Health-Care Reform, 2015

What the next health-care fight will look like and why it might be even harder than the last one.

By Jacob S. Hacker

Tagged Health CarePublic Policy

It’s five years after passage, and the landmark reforms championed by a progressive president have survived two election campaigns in which opponents have called for their repeal. The leading critics in the business sector seem resigned to working with the new law. And the major implementation milestones have been met, though the slow rollout means that tangible benefits have only just become apparent. Yet all this is not enough to ensure that the law will achieve its key purposes. Without additional reforms, the act passed with much fanfare five years prior will not guarantee universal coverage. More important, it will remain inadequate in key areas, with the real, continuing danger that its limited funding will be outrun by skyrocketing costs.

It sounds like a forecast of where the Affordable Care Act (ACA), the landmark health-care legislation passed earlier this year, will be in 2015. But in fact it describes the actual historical standing of the Social Security Act on the law’s fifth anniversary in 1940. During the 1936 presidential campaign, Republican candidate Alf Landon had criticized the legislation as a “cruel hoax”–and gone down to defeat. By the end of 1937, the Supreme Court had affirmed the act’s constitutionality, and its “old-age insurance” component, which we now call Social Security, had been implemented successfully (although states were dragging their heels on other parts of the legislation, such as public assistance for the poor). But Social Security covered only half the population. Worse, its benefits were meager and not tied to inflation. As prices rose, those benefits were destined to fall, and they did. It would be another ten years before the program was put on a stronger foundation with the Social Security Amendments of 1950, the founding law for the modern program.

This last chapter in Social Security’s early history may seem to promise a happy fate for health-care reform–if not in the next decade, then beyond. Indeed, many advocates of the law have declared that a similar expansionary process will play out today. Here’s Paul Krugman: “Highly imperfect insurance reforms, like Social Security and Medicare in their initial incarnations, have gotten more comprehensive over time. This suggests that the priority is to get something passed.”

It’s true that, even by 1940, the Social Security Act had already been expanded. Amendments passed in 1939 created survivors’ benefits and moved up the first payment of benefits to 1940 from the original 1942. But that expansion had been supported by conservatives who wanted to rein in the program: In return for the larger, earlier benefits, the amendments eliminated the program’s reserve fund, making it fiscally vulnerable. Without the reserve fund and with conservatives blocking the payroll-tax increases needed to fund adequate benefits, the program languished over the next ten years. And Social Security was a simple, understandable program, enacted in a far more favorable political climate than greets the intricate and far-less-understandable ACA. If Social Security faced hard sledding, the cause for vigilance and determination with regard to the ACA is all the greater.

The story of the Social Security Act offers a salient reminder to today’s health reformers: Implementation of a law is only part of the challenge of social reform. The other, more daunting part is building support for the improvement and expansion of the inevitably jerry-rigged programs that can pass through America’s polarized and fragmented legislative process. Democratic Senator Tom Harkin of Iowa rightly calls the health-care law a “starter home,” with the need for plenty of renovation. Unfortunately, the home is not built yet, and the construction zone is in the path of a hurricane: the perfect storm of runaway costs and unbridled conservative attacks on the law.

In 2015, the full force of this storm will not yet have hit. The Obama Administration will have been through a series of battles over how to implement and enforce the law, and while not all the tests will have been met, the basic building blocks of the law will almost certainly be in place. Millions of Americans who are uninsured today will have coverage, and those who already have coverage will have much greater assurances that they can obtain it even if they lose or change jobs, become sick or disabled, or live in a family with someone who experiences such events. The result will be increased public support for the law, albeit in a climate of continuing suspicion and acrimony in which conservative opposition remains strong and misinformation rife.

And yet these partial successes will also showcase the gap between the rhetoric of reformers and the reality of reform. While millions will be newly insured, millions more will still lack basic protections: They will fall through the law’s cracks, or they will be exempted from its requirement to buy coverage because they cannot afford the premium. Medical costs will still represent a painful hit to family incomes. And families who don’t qualify for generous subsidies will still find insurance shockingly expensive.

