The issue sucking up the oxygen in Washington today is whether to have a public health insurance plan compete with private insurers for the business of Americans without secure workplace coverage. Americans overwhelmingly back the idea, President Obama strongly supports it, and House Democratic leaders have drafted legislation that shows how it can be done. But the insurance and pharmaceutical lobbies and some medical provider groups have cried foul, and they have found a receptive ear not just among Republicans but also some Democrats who demand that reform be bipartisan, even if they have to cut the heart out of it.

Opponents of the plan paint a dystopian future in which the government takes over American medicine, limiting choice and competition. The claim is demonstrably false: If the public plan option were enacted, most Americans would continue to get private insurance through their employers as they do today, and the public plan would be just one choice offered alongside a menu of private plans. Yet a post-reform world of unraveling choices, runaway costs, and rampant health insecurity could well materialize--if critics get their way and the public plan dies as a health care bill wends its way to passage.


Fast forward a few years to the first day that this reform bill--signed with much fanfare in the Rose Garden, with a beaming bipartisan coterie--takes effect. The bill’s crown jewel is not the public option, but a “national insurance exchange,” a benefit clearinghouse that is supposed to sign up private insurers to provide choices to people without workplace insurance. These choices vary based on the region you live in, to reflect the plans in the local market.

In many markets, however, the choices turn out to be roughly as limited as they are today, when the dominant insurer enrolls at least half of privately insured people in 16 states and at least a third in 38 states. The national insurance exchange is meant to create greater competition, but for most of the country, the choice is basically between WellPoint and UnitedHealth--gargantuan for-profit insurers each about the size of Medicare. Yes, there is more than one choice in most areas, but not choices that meaningfully differ from each other, or from what is on offer today.

Ironically, the problem is worst in the rural areas of the country whose Democratic Senators--such as Kent Conrad of North Dakota and Finance Committee Chair Max Baucus of Montana--have been among the Democrats most willing to forsake the public health insurance plan. In these rural areas, one or two dominant insurers hold over 90 percent of the market. (In all of Montana, for example, one insurer has 75 percent of private enrollees.) For people in these parts of the nation, a real choice of health plans is as mythical as unicorns.

Equally mythical, it soon becomes clear, are the consumer cooperatives that Conrad and Baucus had backed to attract Republican support. The reform legislation envisioned that these cooperatives would be chartered by the government and owned by consumers--the idea being that a democratically-controlled enterprise would be driven not by profit, but by serving the interests of its citizen-owners. But the cooperatives are almost impossible to get off the ground, just as similar consumer-oriented ventures have been in the past. Doctors largely boycott them, insurers undercut them, state politicians argue over them, and federal dollars are woefully insufficient to nurture them. It soon becomes clear that they represent little more than a fig leaf covering a lack of commitment to the basic aim of a public plan: having a tough competitor that forces large insurance companies to bring up their standards and bring down their prices.

Not surprisingly, the premiums that most plans offer within the exchange are just as high as they are today. Without a public plan offering coverage that, estimates project, would be around 25 percent cheaper, the private plans in many markets are free to gouge consumers without much concern about losing business. And without pressure on these plans to control costs, they aren’t about to cut back their administrative waste or high profits or excessive executive salaries, much less bargain aggressively with drug companies and hospitals demanding ever higher prices.

Worse, because coverage within the exchange is subsidized for lower income workers, taxpayers pick up the tab. With the cost of the health care overhaul outstripping projections, national politicians start the difficult process of cutting the initially generous benefit package and focusing public assistance on the neediest within the exchange. Middle-class Americans start wondering what’s in reform for them.

 

Look a little further down the road. It’s been three years since the president signed the bill. Despite high hopes, the patchwork of federal and state insurance regulations created by the legislation isn't working. The worst abuses--such as revoking policies of people who thought they were covered after they’ve run up big medical bills--have largely ended. But private insurers continue to ration care in arbitrary ways that put their profits before patients, and many Americans still can’t obtain or afford private insurance that promises them health security. The basic problem is that the regulations stand alone, without the auxiliary precaution of a public health plan whose mission is to improve the quality and cost-effectiveness of care.

