The Public Option Debate Moves to Colorado

A signature initiative of the Biden 2020 campaign—a “public option” health insurance plan—was an early casualty of a Congress controlled, but only barely, by Democrats in 2021. The idea has not gone away entirely, however, and is now seen as a prominent state-focused initiative. A major test is set to begin in Colorado in 2023, with the Biden administration in full support. How this experiment goes could influence the future direction of national reforms.

In 2020, it was reasonable to think a public option—so-called because of the government’s heavy involvement—might be one of the big agenda items in Congress if Biden won. After all, he had championed the concept frequently as a candidate, especially during the primaries. But with Congress so evenly divided after the election, it was clear there would not be sufficient support, even among Democrats, to act on a national plan.

A major obstacle is the health sector itself. While a public option would be less disruptive than Medicare for All, insurers, hospitals, and doctors are still wary of it. Insurance companies object to competing with a publicly run (or at least publicly backed) plan, fearing, with some justification, that the government might tilt the playing field against them. For their part, medical service providers worry that a public option will cut their fees unreasonably and still expect them to provide high-quality care to patients.

Those concerns do not go away when states take the lead instead of the federal government, but Democratic officials in several of them are working to find ways to neutralize the critics. So far, the governors in Washington, Nevada, and Colorado have successfully pushed plans through their legislatures, with others actively considering following similar paths.

Some qualification of what is actually moving forward in these states is required. None of them are implementing a public option as the concept was originally conceived. Nationally, sponsors wanted to create a new, federally run insurance plan that would compete with private offerings. It would be administered like Medicare, with the government collecting premiums directly from enrollees and paying hospitals and doctors based on regulated payment schedules.

That’s not what these states are doing. In those with enacted plans, the state governments are not running new insurance offerings directly. Instead, they are pushing the private insurers already competing in their markets to supplement the policies they sell to consumers with one that adheres to stricter state regulations, including limits on what can be charged for enrollment.

Colorado is an especially important early adopter of this concept because its plan has been blessed by the Biden administration and is being promoted as a model for others to follow. 

“The Colorado option,” as it is called by state officials, is set for a five-year test starting in 2023 following enactment of a state law in 2021 and federal approval of the state’s section 1332 waiver request. Such waivers were authorized in the Affordable Care Act (ACA) to allow states to experiment with program designs that differ from the standard model established in the law. For instance, states can design different approaches to subsidizing coverage, or change certain insurance regulations, although the state-initiated states cannot proceed if they would increase federal costs or reduce insurance enrollment. (Washington now has submitted a section 1332 waiver for its public option plan too, and Nevada is expected to do likewise in short order).

Approval of the Colorado waiver was crucial for giving the initiative momentum because it confers credibility and unlocks additional funding. The federal financial support for the Colorado plan—estimated at $214 million in 2023 and $1.618 billion over five years—is provided because the government expects costs for ACA-authorized premium tax credits to fall below what would occur without the Colorado option. Approval of the state’s waiver allows the federal government to send the savings to the state to bolster support for enrollment and accessing care. The state plans to lower cost-sharing for some low-income consumers, make coverage available to persons ineligible for ACA support because of their immigration status, and lower premiums for households that receive assistance based on single rather than family coverage as a consequence of the so-called “family glitch.”

Wakely, the actuarial firm, agrees that the Colorado option will lower premiums and federal expenditures. However, the firm’s calculations separate the effects of the introduction of the Colorado option from extension of a previous waiver instituting a reinsurance pool that compensates insurers with an unusually high number of expensive cases (the presence of this protection allows insurers to be more confident when holding down their premiums to attract market share). Both reforms are now approved for 2023 to 2027, with the Colorado option expected to reduce federal costs by only $500 million over the course of the five-year test (the rest of the savings is from the reinsurance program). For consumers, Wakely estimates the new insurance offerings will lower overall premiums in the market by 1.3 percent in 2023, and 13.7 percent in 2027, which will result in about 25,000 additional people signing up for coverage.

What gives public option plans teeth are low payment rates and required participation. State officials have substantial leverage when they can force private insurers to sell public option plans and compel hospitals and doctors to care for the patients enrolled in them. With the providers blocked from opting out, the state can impose lower fees for medical services, which in turn allows insurers to charge lower premiums.

The key design features of the Colorado program signal this is the direction it is going:

• Compulsory offerings. Beginning in 2023, all insurers offering coverage to individuals (and their families) or small businesses must offer Colorado option coverage in addition to the other policies they sell.

• Standardized benefits. All Colorado option offerings will have the same standardized benefit package, as specified in state regulations.

• Capped premiums. In 2023, insurers must offer Colorado option plans that have premiums 5 percent below what they charged in the same county in 2021, adjusted for inflation as measured by the consumer price index (CPI) for medical care. In 2024, the required premium savings is increased to 10 percent, and then to 15 percent in 2025. After 2025, the premiums can grow no more rapidly than the CPI-U for medical expenses.

• Expansive provider networks. Insurers must offer Colorado option plans with networks of participating providers that are as broad as their other offerings, with a special emphasis on reaching populations that have traditionally had more restricted access to services.

• Fall-back state intervention. Starting in 2024, if insurers cannot meet the law’s requirements, either because providers refuse to participate or insurers cannot meet the premium targets, the state can step in and force hospitals and doctors to accept patients enrolled in Colorado option plans with fees that are low enough to keep premiums below the allowable amounts.

A premise of the Colorado option and similar plans is that it is possible to cut reimbursement rates for hospitals and doctors without impairing the quality of services provided to patients. The provider community strongly disagrees with this assumption, of course.

What that means for the future course of the public option is not yet clear. It may be that hospitals and doctors in Colorado will reluctantly accept reductions in their incomes to avoid a confrontation with the state. So far, however, there is no real indication of that occurring, especially as providers become concerned that the premium targets were set without a clear view of the surging inflation rates seen in recent months.

It is more likely, therefore, that federal approval of Colorado’s waiver will not be the final word on what is implemented. Inevitably, there will come a moment when hospitals and doctors object to the planned reductions in their incomes implied by the public option’s premium caps. At that point, the fight is certain to move back into the political arena, with an outcome that is far from certain.

James C. Capretta is a senior fellow and holds the Milton Friedman Chair at the American Enterprise Institute.