ACA marketplace

The ACA marketplace: A new public option?

Leading health economist weighs in on President Obama’s proposal for a Medicare-like public option on the health care exchanges
July 18, 2016

President Barack Obama wrote an article last week for the Journal of the American Medical Association in which he proposed a limited public, Medicare-like option to provide more choice in markets that currently have limited competition—only one or two private insurers. It was part of a larger piece in which the president examined the impact the Affordable Care Act (ACA, nicknamed “ObamaCare”) has had on the health care system in the United States.

Michael A. Morrisey, PhD, professor and head of the Department of Health Policy and Management at the Texas A&M School of Public Health, weighs in on whether a public-option approach might help restrain rising premiums and suggests that possible impacts all depend on the details.

“How a public option would play out in one- or two-insurer markets is pretty uncertain,” Morrisey said. “It would require some sort of comparative advantage over private insurers to be successful.” That competitive advantage might be as simple as being willing to lose money. Although a private insurer couldn’t remain in a market where it is suffering a loss, a public option may be able to sustain such loses over time and still function. Indeed, Medicare works this way; the Federal government subsidizes Medicare losses.

“One scenario is that a public option enters communities which have only one or two private insurers,” Morrisey said. “It sets its premiums to be the low-priced provider and attracts both new enrollees and switchers from the other plans. Its losses are covered, perhaps by the existing Medicare Trust Funds, or perhaps by some other claim on the United States Treasury.”

Indeed, if premiums are low enough, the public option could attract virtually all those in need of coverage and drive the private plan or plans out of business.

A second comparative advantage is setting fees for providers.  “In the private sector, success really comes down to the fees the private insurers pay hospitals and physicians,” Morrisey said. These fees are determined by the insurer negotiating with local health care providers, and they may be of primary importance.

“According to our research, a key to being successful in the exchanges is the ability to negotiate acceptable prices from hospitals and physicians,” Morrisey said. “So, one advantage of a public option may be its ability to pay hospitals and physicians the prices that traditional Medicare has already set, which are well below the prices that private insurers have been able to negotiate.”

However, these lower prices are also one reason providers are sometimes not willing to accept too many Medicare patients, especially when they have potential patients with private insurance willing to fill those beds or appointment slots at higher prices. “Only when providers have some extra capacity does the Medicare-fee strategy for the public option work,” Morrisey said. “In this case, providers take the new enrollees and are happy to take the existing Medicare fees, but when private demand for health care services is high, current Medicare beneficiaries and new public option enrollees would have difficulty finding physicians willing to treat them and hospitals able to admit them.”

However, this isn’t the only possible scenario. “A public option with a network as large and open as traditional Medicare could easily attract a disproportionate share of high utilizers who would likely be attracted by the depth of specialists available, even if premiums cost more than they would with the private insurer,” Morrisey said. In this case, the private plans—with their relatively small networks but low premiums—could serve the relatively healthy members of the population. “In this scenario the private plan does just fine, and the public option is effectively taking care of a high risk pool of patients.”

If Congress balks at a public option, Morrisey suggests that there might be another way: offering extra subsidies to private carriers if they provide coverage in areas that would otherwise be economically disadvantageous to them.

“None of this is to suggest that a public option is not an important alternative, worthy of consideration, that may ultimately be the future of the ACA,” Morrisey said. “However, just as the ACA has consequences and complexities, so too do alternatives and refinements such as the ones proposed by the president last week. The impacts are in the details, and we just don’t know what those are yet.”

— Christina Sumners

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