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Angie Drobnic Holan
By Angie Drobnic Holan May 19, 2009

Some private health insurance can survive public option

With high-profile support from President Barack Obama, Congress is preparing a major overhaul of the nation's health care system. The details have yet to be revealed, but that hasn't stopped critics in Congress from going on the attack.

Obama and the Democratic leadership have proposed broad outlines for the overhaul. The centerpiece of their plan remains the employer-based system, where most people have private health insurance through work. To rein in costs, the government would invest in electronic medical records and encourage efficiency and preventive care.

To get coverage for people who don't have health insurance, the plan would increase eligibility for the poor and children to enroll in initiatives like Medicaid and the State Children’s Health Insurance Program. Finally, the plans seek to create a health insurance exchange, where individuals and small businesses can easily comparison shop for insurance coverage. One of the exchange plans would be a public option run by the government. 

It's the public option that has fueled Republican attacks. Senate Republican leader Mitch McConnell of Kentucky said on Fox News Sunday that a public option would destroy the private insurance system.

It "would mean a government plan that would inevitably put the government between you and your doctor, and there would be no more private insurance," McConnell said.

Asked why by interviewer Chris Wallace, McConnell said, "Because the private insurance people will not be able to compete with a government option."

McConnell is incorrect — the Democratic plan does not intend to do away with private insurance. His statement that private insurance "will not be able to compete with a government option" is challenged by nonpartisan health care experts who disagree.

McConnell's view is that if the government offers a cheaper, public plan, people will dump their private insurance to get lower health care premiums. Over time, this would errode the private health care system. In theory, it makes sense that people would want the health plan that saves them the most money, and experts do say some private insurance companies might struggle to survive against a government competitor. In practice, however, researchers don't believe public options would destroy the private insurance industry.

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"Every time I hear these claims I'm astonished," said Cathy Schoen, senior vice president for the Commonwealth Fund, a foundation that studies health care and advocates more coverage for the uninsured, minorities and people with low incomes. She said a public plan could pressure private insurers to lower premiums or negotiate better rates with hospitals, but it would not put private companies out of business.

"The public plan could get a reputation of not being good. The private plans could say, 'Let's change our behavior so we don't lose business,'" Schoen said.

Another nonpartisan research group, the Urban Institute, reached similar conclusions.

"Private plans would not disappear. Private plans that offer better services and greater access to providers, even at somewhat higher costs than the public plans, would survive the competition in this environment," wrote John Holahan and Linda Blumberg of the Urban Institute's Health Policy Center.

One of the problems right now is that private insurance is not as competitive as you might think. Both the Commonwealth Fund and the Urban Insitute have noted that most health care markets are dominated by a small number of big insurers.

"The increased concentration has made it difficult for the nation to reap the benefits usually associated with competitive markets," Holahan and Blumberg wrote.

Not that a public option will solve all problems. They concluded that a public plan is not sufficient to control growing health care costs, and that other cost-containment strategies would be necessary.

Finally, we should point out that it remains to be seen how the Democratic plan will deal with the public option, which could be structured in several different ways.

McConnell flatly states that the public option would run private plans out business because they "will not be able to compete with a government option." Even though we have limited details on how the plan would be implemented, there is enough in the administration proposal  to conclude that McConnell's worst-case scenario is unlikely. That brings us to Barely True.

Editor's note: This statement was rated Barely True when it was published. On July 27, 2011, we changed the name for the rating to Mostly False.

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