A Government-Run Health Insurance Plan Would Be Less Radical Than Medicare For All. But It Still Wouldn't Work.

The public option comes with plenty of pitfalls.

The health care debate in the Democratic primary so far has, for the most part, revolved around a single question: Medicare for All—or something else? 

Given the persistent political and policy challenges to passing and implementing a single-payer system along the lines envisioned by Sen. Bernie Sanders (I–Vt.) and other Medicare-for-All boosters, the answer is probably going to be "something else." So it's worth asking what that something might be.

The most likely answer is a "public plan" or "public option"—that is, a government-run health insurance plan that would exist alongside today's insurance options, supplementing employer coverage, Obamacare, Medicare, and Medicaid without fully displacing them. Indeed, should Democrats win both Congress and the White House, the proposal of a public option is, at this point, far more likely than a big push for Sanders-style Medicare for All. 

The public option was a feature of several early drafts of Obamacare, but was dropped from the final bill, primarily due to opposition from then-Sen. Joe Lieberman of Connecticut. So it's no surprise that the presidential race's most prominent public option backer is former vice president and current Democratic frontrunner Joe Biden, whose health care proposal has been billed as both an update to Obamacare and a moderate alternative to Sanders' single-payer plan. 

A public option would probably be less radical, less disruptive, and, on paper, less expensive for the government than Sanders' Medicare for All proposal. Yet it would still pose real challenges in terms of cost and political viability.

Although the final text of Obamacare didn't include a full-fledged public plan, it did include a substitute in the form of funding for nonprofit insurance co-ops. As the health care law was being drafted, members of the Obama administration, including President Barack Obama himself, made clear that they saw little difference between the two systems: "You could theoretically design a co-op plan that had the same attributes as a public plan," then–Health and Human Services Secretary Kathleen Sebelius told Bloomberg. "I think in theory you can imagine a co-operative meeting that definition," Obama told Time, referring to a public option. 

Public plan proponents often pitch the idea as a way to increase insurance market competition. It wouldn't outlaw private insurers like a Sanders-style Medicare for All plan. Instead, they argue, it would force them to compete with government-run insurer that wouldn't need to make a profit and could therefore be more efficient. And, they add, if a public option pays rates comparable to Medicare's—which tend to be much lower than the rates—then cost estimates indicate the plan could actually save the federal government money, reducing the federal budget deficit by more than $100 billion over a decade. 

This was the basic argument for Obamacare's co-ops as well. Yet by and large, they were failures. The health law called for $6 billion in federal funding to help start these nonprofits, a figure that was eventually whittled down to about $2.4 billion. More than 20 were launched. By 2016, 17 had collapsed, leaving hundreds of thousands of beneficiaries without coverage. In every case, the reason was simple fiscal math: The co-ops couldn't bring in enough premium revenue to cover medical expenses. 

If you view the co-ops as test cases for a public option, there are lessons to be learned from these failures: Launching a new health insurance plan at reasonably competitive rates that also bring in enough money to pay the bills is difficult, even with billions in federal funding at your disposal. There's little reason to think that a federally backed public option would fare any better, especially since lawmakers would face considerable political pressure to keep premiums artificially low. 

There's a crucial difference, of course, between a government-subsidized insurer run as a nonprofit and an entirely government-run health insurance plan. When Obamacare's co-ops ran out of money, they shut down. A national public plan might conceivably continue to operate at a loss forever, with taxpayers making up the difference. Medicare's long-looming insolvency—currently set for 2026—makes clear that long-term actuarial soundness is no requirement for a government health care program. 

And a public option's costs could be greater than Medicare's, since it there would be considerable political pressure to pay higher rates. 

That's what happened in Washington, the only state to implement a public option. As The New York Times reported in June, state legislators originally wanted to set up a state-run health insurance plan that would pay the same rates as Medicare. But that would have represented a steep reduction from the rates paid by private insurance; Obamacare plans, for example, paid about 174 percent of Medicare rates. Doctors and hospitals pushed back against the proposal, and lawmakers eventually gave in, passing a plan that paid 160 percent of Medicare rates. 

As the bill's sponsor, state Sen. David Frockt (D–46th District), told the Times, that concession was the only way to get the bill over the finish line. "I don't think the bill would have passed at Medicare rates," he said. "I think having the Medicare-plus rates was crucial to getting the final few votes." 

Biden isn't the only prominent Democrat to back a public option. Influential Senate Democrats—who would presumably end up crafting much of any actual legislation—have been touting the idea recently too, saying that they no longer worry about trying to appease their Republican opponents. 

But the problems and complications with building a new government-run insurance plan aren't exclusively a matter of Republican obstructionism. Hospitals and doctors will lobby for higher rates under any circumstance, and designing insurance that is actuarially sound while offering competitive benefits and pricing will be a challenge no matter what. In other words, it would still come with plenty of potential pitfalls—and so far, Democrats appear to have few if any plans to deal with them. 

Finally, there is the matter of the public option's place in the health care debate as the sensible, pragmatic fallback position for those who see Medicare for All as too much, too soon. Biden and others are pitching the idea as a moderate alternative to single-payer, but this is a relative comparison that works only because Medicare for All is even more radical. A public option might be less immediately disruptive than a full-stop single-payer overhaul, but it would still substantially increase the feds' role in financing health care. Over time, it would expand and extend the federal government's control over the system, giving both Congress and the executive branch another means with which to influence the delivery of health care. It wouldn't quite be a government takeover, but the government would certainly tighten its grip.