In short, reformers will discover the same painful truth made vivid by Social Security’s stagnation after 1940: Maintaining the legislative status quo against the forces crying “repeal and replace” is not enough. The reforms launched with the ACA will need to be pushed forward or they will fall increasingly short. Every crucial aspect of the act–the reach and affordability of insurance, the cooperation of states and employers, the promise of federal budgetary savings–will rise or fall on reformers’ ability to strengthen the act to ensure that it delivers on its promises. And, alas, playing offense is harder than playing defense in American politics, particularly in our current polarized climate.

Five years after passage, the ACA will be neither an endangered, crippled program nor a sweeping, uncontroversial success. Like Social Security in 1940, it will be a work in progress–one that could head in very different long-term directions: expansion and solidification, or erosion and fragmentation. How the first five years of the ACA are handled will shape the road taken. But, as Social Security’s history shows, the next five are likely to be even more critical.

The Implementation Imperative

Wilbur Cohen, the architect of Medicare, was fond of saying that successful social programs were “1 percent inspiration and 99 percent implementation.” As a brilliant administrator, he could be forgiven for a little hyperbole, especially since the exaggeration was in the service of an essential truth: Getting from good laws to favorable outcomes is no easy task. This is particularly so when laws lean heavily on the cooperation and partnership of multiple parts and levels of government and many private-sector actors with differing interests. In this respect, Cohen’s Medicare was a model of simplicity–a single national program automatically enrolling a defined population and dealing with a few key stakeholders, most notably hospitals and doctors, whose main interest was higher reimbursements.

By comparison, the ACA looks like a Rube Goldberg contraption. Its basic structure mixes state and federal responsibilities, competing administrative centers of authority, and public and private activities in a manner that can be charitably described as complex. The most Medicare-like aspect of the original legislative package was the so-called public option–a public insurance plan competing with private plans for the business of nonelderly Americans, an idea I have long championed. However, the public option was stripped from the legislation in the Senate to batten down wavering Democratic votes and overcome a GOP filibuster. A simple, popular element that could have provided a major tool of cost containment was lost.

The simplest way to describe the new law is that it creates three pillars of coverage, supported by a foundation of regulations and spending. The first pillar is an expansion and upgrade of Medicaid, the existing state-run program providing health coverage to the less affluent. Even though the federal government will finance virtually all the expansion, states will have to reach those who are eligible and ensure that coverage on paper means in fact that doctors and hospitals will be willing to take often-penurious payments–something many states do poorly now and will continue to do poorly after reform.

The second pillar is the creation of new health-insurance “exchanges” that will allow small employers and Americans who do not receive employer-based coverage to choose among regulated private plans, with much of the premium expenses for middle- and low-income Americans borne by the federal government. The plan is to have these exchanges set up by the states by 2014, but the federal government will establish them directly if states do not. Moreover, states can also establish them in cooperation with other states, an option that might be attractive in less populated regions or where multi-state metropolises exist. And the federal government will contract with at least two private health plans directly–at least one a nonprofit–to provide coverage on a nationwide basis. These national plans will also be offered through the exchanges.

The third–and, in terms of the number of Americans covered, the broadest–pillar will be regulated and subsidized private coverage through employers. Large employers (those with more than 50 workers) will be required to provide minimum coverage to their workers or pay a fine. The terms of employment-based plans will be regulated. And, eventually, the favorable tax treatment of those plans will be limited. In essence, the ACA gradually transforms the present voluntary, regulated, subsidized system of workplace insurance into a less voluntary, more regulated, and less subsidized system.

The Affordable Care Act, Age Five

Each of these three pillars raises distinct implementation challenges and significant unknowns. This is in part because, at the insistence of the Senate, the law leans so heavily on the states for the expansion of coverage and regulation of insurers, making the ACA in essence not one reform law, but a framework within which as many as 50 could blossom–or wilt.

Even if the full-throated state challenges to the law crumble, that will not stop many states from fumbling the establishment of the exchanges, the regulation of insurers, and the expansion of Medicaid. Across the states, the administrative capacities of public officials vary enormously, as does the will of those officials to use the capacities they have. In many cases, state regulators are badly outgunned by insurers and providers tenaciously defending their economic turf. As a result, the initial rollout of the law is destined to be one of mixed success.

