Colorado plan for a 'public option' would cut provider payments to fuel premium declines

Colorado released a proposal to install a new statewide insurance plan option that would severely cut reimbursement rates to providers.

The draft report released by two state agencies (PDF) Tuesday details the “state option” that would require large insurers to offer an insurance plan intended to increase competition. While the proposal differs from federal public option proposals that have the governments run their own plans, Colorado does aim to set a benchmark payment rate to bring its provider reimbursement in line with other states.

“The reason that health insurance is so expensive is that health care itself is expensive,” the draft plan said. “Worse, there are no standard prices for care across our state.”

Currently, an average insurance plan on Colorado’s individual market reimburses providers 289% above Medicare payment rates. A state option plan would reimburse providers between 175% and 225% of Medicare.

“Benchmarks will include a special focus on addressing and protecting the financial well-being of our rural and critical access hospitals and work to ensure access to care for the communities they serve,” the plan said.

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Colorado’s legislature passed a bill earlier this year that called for state agencies to explore a new public option to compete with private insurance.

Under the proposal, insurers that have a certain market share must offer a state option and would shoulder the financial risk of the plan. Starting in 2022, the state option will be available through Colorado’s Affordable Care Act (ACA) insurance exchange or outside of the exchange.

Residents who are eligible for ACA subsidies that lower the cost of insurance can also buy a state option. Every state option plan must cover all of the ACA’s essential health benefits and must use the dollars from any prescription drug rebate to reduce the price of individual policies, the plan said.

Any state option plan must also have a medical loss ratio (MLR) of 85%, meaning 85 cents of every premium dollar must go toward medical claims and the rest to administrative costs. The ACA requires qualified health plans to have an MLR of 80%.

Colorado also would apply for a Section 1332 waiver from the Trump administration to use premium tax credit pass-through funding to help provide more benefits for the state option plans such as dental coverage.

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However, the Centers for Medicare & Medicaid Services has not been a fan of the public option, which has gotten endorsements from Democrats.

The new insurance option could reduce average premiums by between 10% and 18% compared to estimated rates in 2022 on the individual market, according to an analysis from consulting firm Wakely. The draft report now goes to state lawmakers to decide on a final measure. But provider groups in the state are already signaling concerns, which could complicate any effort for final approval.

The Colorado Hospital Association said Tuesday it was "skeptical about what appears to be the first step toward price control or rate setting as well as an intent to make provider participation mandatory. These factors, when combined with the potential to dismantle the private insurance market are cause for concern."

If enacted, Colorado would join Washington as the only states offering a state-based insurance option. Washington’s plan would go into effect in 2021 and sets a payment benchmark rate for providers.

But the idea of a government insurance option is gaining attention from other states.

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“There are a lot of states that are looking for ways to address the affordability problem from their residents and hearing loud and clear that affordability is a pocket-book concern,” said Sabrina Corlette, research professor and founder at Georgetown University’s Center on Health Insurance Reforms.

Corlette said at least a dozen states considered a public option in some form this year. However, a new insurance option comes with some fraught political trade-offs, she said.

“I think the state has to make a choice between do we put state money on the table to improve subsidies for people like California did or do we address underlying costs by taking on our providers,” Corlette said. “Both of those things can be very politically challenging to achieve.”