The Hill newspaper is reporting that Speaker Nancy Pelosi (D-CA) is scrapping an agreement with Blue Dog Democrats that decoupled the public option from Medicare and required the plan to directly negotiate its reimbursement rates with providers.

“Pelosi is planning to include a government-run “public option” in the House version of the healthcare bill. She wants to model it on Medicare, with providers getting reimbursed on a scale pegged to Medicare rates,” Mike Soraghan writes. The original House bill allowed the public option to reimburse providers at five percent above Medicare rates:

Pelosi’s decision to abandon the agreement that was made with a group of Blue Dogs to get the bill out of committee would steer the healthcare legislation back to the left as she prepares for a floor vote. Pelosi is planning to include a government-run “public option” in the House version of the healthcare bill. She wants to model it on Medicare, with providers getting reimbursed on a scale pegged to Medicare rates….Blue Dog Democrats, many of whom represent rural districts where Medicare reimbursement rates are low, vehemently oppose tying the public option to Medicare.

The compromise initially “drew howls of protest from liberal members” who argued that a small just-established public option would be unable to negotiate lower reimbursement rates without relying on Medicare’s existing size and leverage. By reimbursing providers some percentage above Medicare rates, however, the public option could benefit from Medicare’s ability to negotiate with providers and pass on the savings to consumers, these critics argued.

Indeed, according to the Congressional Budget Office, a public option that reimburses providers at market rates would not lower premiums. In its analysis of the HELP committee bill the CBO concluded that “the public plan would pay providers of health care at rates comparable to privately negotiated rates—and thus was not projected to have premiums lower than those charged by private insurance plans in the exchanges.” As a result, that kind of public option does not “have a substantial effect on the cost or enrollment projections.”

Conversely, the House bill’s original public option “would be about 10 percent cheaper than a typical private plan offered in the exchanges,” the Congressional Budget Office concluded.

During a recent hearing before the Democratic Steering and Policy Committee Forum on Health Insurance Reform, Pelosi insisted that a robust public option would lower private premiums and hold insurers accountable. “[If reform does not include a public option], we will be passing the ‘Private Insurance Profit Perpetuation Act,’” Pelosi said. “We have no intention of doing that…We want the private sector to thrive — we don’t want our members to go into an exchange where they only have one choice, where there’s sole sourcing. But that the public option provides that competition.”

I’m live Tweeting the Senate Finance Committee’s mark-up on @wonkroom.

Sen Max Baucus (D-MT) has just released a Chairman’s amendment to his mark. The new amendment enhances the bill’s affordability measures and increases the threshold on so-called Cadillac health care plans for ‘high-risk’ Americans. The modified amendment also preserves a subsidy to certain Medicare Advantage plans.

Baucus accepted 29 Republican amendments, including 10 from Sen. Olympia Snowe (R-ME), who has indicated that she is open to voting for the Senate Finance Committee bill. Baucus did not address any public option amendments and will likely consider Snowe’s trigger proposal during mark-up.

Below are the most significant revisions:

