Add a "Public Plan" to the Health Insurance Exchanges

Starting in 2014, health insurance exchanges will be established through which individuals and families may purchase private coverage. In general, people who are not offered coverage through their employer and purchase coverage through an exchange will be eligible for federal subsidies on a sliding scale if their income is between 138 percent and 400 percent of the federal poverty level. The amount of the subsidies will be based in part on the premium of the second cheapest plan offered through the exchange in an enrollee's area of residence. Small employers will have the option to allow their workers to buy coverage through the exchanges, and beginning in 2017, states may grant large employers that choice as well. In those cases, the affected workers will not receive exchange subsidies, but the costs of their coverage will be excluded from income and payroll taxation, just as the costs of other employment-based health coverage are currently excluded.

Under this option, the Secretary of Health and Human Services would establish and administer a public health insurance plan that would be offered alongside private plans through the exchanges beginning in 2014. The public plan would have to charge premiums that fully covered its costs for benefit payments and administrative expenses. The plan's payment rates for physicians and other practitioners would be set to exceed Medicare's rates in 2010 by 5 percent and would rise annually through 2014 and beyond to reflect estimated increases in physicians' costs; those payment rates would not be subject to the future reductions required by Medicare's sustainable growth rate formula. The public plan would pay hospitals and other providers the same amounts that would be paid under Medicare, on average, and would establish payment rates for prescription drugs through negotiation. Health care providers would not be required to participate in the public plan in order to participate in Medicare.

In the Congressional Budget Office's estimation, the public plan's premiums would be 5 percent to 7 percent lower, on average, than the premiums of private plans offered in the health insurance exchanges. The differences between the premiums of the public plan and the average premiums of private plans would vary across the country, largely because of geographic differences in the plans' relative payment rates for providers. Those differences in average premiums would also reflect differences in the other factors that affect all health insurance premiums, including administrative costs, the degree of benefit management applied to control spending, and the characteristics of the enrollees (the effects of which would be partly offset by the risk-adjustment mechanism that will be used in the exchanges).

This option, CBO and the staff of the Joint Committee on Taxation estimate, would reduce federal budget deficits by about $88 billion over the 2012-2021 period. That reduction is the combination of an almost $27 billion reduction in outlays (mostly from a reduction in exchange subsidies) and a $61 billion increase in tax revenues (mostly from changes in employment-based insurance coverage). Those estimates include effects on other outlays and revenues related to insurance coverage (such as Medicaid outlays and penalties on employers and uninsured individuals).

Overall, exchange subsidies would be reduced by $35 billion over the 2014-2021 period. (Although the exchange subsidies for premiums are structured as refundable tax credits, most of the resulting costs are classified as outlays because the payments will usually exceed their recipients' total income tax liability.) That decline in subsidies is the net effect of several influences. By CBO's estimates, the public plan's premium in many parts of the country would be lower than the second-lowest premium among private plans; the introduction of the public plan in those places would therefore reduce federal subsidies that are tied to that benchmark. The existence of a public plan with substantial enrollment would also, CBO expects, place additional competitive pressure on private plans operating in the exchanges to lower their premiums to some degree, thereby producing a further reduction in federal subsidies. Partly offsetting those two sources of federal savings would be higher enrollment in exchange plans, which would increase subsidy payments.

The increase in tax revenues under this option results primarily from changes in employment-based coverage, which is offset in part by an increase in costs for providing tax credits to small employers. Two developments would result in a greater share of employees' compensation taking the form of taxable wages and salaries (rather than nontaxable health benefits), thereby resulting in higher revenues. First, because the public plan would make the exchanges more attractive to individual purchasers, some employers would forgo offering coverage altogether, thus reducing their spending on employment- based health insurance and increasing the share of compensation devoted to taxable wages and salaries. Second, the availability of a relatively inexpensive public plan would also lead some employers to purchase lower-cost coverage for their employees through the exchanges. The resulting reduction in spending on employment-based coverage would further increase the share of total compensation devoted to taxable wages and salaries. Those budgetary effects would be partly offset by the reduction in revenues that would occur as more small employers took advantage of the tax credits that will be available when purchasing coverage through the exchanges.

Enrollment in the public plan would be affected by several considerations, including its relative premium and the number and types of providers that decided to participate in it. On the basis of all relevant factors, CBO estimated that, on average, about 13 million people--about one-third of the estimated 38 million that would obtain coverage through the insurance exchanges--would enroll in the public plan in the 2017-2021 period. Of that number, on average, about 25 million people would purchase coverage individually, and about 13 million people would obtain employment-based coverage through the exchanges. (Given all of the factors at work, however, those estimates are subject to an unusually high degree of uncertainty.)

Compared with projections of health insurance coverage under current law for the 2017-2021 period, under this option, about one and a half million more people would obtain individually purchased coverage, CBO estimates, and about one and a half million fewer would have employment-based coverage. The option would have minimal effects on the number of people with other sources of coverage and the number of people who would be uninsured.

Supporters of this option might point to the federal savings that would result. In addition, because the public plan would be one of the lowest-cost plans in many areas, the option would help reduce premiums for some individuals, families, and employers who purchase insurance through the exchanges but do not receive exchange subsidies. Another argument for this option is that a public plan would increase the competitive pressure on private plans, leading them to reduce their premiums.

Opponents might be concerned that the public plan's payment rates would be substantially lower than rates for private plans in many parts of the country, which could lead some providers who participated in the public plan to reduce the quality of care they furnished. Although providers' participation in the public plan would be voluntary, opponents might anticipate that enrollment in the plan could be sufficiently large that providers would face substantial pressure to participate.

Another concern is that the federal government would have to finance the public plan's losses if the plan attracted high-cost enrollees and was unable to collect enough in premiums to cover its costs. (The public plan would be required to build up a contingency fund.) More generally, opponents might object to a greater federal role in providing health insurance.