This afternoon, the House Republican Health Caucus hosted “a Policy Forum exploring the options for making health coverage affordable for individuals with pre-existing conditions.” At the event, Karen Ignagni — the President and CEO of America’s Health Insurance Plans (AHIP)– asserted that the health care bills before Congress contain “no cost containment” provisions:

First, we’re looking at pieces of legislation with no cost containment. There is no bending the curve, as Doug [Holtz-Eakin] indicated, in these pieces of legislation. I have a hunch that members of Congress, as they’re thinking about constructing proposals, are going to come back to that curve bending discussion, as you indicated in your opening remarks and I think that’s going to be very important.

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Ignagni — who recently released a now discredited report claiming that health reform would increase premiums — went on to criticize the Senate Finance Committee’s weak individual mandate requirements and the excise tax levied on high-cost health care plans.

Ignagni is right to argue that Congress should strengthen the individual mandate requirement, but her central claim is demonstratively false. In fact, many economists believe that the very policy measures she opposes would bend the cost curve downward.

As Christina Romer explained this morning during a speech at the Center for American Progress, the excise tax on high cost plans “will discourage insurance companies from offering high-priced plans that would otherwise eat up larger and larger shares of workers’ wages. A policy such as this is probably the number one item that health economists across the ideological spectrum believe is likely to stem the explosion of health care costs.”

Secondly, the Senate Finance Committee’s bill (along with the House legislation) goes a long way towards “reining in costs” and controlling spending (over the long term and the short term). It restructures payments to Medicare Advantage plans (to base payments on plan bids with bonus payments), establishes an independent Medicare Commission to submit proposals for reducing excess Medicare cost growth by targeted amounts, reduces Medicare DSH payments by an amount proportional to the percentage point decrease in the uninsured, reduces payments for preventable hospital readmissions in Medicare, and establishes a hospital value-based purchasing program in Medicare to pay hospitals based on performance on quality measures. The House and Senate Finance bills also invest in critical delivery system reforms.

Ignagni is dismissing cost containment policies that undermine insurer profits and pretending that the industry is not at least partly responsible for the trend in spending. But just because she refuses to see them, doesn’t’ mean they don’t exist.

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This afternoon, Senate Majority Leader Harry Reid (D-NV) announced that the merged Senate health bill would establish a national public option that allows states to opt out of the plan by 2014. Reid did not indicate that he had 60 votes in support of the opt-out, but said that he would not submit competing public option compromises to the Congressional Budget Office. The answer suggests that the Senate would not use the trigger or any other compromise as an alternative if the opt-out measure fails to obtain the 60 votes needed for cloture.

Reid said that the final legislation will also provide seed money for states to establish consumer driven cooperatives:

As we’ve gone through this process I’ve concluded — with the support of the White House, Senators Dodd and Baucus — that the best way to move forward is to include a public option with the opt out option for states. Under this concept, states will be able to determine whether the public option works well for them and will have the ability to opt out if they so chose….We’ve spent countless hours in the last few days in consultation with Senators who have shown a general desire to reform the health care system and I believe there is a strong consensus to move forward in this direction.

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The opt-out compromise, initially floated by Sen. Tom Carper (D-DE), is loosely modeled on Medicaid, which originally allowed states to “opt-out” of the program and today enjoys the participation of all 50 states. Supporters of the plan believe that if the public option proves itself in states where it’s functional, then legislators from conservatives states would be hard pressed to exempt their states from the program. After all, why reject an option that offers lower premiums and saves the state billions in health care costs? Rhetoric about a ‘government-takeover’ of health care may sound good on television, but it loses its appeal when you’re trying to balance your books.

But whether or not the public option will actually lower health care costs will depend on how it’s structured and how it pays providers. The public option has to be large enough to sway large provider groups to lower health care costs and initiate delivery system reforms.

So what are the states opting out of? Below are two basic options:

- A national plan that pays 5% above Medicare rates: A robust public option that initially reimburses providers at 5% above Medicare rates and strongly encourages all Medicare doctors to participate, was originally part of the House bill. This kind of plan would take advantage of Medicare rates, providers, efficiencies and administrative simplifications. According to the CBO, a robust public option could save $110B/10yrs, lower premiums by 10%. A second alternative would allow the public option to reimburse at higher than Medicare rates but could trigger the lower Medicare reimbursements if costs increased. This plan could also initiate greater delivery and payment reforms.

- A national public plan that negotiates payment rates with providers: A so-called level playing field public plan that reimburses providers at market rates would take advantage of Medicare efficiencies and administrative simplifications, but would not piggy-back off of Medicare-established reimbursements or provider reach. This kind of plan was part of the HELP bill. According to the CBO, the option would save $25B/10yrs but would not lower premiums within the exchange. This plan could also initiate greater delivery and payment reforms.

POLITICO is reporting that currently, Reid “has between 56 and 57 votes for the opt-out, which is being pushed by Sen. Charles Schumer, according to Democratic aides. A public option with a delayed “trigger” — supported by the White House and Maine Republican Sen. Olympia Snowe — has between 58 and 59 backers.” Reid dismissed competing public option proposals, telling reporters “We hope that Olympia will come back, she has worked hard, she is a very good legislator. I’m disappointed that the one issue, the public option, has been something that that’s frightened her.”

