Introduction and summary
As the largest source of coverage, employer-sponsored insurance (ESI) has long been the backbone of the United States’ health insurance system.1 By leveraging preferential tax treatment, larger risk pools, and administrative efficiencies, employers historically have been able to provide comprehensive coverage to their employees at a comparatively lower cost than similar offerings in the nongroup market.2 However, rising health care prices are eroding the value of ESI, leaving employers and employees to bear the brunt of growing costs.
Medical inflation typically outpaces inflation of other products and services.3 These higher prices raise insurance costs, ultimately increasing ESI premiums and deductibles.4 Since the early 2000s, premiums have regularly grown faster than inflation.5 Accordingly, in 2023, the average annual ESI premium was $8,435 for single coverage and $23,968 for family coverage.6 Households with incomes below 200 percent of the federal poverty level spend a significantly greater share of their incomes on health premiums and out-of-pocket expenses than do higher-income households with ESI.7
Employer efforts to brace against rising insurance expenditures are presenting significant affordability and access challenges for workers. Tactics such as shifting costs to employees through higher deductibles, copayments, and out-of-pocket limits or incentivizing high-deductible health plans (HDHPs) contributed to nearly one-third of working adults being considered underinsured (lacking access to affordable health care, whether due to high out-of-pocket costs or deductibles) in 2022.8 In 2023, among adults with ESI, 43 percent reported difficulty affording health care costs and 29 percent reported forgoing health care or prescription drugs due to cost.9 And there appears to be no end in sight: A 2023 KFF survey found that 23 percent of employers intend to further increase workers’ contributions in the next two years.10
Reducing costs and improving ESI affordability is a priority for the business community: A 2021 KFF and Purchasers Business Group on Health survey found that 87 percent of business leaders believed the cost of employee health benefits “will become unsustainable in the next 5 to 10 years.”11 Employers are seeking policy intervention: The same survey found that 85 percent of business leaders “believe that there will need to be greater government roles in providing coverage and containing costs.”12 In response, policymakers are exploring a variety of legislative and regulatory options. At the federal level, policy options under consideration include increasing transparency, addressing consolidation, improving access to comprehensive plans, and reforming the prescription drug market.13
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A solution to improve ESI affordability that policy researchers, including at the Center for American Progress, have previously proposed and that is deserving of further exploration is an employer public option: a government-sponsored health insurance plan that employers could choose to offer to their employees as an alternative to existing private health insurance options.14 This report first provides an overview of public option reform generally, highlighting three distinct models—classic, buy-in, and public-private partnership—and their cost reduction and containment mechanisms, considering how those reforms may apply to the ESI market. The report concludes with policy principles and design recommendations for implementation of an effective employer public option, including employer eligibility, employer and employee choice, benefits and levels of coverage, rate setting, network adequacy, and financing.
Public option frameworks
While the term “public option” has been used in various contexts and included in a variety of policy proposals at both the state and federal levels, for the purpose of this report, public option refers to a government-regulated health plan that aims to improve coverage and bring down costs through improved competition.15
General characteristics of public option plans include:
- Enrollment available to all.
- Competition alongside existing individual-market private plans.
- Government-set reimbursement rates.
- Income-based financial assistance available to those who need it.16
There are a range of public option models that can be tailored to meet specific affordability goals and objectives if adapted for employers. Common public option models include: classic government-sponsored and -administered health insurance, buy-ins to public programs, and a government-contracted public-private partnership.
‘Classic’ public option
The classic employer public option would be a wholly government-backed plan that directly competed with private health insurance plans.17 The government would establish, administer, and manage the employer public option, controlling eligibility, benefits, cost sharing, premium setting, and provider payment rates.18 The government would also bear the financial risk of the employer public option. The government could finance the program via enrollee premiums and cost sharing, state or federal revenues, or a combination of each.19
Many proposals of this type (whether related to employers or generally) are reform packages that include a public option plus other changes to affordability and eligibility with the goal of achieving universal coverage. Medicare Extra, a 2018 CAP proposal for a classic public option, was designed to achieve universal health coverage in the United States through establishment of a public option managed by the federal government.20 The national Medicare Extra program “would be available to all Americans, regardless of income, health status, age, or insurance status.”21 Provider rates in the program would be capped at a percentage of Medicare rates, and financial assistance would be more generous than the original Affordable Care Act (ACA) subsidy levels.