Much hinges, therefore, on how the federal government uses the fallback authority at its disposal. When states fail to develop plans for workable exchanges, or fail to carry out those plans, the federal government needs to step in, as it did in setting up temporary high-risk insurance pools (a stopgap measure in the law until the exchanges go live in 2014) in the nearly two dozen states without their own plans this past July. Indeed, a paradox of the law is that reform’s strongest advocates at the state level should be willing to encourage state leaders not to set up their own exchanges, pressing instead for state officials to conserve resources and enlist the federal government to contract with and oversee private plans directly. Not only would it be less costly for one federal agency to set up exchanges in different states than for each state to independently establish its own, the feds also have the will, expertise, and resources to ensure the exchanges are established on solid terms, prevent insurers from gaming the system, and demand efficiencies from insurers. (Revealingly, private plans regulated by the Federal Employees Health Benefit Program have among the lowest administrative costs in the business.)

At the federal level, the prospects for successful implementation remain far better, not least because of the consistent support for the law that will be forthcoming from Washington so long as President Obama holds office. Nonetheless, the complexity of the decisions placed upon federal officials–perhaps the most common phrase in the law is “the Secretary shall,” a reference to the secretary of health and human services–guarantees that some will be made poorly or turn out badly, while others will pose difficult trade-offs and substantial uncertainties.

In particular, while the states grapple with the thorny problem of creating exchanges, the federal government will face its own challenges in regulating employment-based plans. The Congressional Budget Office’s (CBO) prediction of 30 million newly insured Americans at relatively modest federal cost (or at least modest by health care’s inflated standards) rests heavily on the assumption that virtually all employers now providing insurance will continue to do so, even if their plans are subject to new rules. That, however, is an assumption worth interrogating.

The problem here is not political will or administrative skill. The problem is that the third pillar of the law–the less voluntary, more regulated, less subsidized system of workplace insurance–creates a basic structural dilemma: trying to improve the generosity or security of private employment-based insurance will create costs and administrative hassles for employers that could reduce their willingness to provide insurance at all. Put bluntly, the primary tool that the act grants federal officials–the rules for employment-based plans–can be used aggressively only at the risk of undermining the primary means of coverage in the law.

We can see this dilemma most clearly in the arcane but crucial matter of “grandfathered” health plans. Under the ACA, existing employer-based health plans that remain fundamentally unmodified are exempt from a number of regulations designed to make sure that group and individual plans provide reasonable guarantees of security, affordability, and access to preventive care. These grandfathered plans, in effect, occupy a regulatory netherworld between the new world of health insurance and the old, and so identifying what counts as a change that would cause an existing plan to lose this special grandfathered status is critical.

In June, the Obama Administration issued guidelines for determining whether plans could remain grandfathered that were stronger than many consumer advocates had expected. Yet even these guidelines–which are likely to be weakened in the regulatory review process–still ensure that most employer plans (including, almost certainly, the anemic plans offered by low-wage companies that sponsor coverage, like Wal-Mart) will pass regulatory muster. And regardless of their grandfathered status, employer plans can cover just 60 percent of subscribers’ medical costs–the current norm is roughly 80 percent–and still not violate the law, which means employees could be paying 40 percent plus their share of the premium. This is apparently the price to be paid for a law that, as the proposed regulations revealingly put it, “balances the objective of preserving the ability of individuals to maintain their existing coverage with the goals of ensuring access to affordable essential coverage and improving the quality of coverage.”

The structural bind raised by the reliance on employment-based insurance only hints at the deeper dilemma: Effective implementation and administration of the ACA will not, by themselves, ensure that the key goals of the legislation are met. Even if every step envisioned by the law is successfully taken by 2015–a big if, as we’ve seen–there will still be large gaps in coverage and weak restraints on costs. Insurers won’t be blatantly turning people away, or pricing the sickest out of the market altogether. But they will still be charging premiums that exceed many people’s means, and those premiums will still be rising far too rapidly. While regulators overseeing private plans will know much more about what insurers offer and spend their money on, getting them to change what they offer and spend their money on will be another matter.

In short, Harkin’s starter home needs some major improvements. Unfortunately, the political winds are already threatening to knock the home down.

