Much Ado About ...

Can the public option heal the U.S. health care system?


simon haeder teaches in the School of Public Policy at Penn State.

Illustrated by sam ward

Published May 4, 2020


“The problem of providing satisfactory medical service to all the people of the United States at a cost which they can meet is a pressing one. At the present time, many persons do not receive service which is adequate either in quantity or quality, and the costs of service are inequitably distributed. The result is a tremendous amount of preventable physical pain and mental anguish, needless deaths, economic inefficiency and social waste.”

Sound familiar? Few things better illustrate the stubborn resistance of the U.S. health care system to improvement than this sad assessment from the Committee on the Costs of Medical Care, a blue-ribbon assemblage led by a former president of the American Medical Association — in 1932! That’s right, the year Amelia Earhart soloed the Atlantic and the Dow Jones Industrial Average bottomed out at 41.

Assessing value, defined as bang for a buck (or euro, yen, pound, etc.), a recent study found a 23-point gap on a 100-point scale with our global competitors Canada, Japan, Germany, the United Kingdom and France.

Health care reform is a struggle wherever it is attempted. Yet it is particularly challenging in the U.S. context, with its veneration of individual liberty and the private market, which is contradicted by Americans’ sense of entitlement and its interest-group-ridden government. How do you design changes that can run the political gauntlet without compromising the goals of reform? The latest contender is an oldie but goodie — one that came close to the finish line in the passage of Obamacare in 2009-2010: a government insurer providing a “public option” to private insurance.

Here, I begin with a crash refresher on what ails U.S. health care and why the invisible hand of the market just won’t cut it. I then trace the emergence of the public option and discuss why supporters see it as a winner in both political and substantive terms. As a policy analyst with no dog in the fight, I think much comes down to the nitty-gritty of how the public option is designed, and whether its implementation would lead to more fundamental reforms that dealt with universal coverage and cost control.

All That Ails

Even a cursory look suggests that much is wrong with U.S. health care. Consider the key measures widely used for international comparisons: cost, quality and access.

The United States spends more than 17 percent of its GDP on health care, while Germany spends 11 percent and the United Kingdom less than 10 percent. On a per capita basis, this translates into more than $11,000 for the United States and $5,700 and $4,200 for Germany and the United Kingdom, respectively. Interestingly, we really did not start to distance ourselves in terms of profligacy from other developed countries until the 1980s. But since the spending gap emerged, it has been getting ever wider.

So where is the money going? Some potential culprits can be easily exonerated. We don’t consume more pills or procedures, nor are we generally outperforming our foreign cousins when it comes to deploying expensive technology.

Perhaps, then, we are spending more in order to get higher quality? It certainly doesn’t show up in broad comparisons of life expectancy or infant mortality (America scores poorly on both). But, of course, a lot more than medical care goes into these measures (though, arguably, we do even worse on these “social determinants of health” like economic security, education and public safety). Assessing value, defined as bang for a buck (or euro, yen, pound, etc.), a recent study found a 23-point gap on a 100-point scale with our global competitors Canada, Japan, Germany, the United Kingdom and France.

So exactly how are we managing to blow through close to $4 trillion dollars annually (and $6 trillion by 2027) on medical care that rates a B-minus? The answer was offered almost 20 years ago by the late Uwe Reinhardt of Princeton and his colleagues, and holds even truer today: “it’s the prices, stupid.” We simply spend more than anyone else on every class of medical service and product — everything from physician and hospital compensation to prescription drugs and laboratory tests. And not only are we spending more, we are adding layers of go-betweens who take a big cut in return for very little.

The numbers in that regard are quite startling. While some administrative spending is obviously necessary, overhead accounts for 25 to 30 percent of total health spending. Insurers take home 12 percent of all premiums in the form of profits. All told, one-third of U.S. health care spending can only be rationally classified as waste, and at least in theory could be eliminated without making patients worse off.

And let’s not forget that quantity (in the form of access to care) matters as much as quality. As you’ve no doubt grown weary of hearing, the United States is alone among its affluent peers in not providing insurance coverage to every citizen, let alone every resident. Indeed, even the Affordable Care Act, anathema to Ayn Rand-fearing conservatives everywhere, only aimed for “near-universal” coverage and leaves roughly 10 percent of Americans uninsured to this day.