Buy-in
A buy-in employer public option model would allow employers to buy into an existing public plan or program such as Medicare, Medicaid, a state employee health plan, or a plan that mirrors those existing plans. Costs would be reduced by leveraging the existing purchasing power and administrative systems to negotiate more favorable rates with providers and insurers.22
Under a buy-in model at the state level, employers could have the ability to buy into the state’s employee health plan or the state’s Medicaid plan. At the federal level, employers would need to buy into Medicare. A 2021 buy-in proposal by scholars Allison Hoffman, Howell Jackson, and Amy Monahan recommends offering large employers—those with 70 percent of their workforce enrolled in ESI—the option of offering a Medicare-based plan to their employees.23 Reimbursement rates would be set by the government initially at a percentage of Medicare, and to ensure enrollees had access to a broad provider network, participation in the public option would be tied to Medicare participation.24
Under a buy-in proposal such as the CAP-proposed Medicare Extra, where an employer would want to sponsor participation in a plan, individual employers “would have the option to sponsor Medicare Extra and employees would have the option to choose Medicare Extra over their employer coverage.” According to CAP’s 2018 report, “Medicare Extra would strengthen, streamline, and integrate Medicaid coverage with guaranteed quality into a national program.”25
Public-private partnership
Under a public-private partnership employer public option model, the government would contract with or require a private entity, such as a health insurer, to administer a public option on its behalf. The government would set requirements and affordability elements including premiums and provider payment rates, and the private partner would bear the financial risk for coverage.26
A public-private partnership model public option available in the employer group market would benefit employers by enhancing plan choice and competition while potentially generating cost reductions due to premiums and reimbursement rates being set by the state or federal government.
Public option in action: Federal progress and state individual market experiences
Recent legislative proposals for a general federal public option include the Medicare for America Act of 2019, the Consumer Health Options and Insurance Competition Enhancement (CHOICE) Act, the Public Option Deficit Reduction Act, the Medicare-X Choice Act of 2021, and the Choose Medicare Act of 202127. Generally, federal public option proposals have stalled, largely due to significant industry opposition.28 However, state policymakers across the country are in various stages of exploration and implementation of public option reform to help their state ACA marketplaces achieve affordability goals. Several states—including Maine, New Jersey, Minnesota, and Maryland—have introduced legislation or conducted studies on public option plans.29 To date, Washington, Nevada, and Colorado have all adopted marketplace public option-style programs, with Washington’s and Colorado’s plans opening for enrollment in 2021 and 2023, respectively.30 Although these public option reforms are only available in the individual market, they still can serve as a blueprint for future public option reform for the employer market, offering insights and lessons learned.
Buy-in public option
To date, no state has implemented a buy-in public option for its individual market. New Mexico has explored adopting a Medicaid buy-in for several years,31 considering a targeted Medicaid buy-in program operated by a managed care organization at Medicaid provider reimbursement rates that would be offered outside the individual market. A feasibility analysis and evaluation suggested that the program could reduce individual market premiums by 15 percent to 28 percent, with a projected total enrollment of 7,000 to 16,000 people.32 Several states offer a buy-in program for the Children’s Health Insurance Program (CHIP), permitting families whose income exceeds eligibility thresholds to buy public coverage for their children.33
Classic public option
To date, a classic public option has not been implemented at the state or federal levels. There have, however, been several proposals to establish a classic public option. For example, the Medicare for America Act of 2019 sought to replace existing health programs, including the marketplaces, Medicare, and Medicaid/CHIP, with a federal public program available to all U.S. residents.34
Public-private partnership public option
Washington’s, Colorado’s, and Nevada’s marketplace public option-style plans are similar to this model, with the state government contracting with private carriers to offer state-backed and regulated plans in the individual market.35 The experiences in Washington and Colorado have demonstrated some progress in improving affordability: In both states, 2024 rate increases for public option plans are lower than increases for nonpublic option plans.36
How public option reform could benefit employers
An employer public option could help lower insurance costs and improve affordability by regulating reimbursement rates and improving competition.
