New health care study: public option would generate more benefits, savings than projected

Susan Gluss, UC Berkeley School of Law, (510) 642-6936

Mary Boyle, Common Cause, (202) 736-5770

The UC Berkeley School of Law’s Center on Health, Economic & Family Security today released a report entitled The Costs and Benefits of a Public Option in Health Care Reform: An Economic Analysis, which argues that the public option is likely to generate greater benefits and cost savings to the American people than has been projected by the Congressional Budget Office (CBO) and other independent analysts. Common Cause supports a public option as a way of reducing health care costs and extending health care coverage to more Americans.

The most sweeping reform Congress is considering as it overhauls the nation’s health care system is the public option, which would create a government-backed health insurance plan. The Cost and Benefits report argues that previous estimates underestimate the benefits of such a plan because they treat the insurance and provider industries as perfectly competitive markets, failing to account for cost savings from increased competition with a public plan.

“Contrary to what some have argued, there is no reason to believe that the public option shifts costs onto private insurers or that employers would suddenly stop covering their employees in favor of the public plan,” said Melissa Rodgers, associate director of Berkeley Law’s Center on Health, Economic & Family Security who co-authored the study.

“The analysis in this report tells us that some of the worst-case scenarios presented in opposition to the public option may be overblown,” said Common Cause President Bob Edgar. “Congress should consider these findings as they continue with their debate over health care reform and the public option.”

Economics scholar and professor Ethan Kaplan, the lead author of the report, analyzed existing economic models that estimate the costs and benefits of health reform proposals, and the public option in particular. He points to flaws in the analysis of the health insurance market presented by the CBO and other groups, which most likely lead to an overestimate of the costs and an underestimate of the benefits of the public option.

Key findings follow:

. The public option can generate savings through subsidy reductions or a tax base increase. Most of the models being used to predict policy outcomes do not take into account the competitive effect of a public option on providers and private insurance.

. Existing studies do not include the monopoly power of hospitals to set high prices. Private insurers pay hospitals on average 30% more than Medicare. A public option that exerts pressure on hospitals to lower the prices they charge private insurers would lead to overall price declines.

. If providers who accept Medicare patients are required to accept public option patients, the public option would be more attractive to consumers. A public option with high individual and provider enrollment would compete with private insurers and yield lower premiums.

. By lowering premiums, the public option will also reduce government spending on subsidies.

. If the public option is to provide competitive pressure on otherwise monopolistic or near-monopolistic insurance markets, then policy makers must give Americans broad access to the public option.

. The public option would increase government revenues by decreasing employer spending on health care benefits, which are not taxed, relative to wages, which are. The public option could also influence both the willingness of people to work (labor supply) as well as the willingness of firms to hire (labor demand). These labor effects could in turn have a further impact on government revenues.

. If the price of health care dropped, firms would switch from spending on health care for employees to paying higher wages. Because wages are taxed but health care benefits are not, this would lead to increased government revenues.

. Providing jobs would become cheaper if the cost of providing health insurance were cheaper.

. If affordable health insurance were readily available to uninsured workers through a public option, this could increase labor force participation, especially at the low-wage end of the market.

How a public option is structured will have immense economic and fiscal consequences.

Authors’ recommendations:

o Administer the public option so that the public option and Medicare appear seamless to providers;

o Tie provider reimbursement rates in the public option to Medicare;

o Administer the public option at a national level;

o Create strong incentives for-or require-Medicare providers to accept public option enrollees;

o Make provider enrollment in the public option the default;

o Make the public option available to all Americans not just to those without the possibility of employment-based coverage and small businesses;

o Cap the premium differentials that insurance companies can charge for the same plan to different groups of consumers; and

o Allow individuals to purchase health insurance through the exchange with pre-tax dollars (or eliminate the employer tax subsidy for health insurance).

Click here to view the study.

For more information about the study, contact Melissa Rodgers,, 510.643.4283

Berkeley Law’s Center on Health, Economic & Family Security is a multidisciplinary research center that addresses the increasing insecurity faced by American workers and families through the development of integrated and interdisciplinary policy solutions.