The Next Political War

The political battle over health reform did not end on the night of March 21, when the House of Representatives passed the Senate bill. It simply entered a new phase, going from conventional to guerilla war. And conservatives have long shown themselves to be better at guerilla warfare than progressives. The fights over the individual mandate are a mere prelude to the struggles to come, which will concern the greatest fault line of contemporary American politics–redistribution, or more precisely, the raising and spending of money to ensure health security.

Redistribution is the soft underbelly of health reform. As the political scientist Theda Skocpol points out:

The 2010 health reform promises subsidies to millions of working peopleof modest means, whose employers do not provide health insuranceand who cannot afford to buy it themselves in the existing marketplace.Most of the revenues to pay for coverage expansion come fromAmericans making more than $250,000 a year, as well as from fees on businesses and cuts in subsidies to private insurersinvolved in Medicare.

This redistribution relies on a grab bag of financing sources, virtually all of which are divorced from the receipt of benefits. Many of these sources are both highly visible and highly unpopular among deep-pocketed interest groups and mobilized segments of the population. As Paul Pierson and I document in our new book, Winner-Take-All Politics, these players have gained in strength over the last generation at the expense of organized labor and middle- and working-class voters.

Maintaining the redistributive aspects of health reform will thus be a formidable challenge. The promise of 30 million newly insured Americans and significant reductions in federal budget deficits are contingent upon the full implementation of the taxes, fees, and offsets in the bill, some of which do not take effect until after the presidential election of 2016. These include roughly $4 billion in annual fees on the pharmaceutical sector, and $8 billion to $14 billion in annual fees on health insurers, as well as limits on tax deductions and tax-favored accounts for medical care mostly used by higher-income taxpayers. Even though most Americans are not highly supportive of tax cuts, Republicans have proved quite adept at using them as a political battering ram. Moderate Democrats have repeatedly been willing to support tax cuts in the past or to oppose scheduled tax increases. With an energized GOP base stoked by Tea Party enthusiasm, the anti-tax pressure is likely to become even more intense.

Reformers should not underestimate the power of the GOP anti-tax crusade–or, for that matter, the party’s anti-regulatory zeal. When the frontal assault on the individual mandate is repelled, the progressive tax provisions in the bill will be the next target, along with the interlocking requirements on employers and insurers designed to guarantee that public financing is backed up with employer contributions and insurance-company restraint. We can also count on Republicans to continue to oppose changes in Medicare designed to build on its past success in restraining costs (though, fortunately, most of these changes are out of Congress’s hands). At the state level, conservative governors and legislators will continue to wage modern-day nullification campaigns, which federal officials will have to resist aggressively at every turn.

And conservatives won’t be the only political force seeking to blunt the law’s effects. Medical industry players–private insurers chief among them–will also be doing everything they can to shape what states do. The grand bargain was supposed to be that insurers would face greater competition in return for millions of new customers. Insurers will get the customers. But with the industry growing more consolidated by the day, they are not likely to face much greater competition. And with the highly visible moment of reform having passed, their lobbyists–joined by representatives of providers, business groups, and other organized interests affected by the law–will be back in the saddle again. Just because they received major concessions doesn’t mean they won’t push for even more. Reformers, backed up by the federal government, will need to push back.

Renovating and Improving the Starter Home

If reformers play just defense, they will be stuck protecting a law that has two notable problems: It is not designed to ensure that everyone is covered; and it is not capable of seriously reining in medical inflation. (Isabel Sawhill and Greg Anrig discuss health-care costs and the deficit in the current issue.)

The first problem is the easier of the two to tackle, at least in policy terms. In our predominantly employment-based system, there are only two routes to seamless guaranteed coverage–requiring that employers provide coverage or contribute toward its costs, on the one hand, or severing the financial link between employment and health benefits by raising the funds for subsidized coverage through alternative means, on the other. The ACA embodies an uneasy hybrid of these two approaches: somewhat weak coverage requirements on the largest employers, but none on those with fewer than 50 workers, and no guarantee that those without coverage through employment will receive insurance through the exchanges or Medicaid.