Gilding this poisonous lily, access doesn’t always translate to adequate access. With ever-fewer Americans blessed with employerprovided insurance coverage — and even that coverage being hollowed out by big deductibles, co-pays and “narrow” provider networks — more Americans are facing heavy costs for marginal service.

Ranting (Briefly) About Markets

So why doesn’t competition among providers drive the system to provide better value? The short answer is that viable competition only works with adequate numbers of non-colluding sellers, along with enough consumers who know enough to make informed choices. As Nobel laureate Kenneth Arrow famously pointed out, these conditions hardly characterize the health care market. Indeed, some of the myriad “market failures” are bad and getting worse.

For one, health care markets are riddled with the sort of market power that would have made a 19th-century robber baron jealous. Health care provider systems are often vertically and horizontally integrated, nominally to match the bargaining power of giant insurers. And in many rural areas, residents have access to only one full-service provider because two can’t operate with any hope of efficiency.

Then there’s the problem of the market for prescription drugs. Many crucial drugs are legal monopolies protected by the patent system. And even where drug patents have run out, patients can no longer depend on generic drug makers to compete away excess profits.

Moreover, let’s not forget the other source of market failure: even where consumers still have leeway to shop around — say, for elective surgery — they rarely have much information to go on other than the comfort of the furniture in the waiting room and the cut of the jib of the surgeon.

Indeed, everywhere one looks, providers are shamelessly gaming the system to maximize profits without adding value. As one observer put it, “people in every sector of medicine are feeding at the trough: insurers, hospitals, doctors, manufacturers, politicians, regulators, charities and more.” Taxpayers and patients are left holding the bag.

There’s a way out of part of the problem.

The pooling of risk — that is, insurance that spreads the cost of being sick across large groups — works to the extent that it solves the access problem for members of the pool. But those who have hoped that insurers would make markets more efficient by using their expertise to act as scouts in directing patients to the right services and use their market power to beat down costs have been sorely disappointed.

The low level of competition among insurers and mind-boggling complexity of health care markets means that it is easy for insurers to pass on costs through premiums and keep a big slice of any savings they do squeeze out of suppliers. Consider, too, that a large portion of Americans get their coverage from public sources (Medicare, Medicaid, the Veterans Administration, the Children’s Health Insurance Program), which allows them to ignore inflation in the costs of goods and services. Still others get their coverage through their employers, and are typically only dimly aware of what they really pay as consumers.

Patch or Start Over?

Health care markets, it is very safe to say, can’t fix themselves. So how do we provide universal access and some degree of cost control? The most radical proposals tilt toward emulation of systems like the one in Canada, where many services are privately provided but there is only a single payer in each region (the provincial governments), or flat-out public systems like that of the United Kingdom (or, for that matter, the Veterans Administration system in the United States), where providers are government employees and the care is financed from general tax revenues.

However, large-scale reform efforts have repeatedly failed under presidential administrations, Republican as well as Democratic.

The last failure — that of the Clinton administration — was arguably the most surprising, since it was a high priority for the new president and, at least initially, opposition was poorly organized.

But liberals did learn some hard lessons from the Clinton health care debacle. Sure, the Clinton administration had done a particularly poor job of selling the specifics. But there were larger, systemic problems blocking reform.

Americans favor health reform in the abstract, they are quick to balk when confronted with the prospect of sacrificing benefits they already have.

Chief among them were the inconsistent views of Americans when it comes to health care reform. Most are generally satisfied with their own insurance. They are distrustful of government and government interference, but surely appreciate access to Medicare, Medicaid, CHIP and VA benefits. They are concerned about costs and budget shortfalls for the government programs, yet shudder at any hint that personal sacrifice will be required of them. While they favor health reform in the abstract, they are quick to balk when confronted with the prospect of sacrificing benefits they already have. And since any conceivable reform would produce some losers among health providers, there will always be interest groups with ginormous lobbying budgets eager to explain why change is worse than the status quo.

So how to thread the needle, tackling cost control and less-than-universal coverage without opening the proposal to fatal opposition from a host of entrenched, well-funded interests and a confused public? With these constraints and the cataclysmic failure of the last major effort to reform American health care fresh on their minds, a number of individuals independently developed health reform proposals that envisioned a greater role for government — not in the provision of health care (à la the VA), but in the provision of health insurance by creating a public insurance company of sorts.

