Colorado is among a small group of states with proposals to tamp down rising health care costs and expand health insurance coverage through a public option. Colorado lawmakers in the House and Senate are working to reconcile versions of public option legislation, after adopting amendments that made significant changes to the original proposal. The legislation has been somewhat of a moving target, which makes analyzing its potential effects like “capturing lightening in a bottle.” However, throughout the process, legislators’ primary aim has been to reduce premium costs for consumers.

Colorado’s efforts are not unique. Legislators in Nevada, Connecticut, and Oregon have also debated public option bills this year, and Washington recently enacted legislation to strengthen its existing public option program. This post is the second of a blog series spotlighting these state public option efforts and focuses on Colorado’s experience.

Colorado has been at the Forefront of Health Reform

Colorado’s longstanding efforts to tackle problems in health care affordability and access were on full display in 2016 when a ballot measure for a single payer health care program was presented to voters. The proposal was overwhelmingly defeated and supporters called the approach “too soon and too fast.” In 2018 Democrats took control of the House, Senate, and Governor’s office, which led to enactment of a number of health laws, including a state reinsurance program and new protections for patients against surprise out-of-network billing. In that year the legislature also enacted a bill directing state agencies to submit a proposal to the legislature outlining the design, costs and benefits of a state public option.

That report was published in the fall of 2019 and detailed recommendations for implementing a public option on and off the health insurance marketplace, to be administered by private insurers, similar to the program operating in Washington state. The agencies also recommended that prices for hospitals be set through a public and transparent formula to “drive rational pricing and hospital accountability” without setting a Washington-style payment benchmark tied to Medicare. At the beginning of 2020, lawmakers were debating legislation to implement these recommendations until COVID-19 upended this and other policy priorities.

The 2021 legislature is revisiting the issue. This session’s bill started out as a more recognizable version of the public option, with the state administering a publicly funded plan to compete with private insurers on the state-based marketplace. The original proposal included a three-year glide path for insurers to reduce premiums by 20 percent or else face implementation of the public option. However, throughout the session legislators have made significant changes to the legislation in response to concerns from hospitals, doctors, and insurers.

A Public Option in Name Only?

The “public option” has lacked a consistent definition, and some argue that Colorado’s latest version doesn’t deserve the public option label. However, there are several provisions that would significantly expand the state role in the design of health plan benefits and potentially the determination of premium rates. Key provisions of the bill include:

• The commissioner of insurance is directed to establish a standardized set of health benefits and associated cost-sharing for “public option” plans.
• The public option plans are to be offered statewide, at the bronze, silver, and gold coverage levels, by private insurers on Colorado’s marketplace for the individual and small-group markets starting in 2023.
• Each year, insurance carriers are required to reduce premiums for the public option plan by six percent for a total of an 18 percent premium reduction by 2025 compared to their 2021 plans. (The Senate version of the bill lowered this target to 15 percent, with a five percent reduction each year).
• Insurers selling plans on the individual and small group markets are required to offer a public option plan and the state is authorized to suspend (or in the House version, revoke) a hospital license for failure to accept the public option.
• Rates are set through private insurer provider negotiations, but failure to meet premium reduction targets triggers a public hearing process with the commissioner authorized to establish reimbursement rates to meet the savings targets while also maintaining network access.
• The state must apply for a waiver under section 1332 of the Affordable Care Act in order to generate potential pass-through payments from the federal government for the lower premium tax credits that result from any premium savings.

Advocates of the public option in Colorado have expressed concerns that the program’s reliance on private insurers to negotiate cost savings with providers could enable the industry to avoid accountability. They’ve also noted that implementing the public option through private insurers in Washington has led to higher-than-expected premiums and anemic enrollment, at least in that program’s first year. However, there are some key differences between Colorado’s proposal and Washington’s public option. While Washington had challenges convincing insurers to participate in the public option, Colorado’s legislation includes an explicit requirement that all insurers that offer plans on the individual and small-group markets to participate in the Colorado option.

Washington’s insurers also struggled to convince providers to accept the public option’s mandated reimbursement rates. Colorado’s legislation provides greater incentives for them to do so. If Colorado insurers can’t find a sufficient number of providers to participate, the bill first authorizes them to seek nonbinding arbitration to determine rates. If that does not work, then the insurance commissioner must hold a public hearing. Based on the evidence presented at that hearing, the commissioner may then establish the reimbursement rate for hospital services under the plan. The bill then grants the commissioner the authority to require state-licensed hospitals to accept that reimbursement rate if their participation is necessary to ensure the adequacy of the public option plan’s provider network. While the House version of the bill includes the option for the state to revoke a hospital’s license if it does not participate, Senate leaders softened that to a suspension. Both bills would also impose financial penalties on hospitals and health care facilities (and in the House version, physicians) who do not accept the Colorado public option.

Some have argued that Washington’s cap on provider reimbursement (160 percent of Medicare) was set too high to achieve significant premium savings. While Colorado’s rate-setting approach does not establish a cap, it does set a floor of 155 percent of Medicare. With average commercial prices for hospital services in Colorado currently at 269 percent of the Medicare rate, consumers could see significant savings if the commissioner reduces hospital reimbursement to 155 percent of Medicare.

Realistic Expectations

It’s no surprise that Colorado’s legislation closely mirrors the approach taken in the only state that has successfully passed a public option plan. As in Washington, Colorado’s legislators have negotiated with insurers and providers in order to reduce their opposition to the proposal. Colorado’s legislation may be considered watered down, but one need only to look to the fate of Connecticut’s public option to be reminded how challenging it can be to balance politics and policy. As the legislation moves into a conference negotiation between House and Senate leaders, lawmakers will need to consider what unique combination of carrots and sticks can achieve the premium savings that policymakers hope for.