During his presidential campaign, Joe Biden promised to create a public health insurance option for individuals who receive insurance through the individual and employer markets. Democrats have not yet fulfilled that promise but they should have an opportunity to do so in their next major bill. Doing so would save hundreds of billions of dollars of federal expenditures in each year, freeing up room to achieve other Biden health care promises, like extending Medicare coverage down to age 60.
Since 2014, Americans have been allowed to purchase individual health insurance plans on the Obamacare exchanges. So far, relatively few people have opted to do so. In 2020, 11.4 million people received their health insurance through the exchanges, which is equal to about 3.5 percent of the country’s population.
Individuals with income below a certain level who buy their health insurance this way receive a subsidy called the Advance Premium Tax Credit (APTC) that ensures that they only pay a certain percentage of their income towards their plan premiums. According to the Congressional Budget Office, the federal government will spend $587 billion on APTC subsidies over the next decade, a figure which excludes the temporary increase in APTC subsidies contained in the American Rescue Plan Act (ARPA).
To determine how much this $587 billion figure could be reduced by a public option, we first look at what the average premium of an exchange plan was for APTC users in 2020. According to the Centers for Medicare and Medicaid Services (CMS), that figure was $606 per month, with the average APTC user paying $89 of that amount and the federal government paying the remaining $517 through APTC subsidies.
Next, we look at how much lower the premiums for a public option plan would be. There are many ways to design a public option but there is a surprising level of consensus about how much a well-designed public option could save.
Rand Corporation modeled a public option that paid providers 40 percent of the way between Medicaid and commercial rates and found it would have premiums 27 percent lower than private plans. A Manatt analysis of a Medicaid buy-in for New Mexico found that “reductions range from 23 percent to 28 percent compared to the individual market average and from 15 percent to 21 percent compared to the estimated lowest-cost premium.” According to the Urban Institute a public option that pays Medicare rates would lower premiums in the nongroup market by 28 percent. Even the industry-led anti-Medicare-for-All group, Partnership for America’s Health Care Future, produced a study that claimed an aggressive public option would have premiums 25 percent lower than private plans.
All of these estimates hover around 25 percent and so we assume that, following the introduction of a public option, the premiums of the benchmark plan could drop by that much, on average. Thus, in 2020, the average premium of an exchange plan would have been $454.50, with the average APTC user paying $89 of that amount and the federal government paying the remaining $365.50 through APTC subsidies.
The difference between the new APTC subsidy ($365.50) and the old APTC subsidy ($517) is 29.3 percent. If achieved, this would reduce total APTC subsidies from $587 billion over the next 10 years down to $415 billion, for a savings of $172 billion.
If you assume that the temporary increase in APTC subsidies in ARPA are made permanent, then the savings from a public option relative to that baseline would be $266 billion.
ESI Tax Subsidy Savings
If this same public option were introduced in the employer-sponsored insurance (ESI) market, this would reduce the amount of money employers spend on health insurance premiums, either because they directly switch to the public option or because they use its presence to negotiate down the premiums they pay to their current insurance providers. Some of those savings would find their way into taxable wages, which would increase the amount of revenue the federal government receives from income and payroll taxes.
Precisely how much revenue would be generated through this mechanism is very uncertain, but conservative ballpark estimates put the figure into the hundreds of billions of dollars over the next ten years.
Take the Free Money
A public option would require no new taxes and operate by competing on the open market without compelling employers or individuals to enroll in it, all while saving the federal government several hundred billion dollars over the next ten years. These characteristics are what are supposed to make it an acceptable moderate alternative to more comprehensive reforms like Medicare for All and what made Joe Biden willing to endorse the idea during his presidential campaign.
With Democrats now fighting with one another over what should be included in the next major bill, a public health insurance expansion that raises a significant amount of revenue should be a no-brainer. It directly achieves one Democratic goal while freeing up money to achieve many others.