Regulating provider reimbursement rates
Central to employer public option cost containment is the government’s ability to determine reimbursement rates for providers, including doctors and hospitals.37 Through government rate setting, a public option can decrease provider payment rates.38 Provider rates are a significant driver of premium rate increases—regulating them could improve the affordability of employer-sponsored insurance by reducing premiums and lowering employer premium contributions and cost sharing.39
Improving competition
Implementation of an employer public option would introduce additional competition into the market. Increased competition among insurers, particularly in less competitive markets, may result in reduced costs for all customers.40 An employer public option could prompt private plans contracting with employers to lower their premiums, raise quality, or reduce cost sharing to compete with the public option.41
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Design considerations for a public option alternative to ESI
Whether pursued via a classic, buy-in, or public-private partnership model, when designing an employer public option that is capable of effectively lowering prices and improving ESI affordability, policymakers should carefully consider the design elements. These details will be critical in determining whether some businesses can be persuaded to forgo their current private coverage in favor of a public alternative, which will be essential to long-term viability of an employer public option. Long-term public option viability is important for ensuring the continued presence of a public competitor to private coverage that can keep exerting downward pressure on insurance premiums and health care costs across the employer market. The design considerations explored below have differing implications for self-insured versus fully insured employers. The recommendations that follow offer a framework for employer eligibility, employer and employee choice, benefits and levels of coverage, rate setting, and network adequacy. Some of the elements have been adapted from CAP’s Medicare Extra for All proposal, and others have been inspired by implementation experience from state-level marketplace public option reforms.
Employer participation should be voluntary
Participation in an employer public option should be voluntary. Despite existing affordability challenges, 6 in 10 workers with ESI reported being “extremely or very satisfied with health benefits” in 2021.42 Voluntary participation would further preempt additional criticism that the reform is a government overreach or unnecessary disruptor of market forces, a charge that has been levied against health reform proposals such as the ACA and that has contributed to the derailment of previous health reform efforts.43
All employers should be eligible to participate
Regardless of model type, an employer public option should be available to employers in both the small and large group markets, as well as to employers that self-insure. The ESI market has seen significant premium increases over the past decade that have affected firms of all sizes.44 While there are arguments to be made in favor of incentivizing large employers to sign up early in a public option’s implementation as a proof of concept and to quickly establish a large risk pool, that segment of the market should not be policymakers’ exclusive focus.45 Smaller businesses are currently the least likely to offer insurance coverage to their employees, most often citing cost as a barrier; small businesses would be able to leverage a more affordable public option to expand their benefits packages, thereby boosting their recruitment and retention potential.46
Employers should retain the option to self-insure or fully insure
An employer public option should maintain the current ESI framework that allows employers to choose their plan funding. Currently, employers have two options when contracting with private insurers: 1) to fully insure their risk pool, purchasing a plan where an insurance company takes on the risk of insuring enrollees; or 2) to self-insure, which results in the employer bearing the risk and contracting with the carrier for administrative services only.47 An employer’s plan funding decision is influenced by a variety of factors, including firm size, employee composition, and risk tolerance.48 Maintaining the flexibility for employers to make these purchasing determinations within an applicable public option model (classic or public-private partnership) is important to increasing the attractiveness of the program among employers. With an employer public option, the government would bear the risk for fully insured employers. For self-insured employers, the public option would function as a third-party administrator.
The employer public option should be the employer’s exclusive source of health insurance
While all employers should be able to choose whether to participate in the public option, those that do opt to participate should make it the exclusive insurance benefit offered to maximize cost savings. If an employer chooses to offer the public option as its health insurance benefit, the employer should not be permitted to offer comprehensive private plan alternatives.49 If employers were permitted to offer both the employer public option and private plans, they may try to improve the risk pool for the private plan and lower their costs by engaging in adverse selection—encouraging older or sicker employees to enroll in the employer public option. This may especially be the case for self-insured employers, who assume the coverage risk for their workers.50 While exclusivity limits an employer’s ability to offer employees a wide range of plan options, the high value and reduced cost of the employer public option should make it an attractive choice. To alleviate concerns about the loss of competitive advantage, employers should be permitted to offer supplemental plans that include additional benefits and act as secondary, complementary coverage to the employer public option.51
The employer public option should include multiple tiers of plan generosity to preserve employer and employee choice
In 2023, 53 percent of workers were offered health benefits of varying plan designs and actuarial values by their employer.52 In keeping with this trend, an employer public option should present employers with coverage options at different tiers of actuarial value. This would address concerns that the exclusivity requirement would result in employers holding full power to make health insurance decisions for their employees. Employees would be able to review their health care needs, compare the tier options, and make the best selection for themselves and their families. In contrast to instances when employees must compare plans with different cost structures and coverage rates, providing multiple tiers under the public option would allow employees to make simpler calculations of risks and expenses.
