An ambitious plan to reduce healthcare costs in Colorado could have far-reaching effects on health insurance companies and providers—if it works.
The Centennial State is implementing a so-called public option plan for its Connect for Health Colorado health insurance exchange that directs participating insurers to offer reduced-premium, standardized policies by cutting reimbursements to providers in their networks.
The state’s insurance and hospital industries staunchly oppose this intervention into their business relationships, just as national healthcare groups objected when the U.S. House included a different form of public option in its version of the Affordable Care Act in 2009. That opposition contributed to the public option being excised from the bill President Barack Obama signed into law the following year.
But success in states such as Colorado and Washington may revive interest in the public option. “That could be something other states look at and say, ‘This is worth a shot,’” said Christine Monahan, a professor at the Georgetown University Center on Health Insurance Reforms.
Likewise, if the Colorado Option results in negative outcomes, such as health insurance companies fleeing the state or providers going broke, that could sour policymakers on this approach to tackling high healthcare costs.
The Colorado Option first became available on the exchange this year, but only Denver Health Medical Plan was able to meet the 5% premium reduction target. This year, however, every exchange insurer is required to offer such a plan for the 2024 plan year as the state moves toward its goal of reducing health insurance premiums 15% by 2025.
Colorado Option proponents hope the effects extend beyond that specific type of coverage by driving down premiums across the board, Monahan said. “That's going to theoretically force those private insurers to start offering more competitive rates, which might eat into their own profits,” she said.
The Colorado Option
Under the state’s program, individual and small group insurers must sell standardized health insurance plans with the same benefits and cost-sharing across their Bronze, Silver and Gold policies. So far, insurers and providers have struck deals to work toward the public option’s premium reduction goal, giving shoppers lower-cost plans from which to choose during the next open enrollment period. This year, 14% of marketplace customers signed up for the Colorado Option.
While this may be attractive to consumers, high enrollment in Colorado Option plans would mean slimmer margins, or even losses, for health insurance companies and providers that would have to settle for less revenue.
“The insurance companies are going to put a lot of pressure on states saying that whatever their model is, the insurance companies can’t succeed at the level of premiums that the advocates of the public option want," said Jacob Hacker, the Yale University professor who originally devised the public option in 2001.
Cigna, Denver Health Medical Plan, Elevance Health, Kaiser Permanente, SelectHealth and UnitedHealth Group will offer Colorado Option plans for 2024 that must cost at least 10% less than 2021, after adjusting for medical inflation.
That’s a sign that the Colorado Option is already working, Insurance Commissioner Michael Conway said. “We got the hospitals to reduce and bend the cost curve in order to get to the rate floors that the law requires,” he said.
To achieve lower premiums, insurers worked out deals to set reimbursements at no less than 165% of Medicare rates for hospitals and 135% of Medicare rates for other providers, as dictated by the state law. Some of these carriers forged agreements with providers just in time to avoid public hearings and preclude regulators from taking over.
“The mere threat of even going to a public hearing and having to sort of open up the books to what it is that goes into all this is not something that issuers are really wanting to do,” said Liz Hagan, director of policy solutions at United States of Care, an advocacy organization that supports the public option.
Insurers submitted their 2024 plans and premiums, including for the Colorado Option, to regulators last month. The Division of Insurance will announce the final premiums in October ahead of open enrollment, which begins in November. Conway acknowledged all plans may not meet the 10% target, but views any premium reductions as success.
The insurer perspective
Implementing and sustaining the public option—and a competitive healthcare market—is more complicated than cutting provider rates for one year, said Saskia Young, executive director of the Colorado Association of Health Plans.
“There's a very big difference between hitting what's allowed for the hospital reimbursement rate and reaching the reduction targets,” Young said.
The Colorado Association of Health Plans has opposed the Colorado Option since its inception. “It has inherent flaws that, from our viewpoint, doesn't make it a sustainable program,” Young said.
Insurers are concerned that Colorado isn’t sufficiently considering factors such as rising costs, changes in utilization in the aftermath of the COVID-19 public health emergency and overall inflation, she said.
And while health insurers are going along with the Colorado Option so far, they could opt out and hamper the state’s ambitions. For example, an insurer could stop selling individual and small group policies in individual counties or the entire state, reducing choices for consumers.
Conway points to SelectHealth’s move to enter the Colorado insurance market for the 2024 plan year as evidence that this dire outcome won’t come to pass. “They're a well-established, well-known insurance company that makes very calculated decisions, and they've made the decision to come here, so they know that they're going to be able to be profitable,” he said.
The provider perspective
The hospital industry warns that insurance companies can’t reduce reimbursements without consequences, and that financially struggling facilities will be further strained. “When you mandate, cut or lower rates on commercial private business, it puts a lot more pressure on hospital sustainability,” said Tom Rennell, senior vice president of financial policy and data analytics for Colorado Hospital Association.
Half of Colorado’s hospitals operate with unsustainable margins, Rennell said. Expenses are outpacing revenue, providers are seeing fewer and sicker patients, and they are facing tough decisions about curtailing services or even closing, he said.
The political stakes
If the Colorado Option and Washington state’s Cascade Select plan, which preceded the Colorado program by two years, fulfill their promises, copycats could emerge in other states. Nevada already enacted a law to make a public option available in 2026, while Minnesota and New Mexico are conducting legislatively mandated studies on public option models.
And while it’s been more than a decade since the federal public option died on Capitol Hill, positive results in Colorado and elsewhere could renew interest. “The state-level plans could become foundations for national level action, if they're successful,” Hacker said.
Correction: An earlier version of this story inaccurately described the rules for provider reimbursement rates under the Colorado Option.
