Senate Majority Leader Harry Reid’s massive Senate health bill (H.R. 3590) contains a “public option”, a new government run health plan to compete against private health plans within a federally designed system of state health insurance exchanges.

Federally Designed State Health Exchanges. Under Section 1311 of the bill, the Secretary of the Department of Health and Human Services would be required to provide states grants for the establishment of American Health Benefit Exchanges, and by 2014 states would be required to establish these exchanges for the purchase of “qualified” health plans. Such plans would only be qualified if they met federal rules governing benefit packages, provider networks, “essential community providers”, quality standards and measures uniformity of enrollment procedures, the right kind of rating system, outreach, reinsurance and risk adjustment, and a variety of other federally determined processes under federal supervision. States would be able to require the qualified health plans to offer additional benefits and make the health plans more expensive, if they wished to do so, but they could not allow benefit changes that differed from the standards set by the federal government. As for the administration of the new federally required exchanges, they are required to be “self-sustaining”, and may impose assessment or fees on health plans and enrollees to secure the coverage of those administrative costs.

Co-ops. Under Section 1322, the Secretary is required to sward loans and grant monies to “member-run” non profit that will offer “qualified health plans”. This is, in effect, a federally created “co-op” option. The coops would be able to make purchasing decisions, but they could not fix provider payment rates. Neither existing private health insurance companies nor government organizations could, under the terms of the bill, set up these co-ops. The Comptroller General of the United States is to appoint an Advisory Board to oversee this new program, and the bill provides $6 billion in federal funding for the start up of the Co-op program. The Senate’s proposed health insurance “coop option” is , in effect, federally created and funded. It is worth noting, as Heritage analysts have noted, none of this is necessary. The only major change in law required to allow for health insurance to be offered through private sector co-ops is a change in the tax laws.

Under Section 1321, states are required to implement standards for the health exchanges by 2014. If states fail or refuse to implement an exchange in accordance with federal rules, the Secretary is required to intervene in the state and operate an exchange and implement those federal standards unilaterally.

The Government-Run Plan. Under Section 1323, the Secretary of the U.S. Department of Health and Human Services (HHS) is required to create a “community health insurance option” to participate through the authorized health insurance exchanges. This is the government run plan that would compete against private insurance. It would be required to offer the “essential” health benefits, as defined by federal authorities, but the states could require the plan to offer more in the state where the plan competes against private plans. The rates for the government run plan would be set by the Secretary, and the Secretary would be empowered to negotiate the rates for doctors and hospitals. Under the bill, the rates must not be higher than the “average” rates paid to doctors and hospitals by the “qualified” private health plans. CBO has estimated that the rates for the government run health plan would be higher than private sector rates for a variety of reasons, including “adverse selection”, the likelihood that older or sicker enrollees would be attracted to the public plan.

While the Congress would provide “start up” funding, the government health plan would be financed by premiums to cover claims, administrative costs and contingency reserves, and the government plan would be subject to both federal and state solvency and consumer protection laws. States would also have the option of not allowing the government plan to compete against private plans within their borders, though CBO estimates that roughly two thirds of Americans would live in states with a government plan. Without the imposition of Medicare rates to ratchet down payments to doctors and hospitals well below those of the private sector, and with a low estimated take-up rate (3 to 4 million as projected by CBO), some liberal analysts who have championed a “robust public option” are questioning the point of the Senate “public option” proposal.

In short, the Reid bill sets up a federally designed system of health insurance exchanges that are modeled after those of the Kennedy-Dodd bill. With respect to insurance rules and the creation, design and operation of health insurance exchanges, the federal government would control the insurance markets, and, depending on the will of the state officials, enter as a direct competitor against private health plans. While states would become vehicles of federal health policy, they could only pursue independent arrangements in health insurance by seeking a “waiver” from federal authorities. In other words, the Senate health care bill further centralizes power and control in Washington.