Why not build on the good name and track record of public insurance, particularly Medicare, when it comes to payment reform, expanded coverage, lower administrative costs and quality improvements? This would not replace private insurance but operate alongside, offering the public more choice and perhaps injecting more competition into the insurance market. The “public option” was born.

And hence, while the details of the various proposals differed, the public option emerged as the fix of choice among Democrats — first on the 2008 presidential campaign trail, and then in the U.S. Congress, where it was included in almost all of the bills that would eventually evolve into the Affordable Care Act. It did well in public polls, presumably because the idea was relatively easy to understand and would not require people to change the source of their current insurance or their medical providers.

To be sure, the version at the center of the ACA was a much scaled-back public option. Yet even this version proved a stretch for a handful of conservative Senate Democrats. Joe Lieberman, from insurance-rich Connecticut, would not budge — private insurers viewed even this modest version of the public option as the proverbial camel’s nose under the tent — and the Democrats could not afford to lose Lieberman’s vote. Thus, the public option was watered down even more.

Indeed, all that was left in the final bill was seed funding for a number of consumeroriented and -operated plans (dubbed “coops”) — a favorite solution of another conservative Democrat, Kent Conrad of North Dakota. The co-ops, start-ups without much expertise or funding, would take on the industry’s heavyweights like Aetna and WellPoint and allegedly act as a yardstick for comparing access and quality. Everyone knew the co-ops were on life support from day one (today, only four of them remain operational), but sponsors of the ACA were determined not to sacrifice the very real gains in accessibility in the legislation on the altar of the public option.

Fast-forward a decade. The ACA has mostly withstood an onslaught of partisan attacks in Congress and the courts. Yet it remains vulnerable to an increasingly conservative federal judiciary, with lawsuits and hostile Trumpappointed administrators posing ongoing threats. Unquestionably, the ACA has done much to improve the lives of millions by extending access to health insurance. Yet, in spite of generous built-in subsidies for middle- class households, premiums and sky-high deductibles are still a big stretch for tens of millions.

Frustrated by the limits of the ACA and worried the Supreme Court will take it apart, liberals have abandoned the ceasefire with moderates that allowed for the passage of the ACA. And, once more, they are pushing for a true Canadian-style single-payer system. Medicare-for-All is their new buzzword.

Centrist Democratic presidential candidates, worried the party would become vulnerable to charges that reform would force voters to abandon their employer-sponsored insurance or their current health care providers, had to respond. And so they have refurbished alternatives that supplement the ACA with something akin to the old public option. Meanwhile, a handful of states, including Washington and Colorado, are contemplating their own public options.

Two equally critical issues: how the public option would be served through provider networks, and how prices for services would be set.
Devils and Details

Like its progressive cousin Medicare-for- All, the impact of a public option would turn on myriad technocratic details. One of them is who would be eligible to obtain coverage through a public option. The public plan would need an enrollment comparable to those of the largest private insurers in order to exercise leverage with providers over the quality of care or its cost. Yet, as in earlier drafts of Obamacare that included a public choice option, enrollment would have been sharply limited. Only those lacking other sources of coverage — a few million spread out over 50 states and myriad health care markets — need apply. And some current variations would go further, limiting access only to applicants in local markets suffering from rapidly escalating premiums or the withdrawal of all private insurers.

On the other end of the spectrum are variations that would make the public option available to all, with some even opening the door to firms that wish to insure their employees through a government entity rather than a private insurer. The range of enrollment predictions is strikingly wide, with the most expansive in excess of 100 million.

Two equally critical design issues: how the public option would be served through provider networks, and how prices for services would be set. Some proposals envision that the public agency would negotiate with individual providers, from hospitals to physicians to pharmacists. Another approach would require providers to serve all public option insurees and to accept reimbursement at slightly higher rates than Medicare’s prices — say, Medicare plus 5 percent — or lose all reimbursement for Medicare and Medicaid patients. The leverage gained by this take-it-or-leaveit approach would offer true potential for cost control. But, of course, it would draw bitter opposition from private insurers that lacked comparable bargaining power and that certainly wouldn’t willingly operate at markups as low as those of Medicare and Medicaid. And, to be sure, providers are vehemently opposed to these relatively low reimbursement rates.

The importance of rules governing eligibility and price-setting nicely illustrate the intricacies of reform of our absurdly complicated health care system. Even seemingly small changes hold significant implications. The design of reform also raises anew larger questions about the stability, efficiency and equity of a hybrid system accommodating both public and private insurers.