From a policy standpoint, the creation of a new funding stream outside of employment–say, a value-added tax whose revenues are dedicated to subsidizing health coverage–has a lot going for it: It could ensure a stable revenue stream, serve other policy goals (such as encouraging savings), and delink health insurance from its precarious connection to employment. Yet it also has notable drawbacks. For starters, it requires frontally challenging the GOP anti-tax crusade. Given the controversy already surrounding reform, this may be a bridge too far. Moreover, a separate revenue source will not have any direct, tangible connection to the benefits of reform, as did the Social Security payroll tax. President Franklin Roosevelt famously said, “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.”

For these reasons, the more promising route may be to build on the existing law to fill in its gaps. One way to do this would be to strengthen the employer requirements to turn them into an automatic source of affordable coverage for workers. In practice, this would mean extending the employer coverage provisions to employers smaller than 50 workers, eventually reaching all employers, including the self-employed. It would also mean transforming the penalty–currently $2,000 per full-time employee (excluding the first 30 employees) for most employers–into something closer to a “play-or-pay” mandate in which uninsured workers’ coverage is automatic through the exchange (or Medicaid) when their employer pays a dedicated payroll-based contribution.

Exempting small employers entirely from the coverage requirement, as under the current law, has two salient drawbacks. First, it means that millions of Americans do not receive automatic coverage at their place of work. More than half of the working uninsured are either self-employed or work in firms with fewer than 50 workers. Because these firms are not required to contribute even a token amount on behalf of their workers, coverage for these workers has to come through Medicaid outreach or enforcement of the individual mandate, neither of which is likely to work as well as simply signing workers up for employer- or government-sponsored coverage at their place of work.

Second, a blanket small-business exemption is ill-targeted, since it treats small high-wage firms with substantial financial capacity to provide coverage (such as law firms) no differently than small low-wage firms without such capacity. Instead, employers that do not sponsor coverage should have to contribute to the cost of their workers’ coverage on a sliding scale based on firm payroll, which is a better measure of a firm’s ability to provide coverage than the number of employees. Moreover, such a change would still take into account firm size as well as wages, easing the burden on the smallest firms. For example, firms could be required to pay 1 percent on the first $250,000 of payroll, 4 percent on the next $750,000, and so on, up to the full levy of, say, 7 percent. The lower contributions required of low-wage firms could be financed by redirecting the law’s ill-targeted tax breaks for small business, which would no longer be necessary to encourage these firms to participate.

This approach would have three benefits. First, the payroll contribution would be a dedicated amount that workers could see as “purchasing” their benefits through the exchange. Second, this approach would mean that everyone working or living in the family of a worker (including the self-employed, who, as with Social Security, would be required to make the contribution on their own behalf) would be automatically covered, either directly through an employment-based plan or through the exchange when their employer pays the contribution.

The third benefit is that a true play-or-pay approach would lessen reliance on the highly controversial individual mandate, which is viewed with skepticism by a majority of Americans and is the target of a vigorous GOP assault. At least before the recent downturn, an approach requiring that all firms (including the self-employed) either play or pay would guarantee coverage to more than 95 percent of Americans younger than 65. If no one was allowed to exit coverage without showing proof of an alternative source, this number would rise to 100 percent in short order, as very few nonelderly Americans have no tie to the workforce for an extended period.

Given the resistance of employers to the present rules, it may seem fanciful to think that the employer requirements could be strengthened. But as the new law kicks in, employers playing by the rules may come to be more supportive, recognizing that their less responsible competitors gain a competitive advantage by not providing insurance and raise the costs of employer plans when their uninsured workers receive uncompensated care. To be sure, this logic would work only for firms actually providing coverage, and it’s likely to be persuasive only for those coverage-providing firms (such as unionized supermarkets) that have aggressive low-wage competitors. But firms not providing insurance could see advantages in a broader employer requirement as well. If the cost of allowing their workers to buy into the exchanges was affordable, small and large firms alike could see it as beneficial to buy coverage through the exchanges rather than on their own. Indeed, the exchanges should eventually be opened up to all employers, not just the smallest–a step that states have the authority to take.

