Could a public option health plan replace the ACA's faltering co-ops?

Topics: Health Care Reform, Exchanges, Medicare, Politics and Policy, Federal Government, Elections, 2016

By Ashley Fuoco Antonelli, associate editor

In the summer of 2009, a battle raged in Washington over the bill that would become the Affordable Care Act (ACA). One of the flash points was the so-called "public option," a proposal championed by liberals to establish a publicly sponsored insurer, akin to Medicare, to compete with private insurers in the ACA's new exchanges.

To Republicans, the idea was a non-starter; Sen. Lamar Alexander (R-Tenn.) denounced it as "a Washington takeover" of health care. Even some Democrats shared his qualms about creating a new government-controlled insurer.

Sen. Kent Conrad (D-N.D.) stepped forward and offered an alternative: What if the ACA instead established regional, not-for-profit cooperative health plans (co-ops)? The co-ops wouldn't be controlled by the government, appeasing moderate Democrats—but they could, in theory, still offer a check on existing insurance companies, appeasing liberals.

The compromise stuck, and when the ACA became law, it led to the creation of 23 co-op plans across the United States. Shortly thereafter, everything started to go wrong.

Sixteen of the original co-ops have shut down, undermined by poor program design, a volatile health care market, and a hostile Congress—and leading some Democrats to call once again for a public health plan to take the co-ops' place.

But would a public plan really succeed where the co-ops failed? To answer that question, we first have to understand what sank the co-ops in the first place.

Why the co-ops failed

Tim Jost, professor emeritus at Washington and Lee University, in an interview with American Health Line said "a whole series of things" led to the string of co-op closures.

He explained, "To begin with, there were some real problems in the way the [co-op] program was designed," including that the co-ops were "supposed to be non-profit" and could not use federal start-up funds to market their plans.

In addition, Jost said co-ops "entered a very volatile market." When the ACA's first open enrollment period launched in 2013, several health insurance exchange websites experienced technological issues, which "delayed and deterred" enrollment. Further, the Obama administration's "late" decision to allow U.S. residents to keep their existing non-ACA compliant health plans "caused problems in terms of the risk pool, which ended up being sicker than expected," Jost said.

On top of that, Sabrina Corlette, a research professor at Georgetown University's Center on Health Insurance Reform, told American Health Line that some co-ops made "bad bets when it came to ... how they priced their plans."

Their financial constraints likely were exasperated by lower-than-expected risk corridors payments, while some of the shuttered co-ops cited higher-than-expected risk-adjustment payments as reasons for their closures.

John McDonough, a professor at Harvard University's T.H. Chan School of Public Health, in an interview with American Health Line said congressional Republicans "blocked" funding for the ACA's risk adjustment, reinsurance, and risk corridors programs, which proved to be "a fatal factor" for many co-ops. He said, "The federal government should have fully funded and operated the [risk adjustment, reinsurance, and risk corridors programs] so that the affected co-ops would have received all the compensating funds they had been promised in the ACA."

Overall, Corlette said while "there's really no one reason why [co-ops] failed," their closures "point to how difficult it can be for a new health insurance company to enter the ... market and increase competition for consumers."

A viable alternative?

In light of the challenges co-ops have faced, some Democratic policymakers in recent months again have started calling for a public option health plan.

President Obama in a special communication published in JAMA in July said Congress should improve the ACA by adding a public option health plan to areas where insurance competition is limited. "Public programs like Medicare," he wrote, "often deliver care more cost-effectively by curtailing administrative overhead and securing better prices from providers."

Also in July, Democratic presidential candidate Hillary Clinton unveiled a progressive health reform plan that included a public option, while the Democratic National Committee released its draft party platform for 2016 that proposes a public option health plan.

Some health policy experts say such a plan could be an effective alternative to co-ops—but they also caution its success would hinge on how the plan is implemented.

McDonough said a "public option would be an appropriate and helpful device" in exchange markets where few, or potentially no, private insurers participate. He explained, "A federal public option plan, backed by the federal government, could have substantial viability and stability," but "if the plan were required to survive only on premium revenue, that could also be pretty risky." He added that a similar plan "created by a state—particularly a smaller state—could face serious challenges in surviving."

Jost said federal funding for a public option could help to "ensure its existence" and potentially avoid the same fate as shuttered co-ops.

McDonough agreed, saying that the federal government would have to "provid[e] back up financing" to "guarantee" a public option's "stability." But he warned such financing could "create unwelcome financial uncertainty for the government."

Jost also said creating a public option similar to Medicare Part D, which uses so-called "fallback plans" that "allow the [federal] government to contract with a plan to provide coverage in markets where one or no insurers participate," could be one way a public option could help improve exchange competition.

Noting Medicare Part D's fallback plans, Corlette said, "That's certainly something, with 20/20 hindsight, maybe the ACA drafters should have put in." But she also cautioned that "a lot of implementation decisions ... would have to be thought through" to ensure a public option's viability. For example, Corlette said policymakers would need to consider how such an option's provider networks would be designed and how participating providers would be paid.

McDonough said if the federal government would reimburse providers who participate in a public option at the same rate it does those who participate in Medicare, as well as "mandate provider participation ... the public option would more than likely succeed in various markets, but the provider community would be hostile to that financing design."

Meanwhile, James Capretta, a resident fellow at the American Enterprise Institute, in a National Review article argued that if the fundamental challenge facing co-ops and other insurers participating in the exchanges "is an unstable environment for private insurance, a public option is definitely not the solution."

According to Capretta, the federal government would have "the ability to regulate prices" for public option exchange plans, unlike private insurers, which "must negotiate contracts with" providers. Those stable prices could help attract enrollees to the public option, but low provider reimbursement rates under the program could drive providers away from participating, which in turn could decrease enrollees' access to care.

Megan McArdle in Bloomberg View also wrote that it could be difficult to get providers on board with a public option, particularly if it reimburses providers at a lower rate than private insurers. McArdle explained that if policymakers were to require providers to participate in such a plan, "all the groups who would be affected—hospitals, doctors, auxiliary service providers, health-care workers' unions and so forth—will descend upon their legislators with the white-hot fury of a thousand suns," in part because the lower payment rates could cut into the providers' bottom lines.

In addition, John Graham, a senior fellow at the Independent Institute, in a commentary argued a public option health plan could "accelerate [private] insurers' exit from the [ACA's] exchanges, making it unlikely that the exchanges would ever become profitable" and ultimately place increased financial risk on U.S. taxpayers.

Corlette also noted those challenges, saying policymakers would have to consider how to incentivize private insurance companies to continue participating in the exchanges when competing with a public option that potentially could offer lower prices.

"In short," McArdle wrote, "while a public option might appear to fix one problem," it also could "create new problems."

Political reality

While the debate over the public option might seem complex, it obscures a simpler political reality: So far, there's no sign that Republican lawmakers are warming to the idea of a public option. If the GOP maintains control of the House in November's elections, the proposal likely will be a non-starter for years to come.

But for supporters of the public option, hope springs eternal. As Obama wrote in his JAMA communication, he remains "optimistic about this country's capacity to make meaningful progress on even the biggest public policy challenges."