In a public-private partnership or classic public option model, plans should mirror the ACA’s tiering system of metal levels.53 To maintain consistency with the current average actuarial value of ESI coverage (83.5 percent in 2019), the base plan an employer chooses to offer should be akin to a marketplace gold plan.54 For additional flexibility, employers should expand their offering to include bronze, silver, or platinum plans, with the plans covering 60 percent, 70 percent, and 90 percent of costs for covered benefits, respectively. To improve affordability and offer further cost-sharing relief for workers, the public option should be designed to include employer subsidies for silver plans, similar to silver loading in the marketplace.55
The employer public option should offer comprehensive benefits on par with private coverage
Under the ACA, insurance plans are generally required to cover 10 categories of essential health benefits.56 An employer public option would cover these services as a minimum standard to make the plan comparable to available private plans. In addition to the baseline coverage categories mandated by the ACA, the public option could include medical device, dental, vision, and hearing services. In the absence of coverage for these additional services, employers should be permitted to offer supplemental plans akin to those that some employers currently offer, such as standalone dental and vision coverage.
The employer public option should have government-set rates
For maximum effectiveness, the government should set employer public option prices administratively rather than through negotiations. Rates should be pegged to Medicare, applying a multiplier of the Medicare Parts A and B fee schedule.57 Some previous congressional proposals for a public option based on Medicare rates, including the Keeping Health Insurance Affordable Act of 2019, also tied reimbursement to the Medicare Parts A and B fee schedule and granted the secretary of health and human services the discretion to increase payments for various providers and care settings, carrying forward existing payment adjustments for critical access hospitals, sole community hospitals, and rural emergency hospitals, as well as geographic adjustments for physician payments.58
According to Urban Institute estimates, a public option available in the nongroup and employer markets with provider rates set at Medicare rates, plus 10 percent for professionals and 25 percent for hospitals, could reduce premiums by 12 percent to 28 percent for participating employers.59 This finding is supported by a Brookings Institution analysis showing that a public option with rates set closer to Medicare rates would produce a greater downward force on prices in the private insurance market.60
Ultimately, the amount of market disruption caused by introducing an employer public option would be determined by the public option’s reimbursement rates. As such, building in flexibility for government officials to adjust payment rates up to a specified multiplier of Medicare rates would be critical to smooth implementation.61 The secretary of health and human services would use their discretion to advance the goals of stability, affordability, downward market pressure on negotiations for private plans, and stability in the provider market.62
The employer public option should have an adequate provider network
An adequate provider network is essential for an employer public option plan because it ensures access to care. Without a sufficient network, the plan’s ability to provide affordable, high-quality health care to a broad population is compromised. Public option design must consider network requirements or incentives to facilitate the development of adequate provider networks.
If an employer public option were implemented at the federal level, the most logical course would be to tie participation in Medicare to participation in the public option. Traditional Medicare’s network would provide a strong foundation nationwide for the public option: 89 percent of nonpediatric physicians accepted Medicare patients in 2019.63 For providers that typically do not contract with Medicare, such as mental health practitioners, or that are in short supply, the employer public option should leave room to negotiate higher payment rates.64
State experiences: Provider participation in individual-market public option reform
At the state level, policymakers have tools to improve provider participation in a public option network. After experiencing issues with hospitals refusing to join public option networks, Washington state began requiring that certain hospitals contract with at least one public option plan.65
State lawmakers could consider targeting greater participation by certain types of facilities, hospitals, or physician specialties by passing legislation to revoke tax-exempt status for nonparticipating entities. In most states, when an entity qualifies for tax-exempt status under 501(c)(3) of the Internal Revenue Code, the entity is also granted tax-exempt status by the state in which it operates.66 Because nonprofit facilities are intended to serve their communities, states could consider creating an additional requirement that health care entities participate in the public option in order to be granted tax-exempt status. Florida and New Mexico have taken similar approaches by tying state tax exemption for nonprofit hospitals to participation in Medicaid; New Mexico takes this further by also requiring participation in Medicare and “county indigent care programs.”67
Another option is to tie participation in the state’s employee health plan to participation in the public option. In Nevada, for example, all providers that participate in Medicaid or the state employee plan or that provide care to injured workers receiving workers compensation must join at least one public option network.68
Financing an employer public option
By maintaining funding through employer-employee contributions and risk spreading, an employer public option could reduce the need to raise revenue from other sources. In addition to the cost containment power of price setting described above, an employer public option plan administered by the government would be able to offer coverage for an actuarially fair premium. Unlike with the private insurance industry, a classic or buy-in public option plan would not have a profit incentive and premiums would be based on expected cost of claims plus cost of administration.