Those with chronic conditions or nearing retirement age who are self-employed or work for small businesses are hit hardest. A 59-year-old self-employed man with diabetes, or a 48-year-old single mother with breast cancer who works at a small retailer--these are the sort of people who will fall through the cracks without a public plan available in all parts of the nation. They may qualify for a “hardship exemption” so that they are not compelled to buy insurance under the reform legislation’s “individual mandate.” But not being forced to buy insurance they can’t afford is a poor substitute for having access to a public plan they can afford.

All this hurts not just patients, but also providers. When reform had passed, doctors and hospitals were told they’d be burdened with less paperwork and fewer uninsured patients. And they almost certainly would have--if reform had covered most Americans, reduced billing hassles and administrative overhead, ensured them a stable connection to their patients, and controlled insurance premiums so those patients could stay insured. But without a patient-centered public plan, providers find themselves in the same old binds they faced before.

What’s more, there’s been no meaningful innovation in the way providers get paid to treat most patients. Private insurers continue to use their old models to pay for care--models that reward volume over performance and quantity over quality. And, as a result, costs have risen inexorably, with health care now consuming more than 20 percent of our nation’s annual GDP, putting growing pressure on public and private budgets.

In alarm, national politicians set about slashing medical spending. While federal policymakers have only the bluntest levers to stimulate innovation among private insurers, they have a ready option for controlling their own health care spending: cutting and restructuring payments to providers and hospitals under Medicare, the largest federal health insurance program. But because Medicare covers only around a seventh of Americans, these efforts are swamped out by cost growth in the overall insurance market. And those seventh of Americans, who vote in high numbers, are not happy about the changes in the coverage they depend on.

They’re not the only ones. When reform had passed, its architects had proclaimed 2009 the start of the road to universal coverage. But to avoid the road to reform that ran through the creation of a new public plan, they took the nation down a path strewn with potholes, detours, and drop-offs that everyone, in retrospect, would have liked to avoid.

 

How can we avoid this nightmarish future? By getting the debate right in the present. We can start by recognizing that we are already on a course for financial ruin. A health plan that tinkers around the edges will not help. What we need is a big win on health care--and a big win must include a public health insurance plan.

Our future world of restricted options also makes clear that a public plan is about choice. People who lack coverage from their employers will have the option of enrolling in the new public plan. They will also be perfectly free to enroll in a variety of private plans. These plans will compete with the public plan on a completely level playing field--both subject to the same rules, both sustaining themselves completely through enrollee premiums and federal premium assistance, both answering to the same regulatory body.

This is a not a radical idea. In many areas of American commerce, private and government programs comfortably co-exist. FHA insured loans and non-FHA loans, Social Security and private pensions, public and private universities--all have long thrived side by side. Each side of the divide has strengths and weaknesses, but in every case the public sector is providing something the private sector cannot: A backup that’s there if and when you need it; a benchmark for private providers; and a backstop to make sure costs don’t spin out of control. Just as it is comforting to have Social Security in case your 401(k) evaporates or an FHA loan in case your credit score tanks, a new public plan provides an added level of protection against the vicissitudes of an unaccountable insurance market. A public plan is about competition as well as choice.

Even on a level playing field, the public plan will create discipline for private insurers that regulations alone simply cannot. Regulations require extensive monitoring and vigilance--and, as we know from careful study and long experience, private insurers will try to get around these rules. Having a tough public-spirited competitor means that the regulations do not have to do more work than can be expected of even the most nimble and powerful regulator, much less real-world regulators constantly subject to industry pressure, ideological attacks, and budgetary constraints. So the public plan is about more than choice and competition. It is also about regulatory realism and restraint of the kind that, in other contexts, conservatives generally espouse.

The goal of the public plan isn’t to eliminate private insurance, or put government in charge of American medicine, or any of the other frightening futures that critics have painted. The goal is to create accountability for the public and private sectors alike while ensuring all Americans have affordable quality care. Sure, there will be tensions and difficult questions to resolve. But the alternative, as we’ve seen, would be far worse.

Jacob Hacker is professor of political science and co-director of the Center for Health, Economic, and Family Security at U.C. Berkeley. Starting July 1, he will be Stanley Resor professor of political science at Yale University. Rahul Rajkumar is a physician at Brigham and Women’s Hospital in Boston, Massachusetts, and a Senior Advisor to Doctors for America.

By Jacob Hacker and Rahul Rajkumar