Public Health Plan

Key Questions

What is the Public Health Plan Option?

Under current law, there is no federal public health insurance option for non-disabled individuals under age 65. Medicare, however, is an example of a federal public health insurance option for the aged and certain disabled individuals. Under Medicare, Congress and the Centers for Medicare and Medicaid Services (CMS) in the Department of Health and Human Services (HHS) determine many parameters of the program including eligibility rules, financing (including determination of payroll taxes, and premiums), required benefits, payments to health care providers, and cost sharing amounts. Despite the public nature of Medicare, CMS subcontracts with private health insurers to carry out much of its administration (Senate Finance Committee: 13).

What are the Major Design Issues Surrounding a PHP?

There are several major issues that must be resolved in detailing a public health plan (PHP) option (Senate Finance Committee: 13):

  • Eligibility. Would the PHP be open to anyone or would it be restricted to certain types of individuals? For example, candidate-Obama’s plan  would have restricted the PHP to individuals without access to group coverage through their workplace or current programs, along with people who are self-employed and small businesses that want to offer insurance to their employees (Obama ’08). In contrast, the Commonwealth Fund proposal and House bill would eventually allow employers of all sizes to purchase coverage in the PHP for their workers (Commonwealth Fund).
  • Provider Reimbursement. How will providers be reimbursed for services they provide to PHP plan enrollees?
  • Provider Participation. Will the PHP be required to establish provider networks or can it compel providers to participate?
  • Reserve Funds. Will the PHP be required to have reserve funds to cover their incurred but not reported claims?
  • Funding Shortfalls. Will the premiums collected by the public option will be required to cover costs or can shortfalls be subsidized by the federal treasury?
  • Administration. Will PHP administration be done by a federal agency or by a third party?

What Major PHP Options Are Being Considered?

Three broad approaches are being considered in Congress (Senate Finance Committee: 13-14):

  • Medicare-Like Plan. This would establish a “Medicare-like” PHP option to be offered through the Exchange. Eligibility rules, markets, and income-related tax credits for the PHP would mirror those for all other plans offered through the Exchange, as would rating rules and risk adjustment. (Rating rules restrict the variation in price of insurance policies according to the risk of the person or group seeking coverage; risk adjustment is an adjustment in the payment for an insurance policy which reflects the expected variation in expenditures of sicker or healthier individuals.) The PHP would start and accept enrollees on the same date that the Exchange begins.
    • Administration. The PHP would be administered by a new agency within DHHS.
    • Provider Participation. Medicare providers would be required to participate in the public option.
    • Provider Reimbursement. Providers would be paid Medicare rates plus 0-10%. The PHP would incorporate any medical delivery system reforms adopted from the overall reform effort.
    • Reserve Funds. The PHP would not have solvency requirements.
  • Third Party Administrator. This would be similar to the Medicare-like plan:
    • Administration. The PHP would be administered through multiple regional third-party administrators (TPAs) who would be required to report to the Secretary of DHHS. This governance structure will be separate from the agency overseeing competition among other private plan options.
    • Provider Participation. The TPAs would be required to establish networks of participating medical providers.
    • Provider Reimbursement. Payments for participating providers would be negotiated by the TPAs.
    • Reserve Funds. The PHP would be required to have reserve funds.
  • State-Run PHP Option. This envisions State-run PHPs. This option could either be mandatory or optional for States. Each state would determine how to administer the PHP and other design details. One possible option is for States to allow individuals to purchase coverage through their State employee health plans.


  • Berenson, Robert A. and Bryan E. Dowd. Medicare Advantage Plans At A Crossroads–Yet Again. Health Affairs Web Exclusive, November 24, 2008.

  • Book, Robert A. Medicare Administrative Costs Are Higher, Not Lower, Than for Private Insurance. Heritage Foundation WebMemo #2505 (June 25, 2009). [Full Text (html)]

  • Butler, Stuart, Jacob Hacker, and Len Nichols. The Public-Plan Option: A Roundtable with Stuart Butler, Jacob Hacker, and Len Nichols. Health Affairs Blog, April 30, 2009. [Full Text (html)]
  • Clemente, Frank A Public Health Insurance Plan: Reducing Costs and Improving Quality. Institute for America’s Future (February 5, 2009). [Full Text (pdf)]
  • Commonwealth Fund Commission on a High Performance Health System. The Path to a High Performance U.S. Health System: A 2020 Vision and the Policies to Pave the Way. February 2009. [Full Text (html)][Full Text (pdf)]
  • Goldsmith, Jeff. The Public Plan: Not Worth the Risks. Health Affairs Blog, May 15, 2009. [Full Text (html)]
  • Hacker, Jacob S. The Case for Public Plan Choice in National Health Reform. Institute for America’s Future (December 17, 2008) [Full Text (pdf)]
  • Jaffe, Susan. Health Policy Brief: A Public Health Insurance Plan. Health Affairs, June 19, 2009. [Full Text (pdf)]
  • Litow, Mark E. Medicare Versus Private Health Insurance: The Cost of Administration, Milliman, Inc., January 6, 2006. [Full Text (pdf)]
  • Milliman. Hospital & Physician Cost Shift: Payment Level Comparison of Medicare, Medicaid, and Commercial Payers. Presented by Will Fox and John Pickering. December 2008. [Full Text (pdf)]. This report quantifies the cost shift for the most recent time periods with data available, 2006 for hospitals and 2007 for physicians. We define the cost shift for each payer as the difference between the actual payment and the payment amount that would have resulted in an equal margin by payer. We estimate the total annual cost shift in the United States from Medicare and Medicaid to commercial payers is approximately $88.8 billion.
  • Moffit, Robert E. How a Public Health Plan Will Erode Private Care. Heritage Foundation, Backgrounder No. 2224, December 22, 2008. [Full Text (pdf)]
  • Nichols, Len M. and John M. Bertko. A Modest Proposal
    for a Competing Public Health Plan
    . New America Foundation, March 11, 2009. [Full Text (pdf)]
  • Obama ’08. Barack Obama’s Plan for a Healthy America. [Full Text (pdf)] .
  • Schlesinger, Mark and Jacob S. Hacker. Secret Weapon: The ‘New’ Medicare as a Route to Health Security.  Journal of Health Politics, Policy and Law 32(2).
  • Senate Finance Committee. Description of Policy Options.  Expanding Health Care Coverage: Proposals to Provide Affordable Coverage to All Americans.  U.S. Senate, Committee on Finance, May 14, 2009. [Full Text (pdf)]
  • Zycher, Benjamin. Comparing Public and Private Health Insurance: Would a Single-Payer System Save Enough to Cover the Uninsured? Manhattan Institute for Policy Research, October 2007. [Full Text (html)]

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