The “public-plan” option is one of the biggest sticking points in U.S. health-care reform proposals, with the good reason that its design -- or really, whether to have it at all -- totally revamps the way health insurance works in this country.

There are two main sticking points: one, whether it makes sense to have a government option side by side with private insurance choices, and two, whether to create a mandate that people must get health insurance. Both those things are included in the health-reform legislation introduced last week by Democrats in the House of Representatives, though the mandate isn’t strict and doesn’t apply to everyone.

The public plan would “serve as a conduit for spreading payment and system reforms, enable the establishment of a coherent set of incentives, accelerate health-system savings and increase value in health-care spending,” Rachel Nuzum of the Commonwealth Fund, a liberal-leaning health-policy foundation, said in a Policy Points memo in March.
It would also provide a safety net for people who aren’t working or whose employers don’t provide health insurance, as well as those who simply can’t afford insurance.

A lot of people are nervous about the idea of creating a government plan, feeling it could be too dominant in the marketplace and interfere with free-market competition.

Karen Ignani, the head of health-insurer advocacy group America’s Health Insurance Plans, and Scott Serota, the president and CEO of the Blue Cross Blue Shield Association, said in a recent letter to senators that "A government-run plan no matter how it is initially structured would dismantle employer-based coverage, significantly increase costs for those who remain in private coverage, and add additional liabilities to the federal budget.”

“If you have a government plan, it would attract people with artificially low rates,” said Robert Zirkelbach, an AHIP spokesman.

The government plan “would dictate the prices it paid for services,” Zirkelbach said. “We know those payments are below cost, and the way hospitals are able to be sustained is to make up for it by charging more” to private insurers. That situation is already occurring with Medicare and Medicaid.

Some conservatives and free-market advocates think the plan is likely to be wasteful, since it will be so big -- and since Medicare and Medicaid, the government health-insurance programs already in existence, have big problems with fraud, abuse and waste.

The Obama Administration is just going to take money from the “financial disaster” of Medicare and Medicaid, and put it “into a public health plan,” said Bob Moffit, the director of the Heritage Foundation’s Center for Health Policy Studies.

But President Obama continues to asset that private plans will remain alive and well, public plan or no.
At his press conference on Tuesday, the president said, “There's no doubt that we must preserve what's best about our health care system, and that means allowing Americans who like their doctors and their health care plans to keep them.”

“The public plan I think is an important tool to discipline insurance companies,” he added. “for us to be able to say, here's a public option that's not profit-driven, that can keep down administrative costs and that provides you good, quality care for a reasonable price -- as one of the options for you to choose, I think that makes sense.”

Then, there’s the issue of whether people should be required to have health insurance. The plan proposed by House Democrats would institute a 2% tax on adjusted gross income above a certain level for some people who choose not to get health insurance. In addition, employers that didn’t provide a certain level of health coverage for their employees would have to pay a fee, though some small businesses would receive exemptions.

Making participation mandatory isn’t necessarily a pill many Americans want to swallow, but if there’s a public plan, it would be hard not to put in a requirement.

The reason a mandate is so central to the functioning of a public plan is that if everyone has access to health insurance, some people are likely to opt out -- mostly younger, healthier people who feel they don’t need the coverage. Those people subsidize the older and sicker people, but if they aren’t there, the premiums of those in the system will rise. More people drop out of the system as the prices rise, leaving only the sickest in the system, and making the costs per person rise even more.

It’s what’s known in the insurance industry as a death spiral.

Indeed, most of the health-reform proposals have some measure of guaranteed coverage with restrictions on how high rates can go. That’s almost an invitation for healthy people to wait to sign up for coverage until they’re sick -- unless they’re required to have insurance.

AHIP’s proposed health-reform solution would mandate that everyone be insured, but would provide a guarantee of health insurance as well as some form of “community rating,” or a concept in which everyone has the same rates.

“We’re saying there will be guaranteed coverage and there won’t be variations [in rates] by health status, AHIP’s Zirkelbach said. Of course, AHIP would prefer that the changes be made through the private sector, rather than a government plan.

Whatever the method, if broad health reforms are enacted, some sort of insurance mandate is likely.

“Except in cases of hardship, once market reforms and affordability credits are in effect, individuals will be responsible for obtaining and maintaining health-insurance coverage” or face the income tax noted above, according to a summary document on the plan introduced by House Democrats last week.