State Coverage Model No Help for Uneasy Insurance Industry

“Even the best of them are pretty far short of what most of us who advocate public plan choice want,” said Jacob S. Hacker, a political scientist at the University of California, Berkeley, who is considered one of the intellectual forces behind the public plan option.

The very point of a federal public plan, as Mr. Obama explained in a letter to Senate leaders, would be to take advantage of an enormous risk pool and efficiencies of scale “to make the health care market more competitive and keep insurance companies honest.” But in projecting how such competition might actually affect the market, the devil is clearly in the details of who Congress would make eligible for coverage, what benefits would be granted and, perhaps most important, how much providers would be paid.

The public plan concept has excited intense opposition from Republicans, insurers and big business. Stuart Butler, a domestic policy expert at the conservative Heritage Foundation, calls it “a nuclear minefield on the road to universal coverage.”

But the White House and Democratic leaders in Congress continue to insist that it is vital to their broader goals of covering all Americans and slowing the growth of costs. Their focus now is on finding a compromise that will maintain a level playing field by requiring, for instance, that a public plan be self-sustaining rather than reliant on tax dollars and that it maintain reserves like a private insurer.

Insurance industry lobbyists are skeptical that the government can fairly referee a contest between its own insurance plan and private offerings. In an era of serial federal bailouts, they ask, would the government really let its own insurance plan fail?

But the administration’s leading voices on health policy say the coexistence of public and private options within state employee benefit programs demonstrates that it can be done.

Len Nichols, the director of health policy at the New America Foundation and the co-author of a proposal to level the field through governance and pricing regulations, said that state employee health plans are “proof of concept” that governments can maintain fair competition. “They do not unleash this impulse to take over the world,” Mr. Nichols said. “I don’t see this leviathan behavior.”

But critics argue that with low administrative costs and no need to produce profits, a public plan will start with an unfair pricing advantage. They say that if a public plan is allowed to pay doctors and hospitals at levels comparable to Medicare’s, which are substantially below commercial insurance rates, it could set premiums so low it would quickly consume the market.

Although the numbers are disputed by public plan advocates, the Lewin Group, a health care consulting firm, recently projected that a plan paying Medicare rates would prompt 119 million of the 172 million people who are privately insured to switch policies (while also providing coverage to 28 million of the 46 million uninsured).

“No one has ever put up a plan to compete that exploited the bargaining leverage that you have with Medicare,” said John F. Sheils, a senior vice president at Lewin, which is owned by UnitedHealth Group, a major insurer. “It’s never been done, and if it’s never been done there’s not much you can conclude from looking at these state plans.”

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