-called Sustainable Growth Rate (SGR) formula in 1997 to check rising health care costs. It states that “the amount Medicare pays doctors for an average Medicare patient can’t grow faster than the economy as a whole.” As the WSJ Health Blog explains, “it’s fine if total payments to doctors go up because the number of Medicare beneficiaries rises. And it’s fine if the average payment per beneficiary rises along with the economy. But if growth in payments per beneficiary grows more than the economy as a whole, the SGR says you have to lower payments to doctors across the board to keep costs under control.”

Democrats are hoping to use the SGR-fix to win-over physician support for reform. As Ways and Means Committee Chairman Charles Rangel (D-NY) explained it, “If we don’t have the doctors on board, we’re in trouble…We have to address this in this bill.”

In 2002, once medical inflation outpaced economic growth, physicians experienced a cut in reimbursement rates, and Congress has patched every cut since. Most health care researchers argue that the formula is ineffective in holding down physician expenditures because it “does little to counter the inherently inflationary nature of fee-for-service payment” (which encourages physicians to prescribe more care) and treats every physician in every region exactly the same. As MedPAC points out, “it neither rewards physicians who restrain volume growth nor punishes those who prescribe unnecessary services.” Policy makers and physicians agree that the SGR must be reformed. In March 2007, MedPAC issued the following recommendations:

1. Repeal the SGR and allow Congress to develop incentives for physicians and other providers to furnish higher quality care at a lower cost.

2. Refine the physician fee-for-service payments and replace the SGR with a new system of expenditure targets.

One proposal would break out the services physicians provide into so-called buckets of care. The Secretary of Health and Human Services would then establish a target — based on projections of increased volume and population growth — for every bucket. Exceeding the target would trigger a pay cut.

It’s still unclear which fix the Tri Committee is considering, but the goal is to reform Medicare payments to doctors in such a way as to discourage doctors from over prescribing treatments and lower overall health care spending.