Of course, the other possibility — less likely given Reid’s reluctance to ask the CBO to score the proposal — is to combine the opt-out public option with a trigger — ensuring that states could only opt out of the public option if the private market offers meaningful and affordable coverage. Any opt-out proposal should also provide for a simple ‘opt-back-in process’ (mandating that state legislatures vote on the opt out every year, for instance.)

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Governors are worried that the proposed expansion of Medicaid — the most efficient way to cover lower income Americans — would strain local budgets and force states to “either raise taxes or make further cuts to state budgets.”

But today, in a speech delivered today at the Center for American Progress, Christina Romer, the chairwoman of President Obama’s Council of Economic Advisers (CEA), stressed that the savings from health reform would outweigh the costs of Medicaid expansion:

Indeed, we believe our measured expenditures are a reasonable estimate of the actual savings, even taking into account that reform will not eliminate all uncompensated care. This is true because we are virtually certain that there is a substantial amount of state and local spending on care for the uninsured that we have not yet identified. Expanding our projections to all fifty states and the District of Columbia implies savings of roughly $116 billion to state and local governments between 2014 and 2019.

For example, CBO estimates that under the Senate Finance Committee proposal, states will spend about $33 billion on increased Medicaid and the Children’s Health Insurance Program (CHIP) over the same 2014-2019 period. Even taking account of this cost, there is therefore a net savings to state and local governments of some $83 billion over six years. When you consider that we are paying for all of the Federal expenditures with other savings and revenue increases, this is $83 billion of additional government saving.

In other words, expanding Medicaid is cheaper than paying for the same population in the emergency room. Recent CEA research of health care spending in 16 states found that those states are spending “at least $4.2 billion on care for the uninsured each year.” “We estimated that they are spending another $600 million on higher insurance premiums for state and local government employees because of the hidden tax uncompensated care adds to all private insurance premiums. All told, the states in our sample are spending at least $4.2 billion on care for the uninsured each year.”

“Health care reform that expands insurance coverage will greatly reduce these state and local expenditures for uncompensated care,” Romer predicted.

First Read is reporting that “Senate Democratic leader Harry Reid has a health-care reform bill ready and will send it to the Congressional Budget Office today for an evaluation of costs.” Insiders tell the Wall Street Journal that the measure will include an opt-out public option and a free-rider employer provision, similar to the one included in the Senate Finance Committee’s bill. Under the merged bill, “employers with more than 50 workers wouldn’t be required to provide health insurance,” the Journal writes, “but they would face fines of up to $750 per employee if even part of their work force received a government subsidy to buy health insurance.”

The policy is designed to protect businesses and their employees from the costs of mandate compliance, but for many progressives, it’s a solution looking for a problem — that creates problems of its own. Progressives have long portrayed the free rider as a discriminatory policy that disadvantages lower-income workers and minorities. The well-respected Center on Policy and Budget Priorities (CBPP) has argued that since the free-rider mandate only requires employers to partly finance the coverage of lower income workers (workers who qualify for subsidies in the Exchange), it may discourage employers from bringing on new lower income hires:

- It would make it considerably more expensive for employers who do not offer health insurance to hire workers from lower-income families. Employers would have strong incentives to tilt hiring toward people who have a spouse/parent with a good income. Poor parents with children in one-earner families would be particularly disadvantaged.

- Since minorities are more likely to have low family incomes than non-minorities, a larger share of prospective minority workers would likely be harmed.

- This provision would be very complicated to administer. Employers would need to maintain ongoing data exchange with state health insurance exchanges.

A pay or play provision — which requires large employers to offer creditable coverage or pay a fine — is more equitable. The provision establishes the principle that while individuals should be responsible for purchasing health insurance coverage, large businesses that do not directly provide health care to their employees should pay into a public pool to help finance their employees’ coverage. The mandate enhances the existing system of employer-based coverage, levels the playing field between employers “that provide insurance and those competing with them that do not,” reduces “crowd-out of private coverage by new public programs,” and preserves the employer contribution — an important source of funding for health care reform. Large employers like Walmart, Target, and even the Business Roundtable have endorsed the mandate.

The Finance Committee considered the mandate option but ultimately rejected it, fearing that businesses would transfer the costs of the mandate into lower take-home pay for workers and job losses. But this is somewhat overstated. The overwhelming majority of American businesses would not face higher costs. The pay-or-play provision in the House bill, for instance, exempts some 87 percent of American businesses from any requirement, but ensures that large employers don’t drop their existing coverage. States — like Massachusetts or Hawaii — already require large employers to provide coverage and have found no evidence of reduced employment.

In a ‘pay-or-play context,’ some large employers would have to pay more under reform, but they would also see concrete savings. With increased access to care, all firms would benefit from the reduction in unpaid medical bills incurred by the uninsured and the savings due to a reduced rate of health-care cost growth and greater labor productivity. On the whole, the consequences of failing to reform health care reform far outweigh concerns about costs to businesses and low income workers. In fact failing to act would hurt the very same businesses and low income individuals that critics are trying to protect.

While the merged bill may include the free rider, Sen. John Kerry (D-MA) introduced an amendment to replace the provision with a pay-or-play mandate during the Finance Committee’s mark-up process and promised to debate the issue on the Senate floor.