Provision	Baucus Mark	New Baucus Amendment	Amendments Accepted (Modified)
Affordability of premiums	Families 100% FPL contribute 3% of income to premiums. Families 300% FPL would contribute 13% of income to premiums.	Families 100% FPL contribute 2% of income to premiums. Families 300% FPL would contribute 12% of income to premiums.	Menendez, Kerry, Bingaman and Schumer as amendment C1; Kerry & Menendez as amendment C9, Stabenow as amendment C1.
Out of pocket protections	300%+ FPL = HSA limit ($11,900 families, $5,590 individuals); 200-300% FPL = 1/2 of HSA limit; 100-200% FPL = 1/3 of HSA limit;	300-400% FPL = 2/3 of the HSA limit	Menendez as amendment C13.
Affordability for older Americans	Insurers can charge an older person 5x more for coverage.	Insurers can charge an older person 4x more for coverage.	Wyden as amendment C9, Kerry as amendment C15.
Easier to opt out of unaffordable employer coverage	If the costs of employer-sponsored coverage exceed 13% of income, an individual can enroll in the Exchange.	If the costs of employer-sponsored coverage exceed 10% of income, an individual can enroll in the Exchange.	Snowe amendment number C2.
Increasing threshold for excise tax on ‘Cadillac’ plans	Insurers w/ policies @ $21,000/families, $8,000/individuals pay 35% excise tax.	New thresholds for high-risk enrollees & non-Medicare retirees aged 55+ ($23,000/families, $8,750/individuals- insurers pay 40% excise tax). Excise tax increased to 40% for all other enrollees, threshold level set at Consumer Price Index (CPI) + 1 percent..	Kerry, Rockefeller, Schumer, Stabenow, Cantwell, & Menendez as amendment F2.
Reducing penalty on individuals/families that don’t meet the requirements of the individual mandate.	Families 100-300% FPL, penalty = $750 – $1,500. More than 300% FPL, penalty = $950-$3,800.	Families 100-300% FPL, penalty = $750-$1,500 . More than 300% FPL, penalty = $1,900 max. Individuals below 100% FPL,no penalty	Snowe as amendment F4 and Schumer as amendment C6
Catastrophic coverage opened to Americans exempt from individual mandate	Only Americans 25 years old and younger could enroll in a ‘high deductible’ catastrophic plan.	Individuals who would otherwise qualify for the exemption from the individual mandate, could now purchase the “young invincible” policy,	Snowe as amendment F5.
Preserving some overpayments to private plans participating in Medicare Advantage	The Medicare Advantage program is opened to competitive bidding.	Preserves Medicare Advantage subsidies for seniors living in high cost areas where plans deliver benefits below the average cost of traditional Medicare.	Bill Nelson as amendment D10.
Federal employees eligible for the Exchange.	Federal employees would not eligible to enroll in the Exchange until approximately 2022.	Beginning in 2013 elected officials and federal employees may purchase coverage through a state-based exchange, rather than using the traditional Federal Employees Health Benefits Plan	Grassley Amendment C3

America’s Health Insurance Plans (AHIP) President and CEO Karen Ignagni has penned a letter to Senate Finance Committee Chairman Max Baucus (D-MT), applauding the senator for proposing reforms that combine “insurance market reforms with the responsibility of individuals to obtain coverage and financial assistance for low- and moderate-income families and individuals.”

Ignagni agrees with the overall tenor of of the package, but lays out several top-line concerns. These are summarized below:

- Insurers Oppose 35% Tax On ‘Cadillac Health Plans’: The industry has long argued that it would pass any new taxes to beneficiaries in the form of higher premiums. Ignagni argues that without adequate cost controls, a growing number of policies would be affected by the tax (which is indexed to inflation, and not health care costs) and some Americans could be priced out of the market. After meeting with Democrats who oppose the tax, Baucus has said that he would raise the threshold for expensive insurance plans that would be affected by a new tax. “Given this dynamic, raising the thresholds would only impact how quickly consumers would hit the cap,” Ignagni writes.

- ‘Government Created’ Cooperatives = ‘Slower March Toward A Government-Run Plan’: Ignagni argues that cooperatives will retain certain competitive advantages. The cooperative would receive start-up funds “it would not have to be repaid” and “the government would continue to act as a “player and referee” with the Secretary of HHS serving as Chair of the “advisory board.” However, despite insurers’ concerns of increased competition the bill’s ‘network of cooperatives‘ would be unable to compete in today’s concentrated health insurance markets. As the CBO has concluded, “the proposed co-ops had very little effect on the estimates of total enrollment in the exchanges or federal costs because, as they are described in the specifications, they seem unlikely to establish a significant market presence in many areas of the country or to noticeably affect federal subsidy payments.”

- Benefit Flexibility To Allow Insurers To Design Policies That Attract Healthier Enrollees: “This means that benefit packages should give consumers flexible options to meet diverse needs and be aligned with the level of premium subsidies provided by Congress, and that the coverage requirement needs to avoid creating incentives for healthy people to forego the purchase of coverage,” Ignagni writes. The letter also expresses concerns about the new national benefit standards.

In other words, insurers want to design packages that attract healthier applicants and deter “enrollment by those in poorer health.” “For example, insurers could offer a benefits design that omits or severely limits services needed by people with serious medical conditions, while offering richer benefits in other areas such as vision care or health-club memberships.” Well-defined standard benefit packages could preclude the industry from slowly moving everyone into high deductible policies.

- Retain Government Subsidy For Plans In Medicare Advantage: The Baucus bill would eliminate the 13% overpayment to private insurance plans that provide Medicare-like benefits at a higher rate, without improving quality. Under the bill, private insurers would have to submit to a competitive bidding process. “We have strong concerns about the proposed funding cuts in Medicare Advantage,” Ignagni wrote.

Ignagni expressed support for establishing a Medicare Commission (which would oversee Medicare spending) and system-wide payment reform.