It is the seemingly small details which will likely end up deciding the success or failure of health care reform. For example, the fate of the public option may rest on a seemingly unimportant, few-word definition in the health care reform bill. Any health care reform bill will provide some individuals with tax credits to help them afford health insurance based on a sliding scale of income. The issue is which benchmark is used to determine how big those tax credits should be.

In the three House committee bills and the Senate HELP Committee bill, they use a benchmark called the “reference premium.” It is the average of the three lowest cost plans on the exchange at a set actuarial level in the area. The Senate Finance Committee uses a different benchmark called the “reference plan.” It is the second lowest cost plan on the exchange at the “silver” level in the area. If progressives want to reduce the cost of the bill while enhancing the cost savings from the public option, they should advocate for using the “lowest cost plan” at an actuarial level on the exchange as the benchmark for determining tax credits.

Why are these benchmarks so important to the public option? Picture the following exchange with several plans being sold at different prices. We know from a CBO letter that the robust public option in the House would be about 10% cheaper than a typical private insurance plan.

Public Option  – $4,500
Private Plan A – $5,000
Private Plan B – $5,025
Private Plan C – $5,050

Reference Premium
Reference premium without a robust public option would be the average of the cost of Private Plan A,B and C. Equal to $5,025.
Reference premium with a robust public option would be the average of the cost of the Public Option and Private Plan A and B. Equal to $4,842.
Reduction of the reference premium as a result of a robust public option is $183

Reference Plan
Reference plan without a robust public option is private plan B. Equal to $5,025.
Reference plan with a robust public option would be private plan A. Equal to $5,000.
Reduction of the reference plan as a result of a robust public option is $25
(Notice there is very little savings from public option compared to using the "reference premium.")

“Lowest Cost Plan”
“Lowest cost plan” without public option is private plan A. Equal to $5,000.
“Lowest cost plan” with a public option is the public option. Equal to $4,500.
Reduction of the “lowest cost plan” as a result of a robust public option is $500.
(This benchmark has the public option produce much greater savings.")

Using the “reference premium” means that including a robust public option has a strong effect at reducing the cost of health care reform. The most recent numbers from the CBO indicate that it would save around $110 billion. If, instead, the bill used the “reference plan” including a robust public option, it would have a much smaller impact on the overall cost of the bill.

A smart way for Speaker Pelosi to reduce the cost of the House’s health care reform effort would be to include a robust public option and use the benchmark of the “lowest cost plan” instead. I do not have a CBO number to indicate what the net effect of this change will be, but my own calculations indicate that using the “lowest cost plan” would result in the public option saving at least twice as much as using the reference premium (more than $220 billion).

When Harry Reid combines the Senate Finance Committee bill with the Senate HELP Committee bill, pay close attention to which benchmark he uses. If he selects Baucus’s "reference plan," it is a clear sign he is stacking the deck against a public option amendment on the floor.

(Note: for simplicity this example did not take into account the small effect the CBO believes a public option will have on reducing the cost of the private plans on the exchange. This would be as a result of increased competition and a small shift of some less healthy individuals choosing to join the public option.)