This is yet another reason why states and the federal government must be vigilant in ensuring that the exchanges are set up on solid foundations, and why cost-control tools have to be used actively and strengthened over time. If the exchanges function effectively to provide lower-cost coverage, they are likely to become more and more attractive to employers, especially the smallest among them. The exchanges, after all, will provide a menu of health-plan options, and they will remove from employers’ shoulders the administrative burden of picking and monitoring health plans and managing enrollment in them (this, incidentally, might be another allure to small firms to participate). So long as firms are required to pay a reasonable amount to fund workers’ coverage, there is no reason to insist that firms provide insurance on their own when they and their workers would prefer to buy it through the exchange.

Cost Control or Bust

None of this will matter much, however, if costs aren’t contained. And here we reach the weakest foundation of Harkin’s starter home. All the reform ideas that would have provided big direct savings–from serious administrative streamlining through a single national exchange to the public insurance option that I’ve advocated–were either sidelined or neutered as they ran the gauntlet of affected interests. Indeed, the public option debate was a case study in why cost control is so hard: Conservative Democrats first effectively stripped out the tools of cost control that would have allowed the public option to compete aggressively with private insurers, most notably, the use of provider rates based on Medicare’s payment schedule. Then, they complained that the public option wouldn’t control costs!

No one who has studied the private medical market in recent years can fail to recognize the unhealthy consolidation that has taken place on both the demand (insurer) and supply (provider) sides. A revealing indicator of the problem: Just as the health-care bill neared passage, the American Medical Association (AMA) released a report finding that 99 percent of metropolitan areas studied had “highly concentrated” insurance markets. Equally striking, a single private insurer held 70 percent or more of the private market in 24 of the 43 states examined (up from 18 of 42 just a year earlier).

The AMA was understandably less eager to point out the simultaneous consolidation of medical providers–with large physicians’ groups and flagship hospital systems gaining enormous leverage to drive up prices, even when faced with dominant insurers. As one health-plan executive recently complained to researchers studying California’s escalating medical costs:

I am shocked there isn’t an outcry over the fact that our costs are driven out of control. We would like to establish some sort of boundary, beyond which these guys can’t go. We’d welcome some regulatory intervention to break up these monopolies, because they are just killing us.

Yet “regulatory intervention”–whether to push back against consolidated health plans, or “break up” dominant provider groups–is not in the cards in most states. The federal government has the leverage to hold down price increases. Medicare, for example, has held annual spending growth (for comparable services) at a level 2-to-3 percentage points below private insurance over the past 15 years or so. By contrast, as a recent report on California health spending (written by Robert A. Berenson, Paul B. Ginsburg, and Nicole Kemper) notes, private insurers’ “payment ratesto hospitals and powerful physician groups approach and exceed200 percent of what Medicare pays, with annual negotiateddouble-digit increases in recent years.”

When the public option was sidelined, California’s senior senator, Dianne Feinstein, called for requiring insurers seeking increases in health-plan premiums to get approval from states before doing so. Although Feinstein’s amendment didn’t make it into the ACA, states have the authority to establish such procedures under the new law. Unfortunately, prior approval is unlikely to have much effect on the long-term trajectory of costs. The majority of states already require prior approval of premiums for at least some insurers and some specific markets. And while regulators sometimes insist on and receive lower premium increases, the overall trajectory of medical costs has continued sharply upward. To be sure, prior approval might be more effective when insurers are constrained from changing what and whom they cover. But even with reform, insurers will be able to lower premiums by restricting (within regulatory bounds) provider networks, the conditions under which they pay for needed care, or coverage terms.

The ACA does, however, include a new requirement with greater potential bite. Under the law, insurers are required to spend at least 80 percent of premiums on medical care, as opposed to administrative costs and profits. More significant still, insurers that do not meet this 80 percent standard–known within the industry, revealingly, as the “medical-loss ratio” or MLR–have to provide rebates to consumers equal to the difference between 80 percent and their actual spending on care. MLRs have been falling since the 1990s, but on average, insurers still exceed this 80 percent threshold: In 2008, the industry-average MLR was 81 percent. Yet many insurers spend less than 80 percent of premiums on care, and in the individual and small-group markets the share can be as low as 60 percent. According to the advocacy group Health Care for America Now, the six largest for-profit companies would have had to provide nearly $2 billion in rebates in 2009 if the requirement had been in effect that year. (It actually takes effect in 2011.)