The employer public option should capture current contributions from employers through maintenance-of-effort and minimum contribution requirements
When an employer offers health insurance to its employees, the premium for that plan is typically divided between the employer and the employee. On average, employers contribute about 80 percent for individual coverage and nearly 70 percent for family coverage.69
Similar to engaging with private insurers to purchase coverage for their workers, employers should leverage the employer public option with the expectation of contributing to the premium costs of their employees. Consistent with CAP’s Medicare Extra for All proposal, an employer public option plan should, at a minimum, require a maintenance of effort by employers, with a baseline premium sharing arrangement of 70/30 for each enrollee.70 Employers that currently contribute a higher percentage toward premiums should still be able and encouraged to do so as part of their compensation packages. For example, employers seeking to put together a competitive benefits package may choose to fund premiums at 80 percent for their base plan, thereby increasing the contribution to other plan offerings as well. While this may seem like a disincentive for employers who currently pay a smaller percentage of premiums to enroll in the public option, their increased proportion of premium contributions should be offset by lower overall public option premiums achieved by rate setting.
Additional benefits of an employer public option
In addition to providing access to alternative, more affordable coverage for workers, an employer public option can build on the coverage gains of the Affordable Care Act and improve health equity—in particular, if an employer public option were to exist alongside a public option in the nongroup market.
An employer public option presents an opportunity to build on the ACA’s success in advancing affordability in the individual market. The ACA’s Small Business Health Options Program (SHOP) was established to allow small businesses (those with up to 100 employees) to access affordable coverage for their employees, including subsidizing coverage for businesses with fewer than 26 employees.71 However, utilization and enrollment has been low due to delays in the rollout of key features as well as the low value and complexity of the small-business tax credit.72 The employer public option would replace SHOP. A companion individual public option, running alongside the employer public option, would help reduce reliance on expensive COBRA coverage and allow individuals a smoother transition into the parallel marketplace plan in the event of job loss. If a public option existed in both the employer and individual markets, it could help reduce gaps in coverage and enable workers to maintain their sources of care and covered treatments.
An employer public option could also advance health equity by improving affordability and access to comprehensive coverage. Lower-income workers are less likely to enroll in ESI coverage due to cost, reporting premiums as an affordability barrier.73 By regulating provider payment rates, a public option plan can pass on savings to lower-income workers through lower premiums, deductibles, and other forms of cost sharing.74 In addition, the comprehensive plan design of an employer public option can better meet the health needs of a diverse workforce. The increase in high-deductible health plan enrollment among workers—from 20 percent in 2013 to 29 percent in 202375—may be further compromising access to care, particularly for people of color, by shifting costs onto employees. HDHPs’ cost containment impacts have been attributed to a reduction in health care utilization, including preventive care.76 A 2017 JAMA study found an association between HDHPs and cost-related barriers to cancer care, with Black patients being more significantly affected.77 A recent McKinsey survey found that more than 30 percent of Black, Hispanic and Latino, and LGTBQ+ employees, as well as employees under age 40, had considered switching employers for better health benefits in 2021.78 A thoughtfully designed public option can make great strides toward health equity and affordable coverage for all workers.
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Conclusion
The continual growth of health care costs over recent decades has increased the cost and compromised the affordability of employer-sponsored insurance. Previous reforms such as essential health benefits and medical loss ratio requirements have helped improve the value of employer coverage; however, additional policy intervention is needed to address costs further.79 There are many opportunities for federal policy action to address rising health care prices that can help alleviate some of that pressure.80 One approach deserving of additional consideration is to design and implement an employer public option. There are a variety of ways to approach employer public option reform, namely through a buy-in that leverages an existing government program; a classic public option that establishes a new government plan to compete with private coverage options; or a public-private partnership that splits plan design and administration between the government and a private entity. Regardless of the chosen model, policymakers considering an employer public option must reflect on a variety of factors—including employer eligibility, employer and employee choice, benefits and levels of coverage, rate setting, and network adequacy—to ensure continued access to high-quality and affordable employer-sponsored insurance.
