Early last week, Rep. Mike Ross (D-AR) — who led a group of seven centrist Blue Dogs who objected to a public option that reimbursed providers based on Medicare rates — floated a proposal to replace the public option with a proposal that would allow Americans under 65 to buy into the Medicare program. Medicare would reimburse the newly enrolled population “at a reimbursement rate much greater than current Medicare rates.”

On Friday, the Wonk Room sat down with public option godfather Jack Hacker and asked him to respond to Ross’ proposal. “Mike Ross is saying that the better alternative to having a new public health insurance plan that’s distinct from Medicare and competes on a level playing field, is actually to just open up Medicare on some new basis to people younger than 65. It’s a pretty remarkable development”:

What I would say is, I’ll take that and raise you. Okay, great! Let’s open up Medicare. If you think that’s a good idea, why don’t we open up Medicare more generally, in the sense that we use the basic Medicare model. And the Medicare model is build on the idea that people who are covered by Medicare have the ability to go to all the providers who contract with Medicare and be assured that in a transparent process that those providers will agree to be paid the rates that Medicare pays….What Ross is really saying, to my mind, is that Medicare is a good model. And the essential part of the Medicare model is that it contracts directly with providers, who agree to accept rates that are based on very careful thinking about what’s the proper amount to pay for different kinds of services.

Watch it:

During the interview, Hacker rejected Ross’ contention that hospitals would close if they were reimbursed at Medicare rates, pointing to research which found that Medicare reimbursement rates lead to greater efficiencies.

Hacker also predicted that seniors would oppose opening the program to younger Americans and explained that Medicare was not designed “to provide health security to a younger than 65 population.” “There are a lot of holes in the Medicare program that should be fixed but which aren’t going to be fixed immediately. One of the important reasons to have a separate insurance plan is to make sure you’re providing the kind of good coverage that you know younger Americans need,” Hacker said.

“Ultimately though, we should understand the public health insurance plan idea, and Medicare as being very much interrelated. That over time, we should see this public health insurance plan and Medicare as a way of improving the cost effectiveness and the quality of care delivered to both younger Americans and to those over 65.”

James Roosevelt Jr., president and CEO of Tufts Health Plan and co-chair of the policy committee of America’s Health Insurance Plans, hijacks Atul Gawande’s argument that national health reform must build on the fundamentals of existing programs to argue that we can’t afford a public health option:

[E]ven if a government-run plan could be designed in a way that preserves choice for most Americans, it would delay the start of universal coverage for years. As a nation, we simply cannot afford to wait for the kind of accessible, portable, universal healthcare coverage that we have available to us today in Massachusetts, or to employees eligible for coverage through the Federal Employees Health Benefits Plan, which was touted during President Obama’s campaign.

Jacob Hacker’s plan addresses this argument: his public plan proposal builds on the existing infrastructure of Medicare while simultaneously “safeguarding and improving the Medicare model.”

Rather than delaying health care reform, a program that builds on the Medicare system guarantees patient familiarity with the plan, simplifies the enrollment process, “ensure[s] continued enrollment across state lines, facilitate[s] interactions with multi-state employers, and build[s] on what already exists.” By pioneering new payment methods — paying primary physicians more, moving way from fee-for-service and towards bundled payments for episodes of care — the new public plan could lower health care costs (encouraging its competitors to adopt similar efforts) and ensure that ‘the best laid plans’ of health care reform are sustainable over the long-term.

In fact, a new Medicare-like model is likely no more disruptive than the Massachusetts Exchange of regulated private ensurers. As Atul Gawande himself explained during an interview with Charlie Rose, “we will have to take the solutions we’ve got and we will build off of them. We won’t blow up the system. We are going to ask ourselves, are we going to build on a program like Medicare or Medicaid or are we going to build on our private insurers and try to subsidize more people to have more private insurance. And that’s actually achievable turf”:

On January 1, 2011 we can have an online choice of four or five private insurers, or we can have a Medicare option, or maybe we’ll have both. But there is no reason we can’t create that within weeks.

Yesterday, University of California, Berkeley Professor Jacob Hacker released a report examining how to structure a public health insurance plan that competes alongside a menu of private insurers within an Exchange of different plans. Hacker argues, rather convincingly, for the establishment of a single national public option that builds on the existing Medicare infrastructure and negotiates with providers for the best health care prices.

Here is a graphical representation:

All of the major Democratic reform proposals contain a public option, but the idea has generated great debate in health policy circles. Critics charge that a public option would push private insurers out of the market and underpay providers. “With the government plan, taxpayers would presumably absorb all of the risks, losses, and liabilities of such an enterprise, while private health plans would absorb their own risks, losses, and liabilities,” the Heritage Foundation argues. “Consequently, from the beginning, such a competition could not possibly be fair in any meaningful sense.”

What these critics really mean, Hacker argues, is that “they do not want a new public health insurance plan to have any inherent advantages.” But that’s akin to criticizing Home Depot for out-competing other home improvement stores by using its market clout to negotiate for better prices with providers. Stripping a new public plan of “inherent advantages” — like the right to use its market share to bargain with providers — “is at odds with true competition, which does not require competitors to be equal but that they have an equal chance to succeed if they are equally good at doing what consumers want,” Hacker writes.

Giving all health care plans the same opportunities would require the following, Hacker argues:

1) Any subsidies for low income enrollees are available for any plan within the Exchange at the same level

2) The Exchange should be run by a separate entity from the administrators of the public health insurance plan.

3) All plans should play by the same rules: charge the same rates to all subscribers, take everyone who applies, provide objective information, offer the same basic package of benefits, hold adequate reserves, and clearly state their terms

4) The public plan cannot dip into general government reserves

5) Plans should be paid different amounts by the Exchange based on the risk of their enrollees. At the end of the year, funds could be redistributed among the plans to ensure that those with very sick people are protected.

6) Plans should bid to provide benefits within specific regions. “Once the premiums were set though competitive bidding, subsidies for low-income enrollees” “should be based on some weighted average of public and private premiums within the region.” This way, lower-income enrollees are not always stuck with the lowest-bid plan.

In the video below, Hacker frames the public plan as a moderate hybrid alternative to the current system and explains how private and public insurers could compete on an equal-playing field without sacrificing their “inherent advantages”:

Watch it:

During a press conference at the Institute for America’s Future, Hacker also assured critics that private plans would fill an important niche within the Exchange.

“I think the private insurers certainly will be have a great role in providing more integrated coverage options than the public plan would provide. So any types of network plans that involve the restricted network of providers, ranging from very tightly integrated staff-model HMOs to more loosely integrated practices, it strikes me as an area where private plans would have an enormous advantage,” Hacker explained.

Private plans would also have a “brand advantage” (in the same way that a lot of people rather have the branded drug than the generic) and “could play an important role” as fee-for-service alternatives that look like the public model but provide “better customer service, nicer marketing and better brochures, but they might also be doing other things in terms of quality improvement or care management that the public plan wasn’t.”

Read Hacker’s full report here.