On April 7, 2021, the Congressional Budget Office (CBO) released a report detailing the key design considerations for a nongroup health insurance plan. The CBO’s public option report comes on the heels of several proposals – including the Medicare-X Choice Act – making their way through Congress or state legislative bodies.
The CBO did not design their report to review any individual plan. Instead, the CBO’s public option report was designed to develop a detailed list of questions any public option design must address. The report also does not put forth any recommendations or answer specific plan design questions. That said, it still offers information that can be useful when understanding the ramifications of certain public option plan designs.
However, the CBO’s public option report did make several assumptions. Among the assumptions:
- The public option would be offered within the existing Affordable Care Act (ACA) marketplaces
- The federal government would bear the insurance risk
- The plans would operate like ACA-qualified health plans and enrollees would be eligible for premium tax credits
- Premiums would cover the expected medical expenses and administrative costs.
With that in mind, here are five takeaways from the CBO’s Public Option Design Review:
Competition Lowers Prices
In the first section of the report, CBO outlined the current state of the nongroup health insurance market. According to the CBO, the ACA exchanges have experienced growth in the number of insurers in exchanges. An average of at least five insurers competes in at least one of a state’s regions. That’s an increase from 3.5 in 2018. That said, it’s still down from 6 in 2015. Additionally, 22% of enrollees have a choice between 2 plans or fewer.
That limited choice leads to higher premiums. CBO found that premiums for benchmark plans are usually lower in areas with more insurers. And the more insurers exist, the fewer enrollees pay for premiums. Those lower premiums encourage more enrollees. Plus, healthier populations with income above 400% of the federal poverty level who don’t earn subsidies in the exchange may be more likely to enroll if premium costs are reduced.
As a result, any public option should consider what impact it will have on competition within a market.
Insurers in ACA Marketplaces Have Higher Administrative Costs
Compared to other health care insurance types, administrative costs in the individual market are higher, CBO found. Where administrative costs in the ACA exchange market averaged 17%, it was 8% of total spending in Medicaid, 7% in Medicare, and 12% in private plans. Consumers typically pay those administrative costs in the form of higher premiums. As a result, a public plan with lower administrative costs – similar to Medicaid or Medicare – could result in lower premiums.
Provider Payment Rates and Prescription Drug Pricing Largely Determine Premiums
Though reduced administrative costs could lead to reduced premiums, the rates that insurers pay to providers and prescription drug costs are the key drivers of premium rates. If a public plan fails to address those two items cost-effectively, premiums likely won’t be significantly better than what’s currently available in ACA markets.
The government could design a public option to minimize payment rates by specifying a formula for deriving those provider payments. For example, the public plan could pay a percentage of Medicare rates. Some states have taken this approach, paying providers a multiple of Medicare rates, like 150%. Not only would those payment rates likely be less than private companies on the marketplace pay, but it’d also likely reduce administrative costs. A plan design tied to current Medicare rates is much easier to administer than one that negotiates rates with providers. The result would be reduced service costs and likely reduced premiums for enrollees.
Unfortunately, providers would likely earn less than they do currently. However, the relatively small number of enrollees in the individual market means it’s not a significant amount.
The public option may also be able to drive down the cost of prescription drugs. Prices could be negotiated by the government, like the Secretary of Health and Human Services (HHS), as has been proposed in some public option plans. Or, the government could contract with a pharmacy benefit manager (PBM) to negotiate drug prices. Or, prices could be set by law. For example, prices could be linked to the average price in Medicare Part D or based on prices in the Medicaid program. Each of those options offers benefits and pitfalls, but for the most part, they would help drive down the cost of prescriptions in the public option plan, and thereby premiums.
A Public Option Could Eliminate Private Options
We discussed how competition can drive down premium rates in the individual exchange. If a public option has significant competitive advantages, it could cause some insurers to leave the market. But if insurers see that they can remain profitable in the exchange – even with a public option – they’ll likely stay.
A public option could introduce other unintended consequences. Because provider rates and prescription costs are the primary drivers of premiums, insurers may look to cut provider payment rates should the public option become reality. If a provider must choose between lowering payment rates or the insurer leaving their market, they may choose lower rates to retain some revenue. But that will impact the provider’s profitability and could have other market impacts.
A Public Option Likely Won’t Significantly Impact Unemployment
Interestingly, a public option is less about lowering the uninsured rate and more about reducing the cost of insurance premiums. The most likely group to gain insurance coverage via a public option would be those who aren’t eligible for subsidies. That group accounts for nearly 10% of the uninsured population. Those eligible for subsidies account for twice that number – about 20% of those without insurance. However, CBO found they’d likely only enroll in the public option if premiums were significantly lower than current private plans. About half of the uninsured were eligible for Medicaid or had access to employment-based coverage that made them ineligible for marketplace coverage. The CBO doesn’t expect the public option to lead to a significant number of those uninsured enrolling because a public option is available. Overall, a public option would likely have a limited impact on uninsured rates.
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