The DHHS’ Centers for Medicare and Medicaid Services (CMS) is out with a new report on HR 3962. This section on the public health insurance option is full of great details:

The proposed legislation specifies that a Federally operated “public health insurance option” would also be available through the Exchange. This plan would meet the same benefit, cost-sharing, network, and other requirements applicable to private Exchange plans and would negotiate payment rates with providers (rather than paying based on Medicare rates, as under H.R. 3200). We estimate that the public plan would have costs that were 5 percent below the average level for private plans but that the public plan premiums would be roughly 4 percent higher than private as a result of antiselection by enrollees. We further estimate that about 25 percent of the approximately 25 million people with Exchange coverage would choose the public plan option; the actual percentage could be substantially different, although the impacts on Federal costs and the number of insured persons are not especially sensitive to this percentage.

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The lower estimated cost level for the public plan assumes that the Secretary could negotiate somewhat lower provider payment rates than those prevailing for commercial plans, in view of the larger enrollment base. Lower administrative costs—due to the economy of scale, reduced marketing costs, and lack of a margin for profit—also contribute to the difference. We anticipate, however, that the public plan would not apply utilization-management techniques as strict as those prevailing in private PPOs and HMOs, thereby offsetting much of the cost advantage. The impact of antiselection is estimated as the amount remaining after risk adjustment is applied.

What is important is that the CMS concludes that the public option would provide better quality health insurance at a better value. The Secretary of HHS would be able to negotiate slightly better deals from providers and have lower administrative costs. The CMS supports all the progressive arguments for even the weaker public option; its lack of profit margin, reduced marketing cost, and lower administrative overhead would produce savings that would be passed on to the American people. Even with less “utilization-management techniques” (i.e. a large, low hassle, and easy to use provider network) the public option’s costs would be 5% less. That could be a savings of roughly $700 for a family of four on yearly premiums; however, under HR 3962 premiums for the public option would still be slightly higher because not enough is done to prevent patient dumping and cherry picking by private insurance companies.

The only way to stop this problem is with a very strong risk adjustment mechanism. The fact that HR 3962′s risk adjuster is far too weak is not the public option’s fault and is an extremely serious problem with or without the public option. It is the Achilles Heel of a managed competition health insurance market. Unless there is a strong risk adjuster there will not be any socially responsible insurance providers on the exchange, public, private, co-op, or non-profit. Even if they managed to provide high quality, low cost health insurance a socially responsible insurer would be flooded with sicker costumers and ironically be forced to charge higher premiums.

This CMS report is a validation of the progressive community’s commitment to the public option. The CMS concluded that even the weaker negiotated rates public option will still provide higher quality, lower hassle, better value health insurance than the private insurance companies. It is also another serious warning about the need for a strong risk adjustment on the exchange. Anyone who strongly supports the public option should fight equally as hard to insure the exchange can work properly by having a more robust risk adjustment mechanism.