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Improving Value

Public Option

A public insurance option was considered but ultimately rejected as a cost saving measure during the legislative debate over the ACA. However, nothing prevents a state from adopting this strategy within its own borders.

The public plan, essentially a voluntary Medicare equivalent for Americans younger than 65 years, theoretically could save money in three ways. First, it could take advantage of the lower administrative costs of government programs, such as Medicare. Second, the public plan could use its substantial market power to restrain the prices of the medical care it finances. The extent of savings would depend in part on the size of the public plan's enrollment; a larger plan would have more purchasing power to control costs. Savings would, of course, also depend on the political willingness to reduce payments to medical providers. Finally, the combination of marketing regulation and competition from the less expensive public plan could also prompt private insurers to innovate in ways that lowered costs.

During the ACA debate, the Congressional Budget Office estimated that the public plan’s premiums would be five to seven percent lower, on average, than the premiums of private plans offered in the exchanges, but the estimates were subject to a high degree of uncertainty.1 The estimate did not include any savings from private insurers lowering their costs in response. It may be worth noting that in the Medicare realm, having private Medicare Advantage plans compete side by side with a public option (traditional Medicare) does not appear to have resulted in more efficient private plans.2

Notes

1.The ACA includes a waiver option for states under Section 1332. See http://www.cbpp.org/cms/?fa=view&id=5265

2. Douglas W. Elmendorf letter to Honorable Fortney Pete Stark, Chairman Subcommittee on Health, Committee on Ways and Means, July 22, 2010 http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/116xx/doc11689/stark_letter-hr_5808-07-22.pdf