The MLR requirement represents an important step in encouraging private insurer transparency. If properly implemented, it could ensure that a higher share of premiums was spent on care, and it might even lead to one-time premium reductions. Like prior approval, however, it will not do much to slow the growth in costs over time. The MLR is a ratio–care versus administration. It says nothing about whether overall spending is excessive or not. What’s more, insurers are doing everything within their power to gut the MLR rules even before they take effect, arguing that scores of functions historically treated as administration–such as the costs of denying care (“loss adjustment expenses,” in insurance-speak), fraud prevention, network management, and provider credentialing–are actually “care.” The Obama Administration is currently standing firm. But some state regulators are already saying that they will exempt categories of insurers or phase in the requirements over an extended period. It is safe to assume that the final MLR rules will be even weaker than those envisioned in the ACA.

By far the most promising approach for state leaders may be to institute “all-payer” rate setting. This is the dominant form of cost control in the advanced industrial world, and it is one that has been pursued by some states and localities in the past. Canada, for example, has used all-payer rate setting for decades, and not only features medical spending roughly half ours on a per-person basis, but has also seen that spending rise much less quickly since the mid-1980s. Just across the border from Canada, Rochester, New York, pursued an innovative all-payer system for its hospitals in the 1980s–with apparent success in restraining cost increases and improving participating hospitals’ financial stability.

Under an all-payer system, payments for specific services or treatment of patients with particular diagnoses would be set through a negotiated process in which insurers, providers, and state governments, as well as consumer representatives, had a seat at the table. These rates would be used by all payers (hence the name), and they could be extended to more complex payment methods, such as payment for entire episodes of care (e.g., treatment of a heart attack). By consolidating bargaining power on the demand side and limiting the ability of providers to play one payer off against another, all-payer systems have the potential to both create lower and more uniform payments and restrain the increase in service prices over time.

The key to controlling costs over the long term, however, is reviving the public option. Besides the one-time savings created by a public option with no need to earn a profit and large numbers of subscribers over which to spread administrative expenses, the public option will restrain costs in two ways. The first and simplest is by building on Medicare’s past and expected success in controlling spending. Indeed, the public option could be the primary vehicle for extending to nonelderly Americans the innovations in payment and care management that will be used to slow Medicare spending growth in the coming years.

The second means by which the public option will hold down costs is by serving as a competitive benchmark for private plans. The public plan will represent a simple, affordable plan available on similar terms throughout the nation, reassuring Americans newly required to have insurance that they can gain access to a transparent insurance product that offers a broad choice of providers. As such, the public option is likely to be an attractive alternative to private plans, pressing insurers to work harder to restrain their own premiums and to showcase their own distinctive merits. In today’s weakly competitive market, even a modest spillover of the public plan’s cost-control efforts into the private sector could have major effects.

In theory, states could create a Medicare-like public option of their own under the new law–and a handful may well do so before the exchanges go live in 2014, including Oregon, Vermont, and my home state of Connecticut. A state public option would create greater accountability for private insurers, especially in states where a single insurer dominates the market. But a state public option would, of course, be available only to those who live within the states that offer it. If only a handful of states move forward, most Americans will be shut out. For the same reason, the cost-control potential of state public plans will be limited. States have far less market leverage than the federal government: A national public option, if equally attractive, would have 500 times as many subscribers as a Vermont-only plan.

Perhaps more important, states also have far less political leverage. State public officials–often less closely monitored by constituents than national leaders, possessing fewer administrative tools and more limited budgets, and frequently term-limited–are a weak match for a determined, consolidated private medical industry. As a prominent consumer representative working to influence state insurance commissioners recently explained, “Insurers spend tens of millions of policyholder-supplied funds to lobby for insurer interests. In contrast, consumer interests have few such resources.” The entire consumer participation budget at the National Association of Insurance Commissioners–the organization of state insurance regulators–is dwarfed by the salary of a single insurance lobbyist. In the face of the industry political onslaught, many states whose leaders are contemplating a state public option may not end up with one at all.

