A Public Option vs. Co-Ops: What's the Difference?

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Ronnie Kaufman / CORBIS

As health-care-reform legislation takes shape in Washington, one hot issue — a Public Option among health-care insurance choices — has emerged as the focal point of dispute. It's even playing out on Wall Street: on the day when the Obama Administration's commitment to a Public Option waned, the share prices of health-care insurers jumped.

Who gains and loses under the different health-care reforms, and why do some groups fear what others most want? To find out, TIME's John Curran spoke with Michael Chernew, a professor of health-care economics at Harvard Medical School. Chernew has done work in the past for groups on both sides of the health-care-reform debate.

What is the Public Option, and why did it become a flashpoint?
The Public Option means different things to different people. It's almost like a Rorschach test — you put the Public Option into the health-care debate, and all of a sudden you see your hopes or your fears, depending on what you believe about the proper role of government.

Please explain.
The version of the Public Plan that's often talked about is one that is tied to Medicare. [Medicare is a government-run health-care plan for the elderly.] People who see the Public Option as hopeful believe that we need strong cost containment in the health-care system and that private industry will never be able to do that for a number of reasons. These people view the Public Plan as a mechanism by which we can both increase health-care coverage to all Americans and control spending. Typically in their versions of the plan, it ties prices — doctor and hospital fees — to what Medicare pays. Also, it assumes that doctors get strong incentives, if not a mandate, to participate in the Public Plan.

Do all supporters of the Public Option envision a plan where the government is calling the shots?
No. Since the description of the Public Option has been a bit vague, there are those who envision it in its strongest form, with mandates and government-set fees, and those who envision a much weaker form, which is practically the same as the health-care cooperatives now being discussed.

The stronger form of the Public Plan gives it considerable power. It has government on its side. Also, it would be such a big buyer of services that everyone would pay it heed. The basic fear among many people opposing this idea — or version — concerns the expanding role of government in health care.

Wouldn't the Public Plan quickly have huge power in the marketplace?
This is where it gets tricky. If providers are required to join, then participation is predictable. But if they are just pressured to join, it's not a given that many will. It depends in part on what percent of a doctor's patient roster enrolls.

Then there's another variable, the fee structure, which will also influence the physician's decision. For example, a physician might say, 'There's no way I'm signing up for this. I'm an overworked primary-care physician. I currently have too many patients. I already feel underpaid. Why would I take a large pay cut just to be part of this plan?' Under that scenario, there would be much lower enrollment in the Public Plan.

Who is most frightened by the Public Option? Is it doctors? Hospitals?
I think both. Providers — physicians, hospitals — realize that if they do this then their fees could go down ... they would be getting less money. Also, the health-care insurers certainly don't want a government-sponsored competitor who, by fiat, can lower prices. Just think of your own industry. A magazine company wouldn't want to compete with a government-run magazine that gets its paper and ink on the cheap and maybe gets a better deal on postage.

I would add that the public opposition from these groups — doctors, hospitals, drug companies, insurers — has been less than I would have expected. In fact, from what I have seen, despite some outrageous claims, even a bit of fearmongering from certain individuals, most sides in this debate have tried to be constructive.

But there does appear to be grass-roots opposition to the Public Plan.
Yes, there are some objections coming from outside of industry, where people fundamentally don't want to have a strong government role in the health-care system. Conservatives are generally concerned about two issues: How much will health-care reform, including greatly expanded coverage, cost the country? And secondly, if the solution to the escalating cost problem is to have a big Public Plan, in their view that's giving too much power to the government.

What's the difference between the Public Plan and the Co-Op Plan?
The biggest difference between a Public Option and a private plan — a Co-Op — in my opinion, is this: Are prices set or not? In other words, is the public plan tied in some regulatory way to the Medicare fee schedule? The second difference is, under what conditions might providers have to participate? Different versions of the Public Plan have their own take on these issues. A Co-Op Plan would be functioning more as a nonprofit company, and it would be unlikely to have such powers.

So how would a Co-Op Plan function? I haven't studied the specifics of the Co-Op programs, but from what I've heard, there is more of a local feel [i.e., perhaps at the state level, not federal], in that they are designed as somewhat of a backstop. That is, if the insurance company doesn't want us, will you take us. It's not clear that this model would be able to achieve many of the cost goals that advocates of a Public Plan would want it to achieve. In my view the Co-Op strikes me as similar in many ways to the weaker version of the Public Plan.

No wonder people are confused. What's the weaker version of the Public Plan?
The big defining difference between the weaker and the stronger versions is that in the weaker version, the Public Plan has to negotiate with physicians to set fees, and physicians aren't given strong incentives to participate. In other words, they could retain their same Medicare business even if they decided not to participate in the Public Plan.

What's the downside of a weak Public Plan?
Money. By making it strong [e.g., mandates, setting fees] you can achieve more cost savings. If you insure a lot of new people, which President Obama wants to do, and you subsidize them, the prices you pay for that matters in terms of what the actual budget estimates are.

If a strong Public Plan is the big money saver, do we lose that benefit shifting to Co-Ops?

I don't know how the Congressional Budget Office scored each one of the different versions of health-care legislation coming out of the House and Senate. But I think the advocates of the Public Plan viewed it as a potentially big money saver — linking prices to Medicare, getting broad participation among providers — and if you drop that and move to Co-Ops, based on what I've seen so far, you're less likely to get those savings.

So how do you pay for a Co-Op Plan if it doesn't generate big cost savings?
There are two types of funding. The first is cost containment in terms of health-care spending, holding prices down, which the strong version of the Public Plan would have been able to do. There are other ideas on the table to achieve health-care cost savings, but that's another discussion. The other type of funding is a financing mechanism, like taxing people over some income level. That's just an income generator, not a money saver.

If you don't generate major cost savings with health-care reform, then expanded coverage will have to be funded with other sources of revenue, and there are different tax ideas to address that.