By Christine Monahan, Nadia Stovicek, and Sabrina Corlette*

Colorado is one of the first states in the nation to implement a quasi-public health insurance option, requiring private health insurers to offer “Colorado Option” plans that meet heightened requirements to provide residents more affordable, high-quality health insurance plan choices. Colorado generally has high commercial hospital rates—on average 283% higher than Medicare rates—spurring action to reduce costs for consumers. The state legislature enacted this program to drive down health insurance premium growth in the individual and small group markets by encouraging insurers to reduce health care provider reimbursement rates and adopt other cost containment measures.

For 2023, Colorado required insurers to reduce premiums for Colorado Option plans by 5 percent (relative to premiums in the same area in 2021 subject to inflation and other adjustments). For each of the next two years, they must decrease premiums by an additional 5 percent. Premium increases thereafter are capped to medical inflation. The law also requires insurers to meet healthy equity-focused network requirements. In its first year, six insurers offered 36 Colorado Option plans in the individual market, representing 11% of plans; 11 insurers offered 48 Colorado Option plans in the small-group market, or about 10% of available plans. While few of these insurers met their targets during the first year, they also did not face any penalty for noncompliance.

Beginning with plan year 2024, the Colorado Division of Insurance (DOI) is bringing more scrutiny to Colorado Option premiums and underlying provider reimbursement rates and can impose lower reimbursement levels to achieve the program’s premium reduction goal. This blog examines how that process is unfolding.

Enhanced Rate Review Under the Colorado Option Program

When Colorado policymakers first began developing a public option, they envisioned the state would set the rates Colorado Option plans would pay health care providers, but industry groups argued that they could lower costs for consumers on their own. Lawmakers ultimately compromised: private insurers and providers could still negotiate rates themselves, but the state would have significantly more oversight authority.

Specifically, health insurers must notify the DOI whether their Colorado Option plans meet premium rate reduction targets each year. If not, the insurers must explain why and, if applicable, identify any hospital or other health care provider that is a cause for their failure to meet the targets and name them in a complaint. The DOI also may file a complaint against an insurer that fails to meet its targets and bring in any providers it determines responsible for that insurers’ failure to comply. The DOI Commissioner may then hold a public hearing with both the insurers and providers at which the insurers can testify about why specific hospitals prevented them from lowering reimbursement rates, thus limiting their ability to lower premiums.

At the conclusion of the hearing, the Commissioner may set new reimbursement rates that the providers must accept and the insurer must use to recalculate premiums. For hospitals, these Commissioner-set reimbursement rates may be no lower than either an annual floor calculated by the DOI or more than 20 percent lower than the insurer-negotiated rate from the previous plan year.

Under a newly enacted law, the DOI also can establish uniform limits on insurers’ administrative costs and profits for Colorado Option plans; the new caps will be 15 percent for administrative costs and 2 percent for profits for plan year 2024.

The Initial Rate Notifications and Complaints

Despite insurer and hospital assurances that they could bring down costs on their own, only one insurer initially met the premium rate reduction targets statewide for 2024. Two others notified the DOI that they would meet the targets for just a handful of their plans, while the majority wouldn’t meet the targets for any plans. Surprisingly, only one insurer, Cigna, named any providers as responsible for the continuing high premiums in a complaint. The remainder cast aspersions on the program and laid blame for rising rates on factors outside of their control, including inflation. (Recognizing that inflation has been higher than anticipated when they first enacted the law, lawmakers have revised how to account for inflation when calculating the premium reduction targets.)

After conducting its own analyses, the DOI filed complaints against several of the state’s bigger insurers and the hospitals it found were keeping those insurers’ premium rates above target. When naming these insurers, the DOI prioritized insurers offering Colorado Option plans with the highest expected enrollment. When naming hospitals, the DOI identified hospitals whose reimbursement rates had a material impact on premiums and that would generate the greatest potential premium reductions for the named insurer if the Commissioner were to order them to accept the applicable annual hospital reimbursement floor determined by the DOI. (The DOI did not account for the law’s provision that reimbursement rates could not be reduced by more than 20 percent compared to 2023.)

The complaints filed by Cigna and the DOI kickstarted a public hearing process into the named insurers’ rates and named hospitals’ reimbursement levels and triggered a flurry of legal filings from all parties.

The Public Hearing Process

The public hearing process did not proceed as planned, but nonetheless appears to have yielded results. Most notably, before the hearings began, Cigna announced that it had reached an agreement with the three hospital systems it named to lower reimbursement rates. One hospital even agreed to rates below the floor the Commissioner could have ordered. Upon verifying the new rates, the Commissioner cancelled Cigna’s hearing.

The Commissioner also cancelled the other hearings after the insurers and hospitals demonstrated that the objectives of the hearing—reducing the provider reimbursement rates—had been achieved. Specifically, the insurers (Rocky Mountain HMO, Kaiser Foundation Health Plan, and HMO Colorado) attested they agreed to provider reimbursement rates that were as low as the Commissioner could have ordered had the hearings proceeded. The Commissioner, in turn, vacated the hearings, but ordered that the insurers provide documentation to the DOI as part of the rate review process verifying their representations, including (1) plan year 2023 and 2024 rate information, including contracts and rate sheets and documentation showing the negotiated rate as a percentage of Medicare; and (2) a statement demonstrating the overall impact of the provider reimbursement reductions on premiums. Because it is unclear when the insurers and hospitals reached their agreements, this information must distinguish between agreements made before and after March 1, 2023, when insurers made their initial rate notifications. The DOI must use this information to calculate the premium rate reduction resulting from providers and insurers achieving the maximum allowable reimbursement rate reductions.

While the process did not occur as originally intended, DOI still led a public hearing to allow the public to testify generally and about specific insurers. Consumer advocacy groups Colorado Center for Law and Policy and the Colorado Consumer Health Initiative praised the public hearing process to keep insurers accountable. Small business groups testified in support of the Colorado Option program and wanted it to be more widely available and easier to access in the state. One individual testified against the program.

What Comes Next

The Colorado DOI is continuing its review of Colorado Option plan rates, both to ensure the final premiums for 2024 meet all expectations under the law and to evaluate the premium impact of the reduction in the negotiated reimbursement rates and the public hearing process. At a minimum, however, we know that the process generated savings for consumers who will be enrolling in Cigna’s Colorado Option plan and requested rate increases for Colorado Option plans are more than 30% lower than the requested rate increase for non-Colorado Option plans. Additionally, the U.S. Department of Health and Human Services has calculated that the Colorado Option program in conjunction with the state’s reinsurance program is expected to reduce average premiums by 22% in 2024, up from 20% when the reinsurance program alone was introduced in 2020.

Although commonly discussed as an example of a state public health insurance option, the Colorado Option program serves as an example of how states can enhance their rate review processes to lower health care costs and improve affordability. Stay tuned for more from CHIR soon on how additional states have and are exploring using enhanced rate review powers to contain costs.

*Authors’ note: This blog was updated on the afternoon of Monday, September 11, to correct the order of the authors.