Hence the need for a national plan. A simple Medicare-like public option could build on the provisions of the law that establish at least two national plans offered within state exchanges (at least one of which must be a nonprofit). Offered within every state exchange, a national public option could provide simple, predictable coverage and use its bargaining power to obtain better rates. Moreover, a public option would have the incentive and ability to invest in innovative payment and care-management strategies, building on the improvements in Medicare envisioned under the ACA. As poll after poll during the health care debate showed, the public option is popular. And unlike many popular ideas, it will actually save serious money. (Recently, the CBO calculated that a stand-alone bill to revive the public option would save nearly $70 billion between 2014 and 2020.)

The public option is often seen–mostly by conservative detractors–as an alternative to relying on private insurance. Although it will certainly cover some Americans who would otherwise enroll in private plans, it is best thought of as an alternative to relying exclusively on regulation to make private plans act in the public interest. The public option is a means of allowing the private and public sectors to operate in cooperative tension with each other, without putting excessive faith in the ability of regulators to make the private sector behave in fundamentally different ways.

Above all, the public option is the renovation that solidifies Harkin’s starter home in the face of the perfect storm. What the advocates of Social Security recognized and fought for in the 1930s and beyond was the strongest structure. They understood that a firm foundation could be built on, that a popular, capable program could attract more financing and greater institutional resources. The case for the public option is not primarily a political case, though it will be an addition to the law that a majority of Americans will welcome. It is a substantive case: The public option is a crucial addition to the institutional architecture of the law, filling in the weakest aspect of the home’s foundation–its anemic cost-control measures–so that the other reforms I have discussed can expand that home to include more Americans over time.

Organizing for American Health Care

Reformers may have won the war in 2010, but they lost the battle for public opinion: Americans were convinced reform was needed, but not that the federal government should have the authority to make sure it was done right. Reformers cannot afford to lose the second battle for public opinion.

Winning it will require organization and narrative. It will also require that progressives coalesce around a broad vision, as they did in the years after the passage of the Social Security Act. That vision should have two sides: the case against insurers and the case for government.

Private insurers are partners in the new law, not potentates. Their cooperation will not be automatic; it will need to be extracted. The largest private insurance companies are a gift for populist critics that just keeps on giving. To get the law up and running and build public trust, federal officials need to keep putting insurers in their place prominently and without apology. They can begin by resisting insurers’ self-serving entreaties to be freed from the requirement that they spend at least 80 percent of their bloated premiums on the actual delivery of care.

But making a case against insurers is not enough to justify the stronger federal role that is essential. Reformers are regrouping to convince Americans that the law is in their interest. But they should not be afraid at the same time to point out where the law needs to be strengthened, especially when that also means pointing out where private insurers continue to fall short. And nowhere is this more true than when it comes to the public option.

This was the approach taken with Social Security, whose champions celebrated the law’s achievements yet never ceased to point out how the law still failed to provide the foundation of economic security promised in 1935. On the third anniversary of the Social Security Act, FDR delivered a stirring reminder of the law’s achievements–and its unmet promise:

We have come a long way. But we still have a long way to go. There is still today a frontier that remains unconquered–an America unclaimed. This is the great, the nationwide frontier of insecurity, of human want and fear. This is the frontier–the America–we have set ourselves to reclaim.

In 2015, we will have come a long way in achieving health security. But we will still have a long way to go. Making the case for the changes that are needed–from strengthening the relatively weak employer requirements in the law, to opening up the exchanges to larger employers, to creating a national public option to slow escalating costs–will require more than incremental steps to build trust in the law. It will also require a broader vision of how the overarching goal of affordable, quality care for all can be achieved, backed up by an ongoing, organized movement. Like FDR in 1938, reformers in 2015 will have to identify the next unclaimed “frontier of insecurity,” and show Americans how and why to cross it.

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Jacob S. Hacker is the Stanley B. Resor Professor of Political Science and Director of the Institution for Social and Policy Studies at Yale University. He is the co-author with Paul Pierson, most recently, of American Amnesia: How the War on Government Led Us to Forget What Made America Prosper.

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