Public Option Would Fix Health Insurance Marketplace

(Photo: AP/CQ Roll Call)

Protesters march in support of health-care reform on March 9, 2010, in Washington, D.C.

Last week's announcement by Aetna that it would stop selling health insurance in 11 of the 15 states where it offers coverage through public exchanges is not a death blow to the Affordable Care Act, but it’s certainly not good news for President Obama’s signature health-care law.

Aetna maintained it was losing hundreds of millions of dollars on the health law’s marketplaces, and the company is one of more than a dozen major insurers that have announced plans to bail out of the exchanges. The failure of the marketplaces to generate robust competition, as Obama had predicted, should focus liberal attention on what many on the left now regard as a major policy objective: establishing a public option for the health insurance exchanges.

The Affordable Care Act has been a substantial success on balance, but it also has serious flaws. On the plus side, roughly 20 million people have health insurance because of the new law. Even after being kneecapped by the Supreme Court, the statute’s historic expansion of Medicaid has enabled millions of poor people to access health care, and Obama’s departure from office may spur more states to accept the federal money on offer. Despite problems with the ACA’s individual insurance markets, the law has offered coverage to many people who would otherwise have been locked out of the market altogether. It has also made individual health insurance plans better and less costly.

On the down side, as Aetna’s decision to leave most of its exchanges illustrates, there are inherent limitations to providing health insurance through markets. Aetna’s stated reason for leaving—that it cannot make money because the people purchasing insurance from the exchanges are sicker than expected—is a case in point. If insurance companies are allowed to deny enrollment and charge more from riskier customers, as they were before the ACA, they can make plenty of money—but the result is that huge numbers of people lack or have worthless coverage. Guaranteeing enrollment and regulating the content of plans fixes this, but it also makes it harder for insurers to make money, potentially prompting them to exit markets.

An additional problem with preserving the role of private insurance can be seen in Aetna’s other reasons for leaving. As Jonathan Cohn of The Huffington Post reports, a major reason Aetna dropped out was to retaliate against the Obama administration for refusing to approve its merger with another insurance company. The leverage that companies have on the individual exchanges allows them to effectively blackmail legislators and regulators into approving actions that are bad for people with insurance.

The Obama administration shouldn’t cave. Instead, Democrats should take steps to address the health law’s underlying problems. The obvious solution is one that surfaced repeatedly in the multiple draft versions of the legislation that eventually became the ACA, and that is now part of the 2016 Democratic Party platform: a public option. This would entail making a government-operated health-care plan available on public markets. Allowing good public insurance to compete would both ensure that decent, affordable insurance is available in all 50 states, and prevent power plays like Aetna’s by making public insurance available as a backstop. If private companies can provide insurance that people want to buy at rates competitive with the public option, good. If they can’t, this would also be fine, because the public sector would absorb a bigger share of the health insurance market, a positive development in itself.

What makes the public option desirable will also make it very hard to pass, of course, even in the event that Congress becomes more Democratic and more progressive after Election Day. Insurance companies know full well how a robust public option would eat into their customer bases and profits, and will fight it with everything they’ve got. Democrats should exhaust every avenue for winning a public option. But if they fall short, there are other ways to strengthen health insurance exchanges.

One of these, which has been advocated by Hillary Clinton, would be to lower the eligibility age for Medicare to 55, down from 65. This would be an easier political lift, and indeed, had it not been for then-Senator Joe Lieberman’s desire to stick it to the liberals who had defeated him in the 2006 Democratic primary, it may well have been part of the original health-care statute. Expanding Medicare makes sense regardless, because it would make good public insurance available to more people. Importantly, it would also indirectly strengthen the exchanges by creating insurance pools that, on average, are younger and healthier. It’s a win-win that Democrats on Capitol Hill, who are expected to take control of the Senate this fall and may even have an outside shot at regaining the House, should be able to pass.

Other potentially viable ways to strength the exchanges, as suggested by the University of Chicago’s Harold Pollack, including making the subsidies available to people purchasing insurance more generous, and providing better compensation for insurers who end up with sicker-than-expected customer pools. As Pollack observes, the latter will be necessary because of a health-care measure approved as part of a 2014 spending bill that largely eliminated the so-called risk corridors that help insurers. The measure was championed by Republican Senator and presidential also-ran Marco Rubio of Florida. Rubio and his allies had framed the risk corridors as an unearned sop to the insurance industry—“a taxpayer-funded bailout.” But that claim didn’t hold water, because while insurance companies cannot deny coverage to applicants, they aren’t actually required to sell on the exchanges. Rather than a gift, compensation for insurers with older, sicker customers ensures that they will remain in markets. Ultimately, Rubio’s initiative did more to harm the middle-class people trying to buy health insurance than to the bottom lines of the insurance companies.

Yet another regulatory fix has been proposed by Henry Aaron of the Brookings Institution: expand the coverage pools by requiring everyone purchasing individual plans to do so through the exchanges. This approach is already in effect in the District of Columbia’s health insurance exchange, one of the best-run in the country, and has proven to be successful.

Even as Democrats mull incremental fixes, they should keep their eye on what for many progressives is the long-term goal: European-style, comprehensive health insurance coverage. Bernie Sanders drew attention to this goal by strongly advocating for a single-payer insurance plan throughout the Democratic primaries. The end point for health-care reform in the United States is arguably much more likely to look like one of the many models offered in Europe, which include hybrid systems that combine public insurance with tightly regulated, often nonprofit, private markets. Full nationalization remains very difficult politically, but there are less-sweeping reform models that could work just as well as single-payer and would be easier to pass.

But step one for Democrats should be to expand Medicare and Medicaid, while also strengthening existing private markets. Perhaps this will move the nation towards a single-payer system, or perhaps it will produce something more akin to a hybrid, public-private system. Either way, the goal of reform should be to provide truly universal and affordable health coverage to all Americans.

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