Of all the health reform proposals bouncing around Congress, none is as divisive as the "public option," a government-run insurance plan that would compete against private insurers. Proponents claim it will drive down prices. Critics worry it could destroy private health insurance and result in a government takeover of health care.
But few observers have acknowledged another effect of the public option, one that would spell disaster for reeling state budgets: the public option will cause state tax revenues to plummet.
How so? Taxes paid by private insurers are a major source of income for most states. For instance, in at least 37 states, HMOs pay premium, income, corporate, or franchise taxes, with rates as high as 3.5 percent.
Similarly, Blue Cross Blue Shield plans, many of which are not-for-profit, pay premium taxes in at least 34 states.
A new public insurance program run by the feds will poach customers from private insurers, driving many out of business in the process. If there are fewer private insurance companies -- and fewer privately insured consumers -- it follows that state insurance tax revenues will dwindle.
How will the public option wreak such havoc on private insurers and state budgets? For starters, it will be able to attract patients with below-market prices. The plan won't have to worry about making money, as losses could be erased by dipping into the federal treasury.
The public option will also be able to reimburse doctors and hospitals at artificially low rates. The federal government's existing public options, Medicare and Medicaid, routinely underpay health care providers by 20 percent.
Some lawmakers have proposed an alternative to the public option -- a network of non-profit state-based or regional health insurance cooperatives. But because of their government charter and initial government funding, these co-ops would pose many of the same problems as the public option.
Providers make up for public programs' underpayment by charging privately insured patients more. In fact, the average family of four shells out an extra $1,500 annually in insurance premiums because of underpayment by government insurance programs.
If the public option employs reimbursement rates similar to Medicare's, private patients will face even higher premiums, thanks to even more Medicare-style cost-shifting. As private insurance becomes less affordable, more patients will flee to the lower-priced public plan.
The Lewin Group found that the public option could cause nearly 60 percent of Americans with private coverage -- roughly 118 million people -- to switch to public insurance.
Federal insurance programs don't pay state taxes. If patients leave private insurance companies, those firms' revenues will decrease significantly. That will yield an equally severe dip in state tax revenues.
For most states, a drop in tax income would be catastrophic. The recession has already left many deeply in the red. Indeed, state tax collections fell 12 percent over the first four months of this year -- a record high.
Fully 45 states are facing budget shortfalls this year. California's is a whopping $26 billion. New York's is a $18 billion. And New Jersey's is nearly $9 billion.
More than 90 percent of taxes paid by insurers fund programs unrelated to insurance. In North Carolina, for instance, taxes on insurance premiums finance firefighting equipment. Without tax revenue from insurers, state governments will be forced to cut funding for vital programs.
A public option could make the states' terrible fiscal situation even worse. By driving private insurers from the market, the public option would scrap a vital source of tax revenue and push state governments to the brink of insolvency.
Janet Trautwein is CEO of the National Association of Health Underwriters. - Ed.