With a public option added, the insurance market reforms of the ACA would have to be maintained, if not expanded. But clearly, additional safeguards would have to be established. First among them is a risk-adjustment mechanism to limit the ability of private insurers to find legal ways to cherry-pick younger, healthier clients — and to drop the lemons. Otherwise, the public option could become the dumping ground for America’s sick and poor, who certainly deserve coverage but would put impossible cost pressures on the public agency.

As suggested above, proponents of the public option are rightly concerned that a relatively small market share spread over the whole country would deny it adequate leverage to compete with the big private insurers in setting provider prices. Then, too, there is the ongoing fear that the agency would be “captured” by private competitors in setting rules or unduly limited by Congress in negotiating with providers. Medicare offers a cautionary tale here: its price-setting mechanism has largely been captured by medical providers and by private insurance carriers who effectively serve as subcontractors in managing HMO-like Medicare Advantage plans.

Yet opponents of the public option also have legitimate concerns. Would the public insurer be able to tap the U.S. Treasury in order to lower premiums or provide better quality? Even if the agency was required by law to cover its costs, what would prevent it from becoming insolvent and dependent on federal bailouts — the way the federal housing finance agencies did during the Great Recession? And, faced by a big public agency determined to hold down prices, might service providers try to recover their losses by charging more to private insurers? Indeed, would private insurers even remain viable in competition with a public agency that was backed by the financial clout of a parent (i.e., the federal government) that has grown used to running trillion-dollar deficits in the midst of economic prosperity?

These concerns, of course, might strike some as ironic or even disingenuous, given the ongoing lack of competition in both health care and insurance markets. But this examination of the potential role of a public option in the ACA does highlight the reality that our hybrid public-private system is not inherently stable. On the one hand, conservatives (not to mention a host of economic interests) can legitimately fear that tinkering could push health care down the road toward a singlepayer system. On the other, liberals are not being paranoid in worrying that rules handicapping the public option could ultimately delegitimize it, leaving health care wide open to private insurers and providers to duke it out in ever more concentrated markets.

Through a Glass Darkly

This is a pregnant moment in the long struggle for the soul of the American health care system. The ACA was envisioned as a grand compromise, more or less providing universal coverage while sustaining the dominance of private insurance and allowing satisfied customers to stick with what they have. The hardest problems — containing prices and rationing services without slowing innovation — would largely be left for another day.

But this compromise is better seen as an unstable truce. The ACA is facing existential threats from both the conservative-majority Supreme Court and a Republican Party that long ago decided that the heir to Mitt Romney’s health insurance plan in Massachusetts was a long step down the road to socialism. Even if it survives its enemies’ ill will, the health care system will remain a Rube Goldberg machine that is failing tens of millions of Americans. How long it will take for cost pressures to finally force a reckoning is anyone’s guess.

Democrats have decided that the results of the 2018 Congressional elections demonstrated that swing voters are eager for something better. They have split into two camps, one favoring what amounts to Obamacare 2.0, while the other, looking to Canada and Europe for inspiration, is ready to tear it all down.

Liberals are not being paranoid in worrying that rules handicapping the public option could ultimately delegitimize it.

The “public option” has become the favorite of the former. As discussed above, though, the impact of adding a public option depends on how it is designed. Offered only to a modest minority of households otherwise unable to buy private insurance at a manageable price, it probably wouldn’t have the clout to make a big difference. Designed to offer headon competition to private insurers, it could certainly shake up the markets for both insurance and health care services. But whether that would lead to an equilibrium in which public and private insurance coexists is anyone’s guess.

Nothing, moreover, in the concept of a public option would make it much easier to tackle the problem of containing long-term health care costs — a problem rooted in expectations that everyone deserves access to any medical care that will make their lives longer and make them feel better.

In the end, how one views the public option turns on how one views efforts at incremental improvements in a health care system that’s just limping along and someday, some way, must come to terms with tough economic realities. It’s hard to envision a scenario in which minor fixes lead seamlessly to major ones. But it’s even harder to envision a scenario in which proponents of a singlepayer system would be able to create a political coalition strong enough to break through ideology and interest-group opposition — along with the reality that most Americans don’t want to rock the boat if it means they, too, will get wet.

main topic: Public Health