The Centers for Medicare and Medicaid Services (CMS) just released a study of the version of the health care reform bill, H.R. 3200, reported out by the Ways and Means Committee.* The study had some positive news for the robust public option tied to Medicare rates. The public option would on average have premiums 11 percent cheaper than private insurance and the public option would end up also making private insurance cheaper.

Premiums for the public health insurance option are estimated to be 11 percent lower than those for private plans on the Exchange. This result is based on an estimate that (i) the cost of the public insurance option for a standard enrollment group would be 18 percent lower than the average for private health plans, but (ii) public plan enrollees would have costs that were 7 percent greater than average (beyond what can be accounted for through risk adjustment) as a result of antiselection. The estimated 18-percent cost differential between the public option and private plans reflects the combination of 17 percent lower prices, 10 percent lower administrative and margin costs, and 9 percent higher costs due to less strict and/or effective care coordination. The finding of 17-percent lower prices for the public plan is a function of the specification that the public plan payment rates would be Medicare rates plus 5 percent. The assumed higher average cost for public plan enrollees is based on an expectation that individuals with above-average costs would tend to prefer plans with less-restrictive utilization management practices.

What this means is that the premiums charged by the public option would be roughly 11 percent lower than private insurance, but, in reality, it would cost 18 percent less for the public option to provide health insurance. Since the public option is cheaper it would end up attracting a less healthy costumer base. Having people with more medical needs sign up for the public option would end up somewhat increasing the premiums the public option would need to charge. Conversely, because the public option would end up attracting many of the least healthy individuals, it would also drive down premiums for private insurance plans.

If Congress implemented a proper risk equalizer for the new exchange, the public option would have premiums on average 18 percent cheaper. The important point is that a robust public health insurance plan could provide health insurance with a large provider network at 18% less cost than private insurance.

*It should be noted that the current House bill is going through major changes and will be substantially different from the one reported out by Ways and Means.