Employer-sponsored insurance is the largest source of health coverage in the U.S., covering more than nine times the number of people than in the individual market. But the employer market’s historic status as the “backbone” of the U.S. health care system is imperiled by rising health care costs. A public health insurance option—frequently floated as a policy to improve coverage access and affordability in the individual and small group market—could help reduce health care costs and expand access to coverage for people with job-based insurance, and has received increasing support among employers.
The Growing Affordability Crisis in Employer-Sponsored Insurance
For many workers, the financial protection provided by employer-sponsored insurance is weakening as they contribute more in premiums and pay higher deductibles while wages remain stagnant. According to an analysis by the Commonwealth Fund, the average employee premium contributions and deductibles accounted for 11.6 percent of the median household income in 2020, up from 9.1 percent in 2010. In five states—Florida, Louisiana, Mississippi, New Mexico, Oklahoma—these two costs added up to between 15 and 20 percent of median household income. As a result of these high costs, individuals are foregoing needed care and often struggle to pay their medical bills or accumulate debt when they do get care.
Employers recognize that affordability is an urgent concern for their bottom lines and their workers, and some employers and purchasing coalitions are experimenting with ways to reduce costs. But taking on the underlying drivers of health care cost growth can be challenging for the average employer, particularly in markets dominated by a small number of health care systems who often demand very high prices.
The vast majority of employers back policy changes to reduce health care prices, including regulating hospital rates (80 percent) and drug prices (95 percent). Employers also increasingly support a public health insurance option, with nearly half (47 percent) of employers with favorable views towards a public option based on Medicare and a majority (60 percent) believing that a public option whose pricing was available to all plan sponsors would be somewhat or very helpful at improving affordability. Likely voters agree, with 59 percent—including a majority of both Democrat and Republican voters—supporting a public option plan that is available to employers.
Benefits to Offering a Public Option to Employers
Although public option designs can vary, the archetype is a publicly administered and funded health plan with government-set reimbursement rates. A related alternative would allow employers to continue to self-fund their plans but leverage a public option for plan administrative services only, with government-set rates and networks. Experts studying these models have found significant benefits for employers, employees, and overall health care costs.
As several studies discuss, public option plans typically offer three direct mechanisms for reducing costs relative to private plans: (1) lower provider reimbursement rates and drug payments; (2) lower administrative expenses, due to efficiencies of scale and other operational differences; and (3) elimination of a profit margin. These differences are expected to translate into reduced premiums for employers and employees without sacrificing comprehensive coverage. Indirectly, competition from a public option also could drive down premiums among private plans. A public option also would increase federal tax revenues as employers shift spending from health insurance to wages because the latter is taxable as income but the former is not.
A series of analyses by the Urban Institute provide a sense of the magnitude of savings. Recent estimates show that if employers are offered a public option plan that sets provider reimbursement somewhere between Medicare and commercial rates (“Medicare-plus”):
- Premiums would fall by 18 to 25 percent for participating employers
- Employers would save of $32 to $86 billion and households would save $27 to $58 billion
- Over 1 million employees and dependents would enroll in coverage, and the number of people uninsured would drop by nearly the same amount
- Nationally, health spending would fall by 3 to 7 percent and the federal deficit would shrink by $13 to $28 billion
Because the employer market is so much larger than the individual market, and tends to pay higher reimbursement rates, these numbers are significantly higher than those that come from offering a public option to the individual market only. An individual market public option plan paying the same Medicare-plus rates would reduce household spending by a still significant, but lower, $3 to $5 billion, reduce the deficit by $6 to 10 billion, and lower the uninsured population by approximately 100,000 people.
Alternatives to a Public Option
Both the Urban Institute and Brookings have analyzed alternatives to a public option, including various mechanisms to limit provider reimbursement rates. The primary distinction between a public option and these types of reforms is their scope. Setting aside indirect effects, a public option would reduce provider reimbursement rates only for the portion of the market that enrolls in the plan. Alternatives, such as caps on the prices providers can charge, could apply market-wide with a greater direct impact. For example, the Urban Institute found that capping provider rates at the same Medicare-plus level would cut employer spending $145 to $202 billion, household spending by $87 to $118 billion, and the federal deficit by $38 to $53 billion. (However, there would be no change in the number of uninsured relative to a public option.)
Potential for Disruption
It is worth noting that the greater cost savings achieved by extending a public option or market-wide caps to the employer market inherently mean greater disruption, particularly for the health care providers facing lower reimbursement. To reduce disruption, a public option’s rate reductions or market-wide rate caps could be phased in gradually over several years to allow health care systems to adjust.
Alternatively, the Urban Institute has also modeled options that would limit rates paid—whether as part of a public option plan or through market-wide caps—by either exempting rural areas or applying the caps only to concentrated hospital and insurer markets.
Exempting rural areas would not substantially affect savings associated with a public option or market-wide cap since a small share of the population lives in rural areas, but this proposal would help protect rural providers from cuts. Limiting the proposal to only concentrated markets, on the other hand, may result in somewhat less uptake of the public option and thus lower savings because large employers with workers in multiple locations are less likely to opt into the public option plan if it is not available in all markets.
Proposals to extend public options to employers and their workers, like the Choose Medicare Act, have yet to gain significant traction at either the federal or state level, with lawmakers’ attention largely focused on affordability in the individual market. But the impact of a public option will be substantially greater if it is open to the employer market.