Colorado’s public option is bad news

Colorado officials just released their plan to overhaul the state’s health care system. The proposal would make a state-sponsored insurance plan available to Colorado residents shopping for health insurance, starting in January 2022.

Proponents of this “state option” claim it will expand access to affordable coverage and encourage competition in the individual market. But if implemented, it would destroy Colorado’s private insurance market and severely restrict state residents’ ability to access care.

Here’s how Colorado’s plan would work. The state would require all private health insurance companies above a certain size to offer the state option plan. Such plans would cover an array of health benefits, including maternity care and prescription drug coverage. Insurers would be required to spend 85 percent of premiums they take in for the state option on medical claims.

Every Coloradan could purchase a state option plan on the same exchanges that sell Obamacare plans. Individuals who receive federal tax credits and subsidies could use those subsidies to purchase the state option. Even those with Medicare, Medicaid or employer-sponsored insurance could drop their coverage and enroll in the state option plan.

The Colorado Division of Insurance and the Department of Health Care Policy and Financing estimate that premiums for the state option would be 9-18 percent cheaper than similar exchange plans — even though public and private plans alike must cover the same benefits.

That’s only possible because the state option would have the power to underpay doctors and hospitals. The proposed plan would reimburse providers at rates between 175 percent and 225 percent of Medicare’s rates.

By comparison, Colorado’s typical commercial insurance plans pay providers 289 percent of what Medicare does.

Hospitals and doctors rely on these much higher payments from private insurers to make up for the money they lose treating Medicare beneficiaries. In 2017, hospitals received just 87 cents for every dollar they spent treating Medicare patients. All told, that year Medicare underpaid hospitals by $53.9 billion.

The state option’s rates wouldn’t be as low as Medicare’s, of course. But they’d deliver a hit to providers’ revenues — one they’d almost certainly try to compensate for by raising prices for private insurance.

Private insurers would pass those cost increases onto customers in the form of higher premiums. That, in turn, would cause people to switch from private insurance to the cheaper public option. Little by little, employers would respond to higher premiums by ending their benefits programs and inviting their employees to shop for coverage in the state exchange.

The state could accelerate these shifts by forcing health care providers to accept the state option — so every hospital and doctor would be “in-network.” It would be the first time that a state forced health care providers to accept public insurance.

Not every hospital or clinic would be able to absorb the state option’s lower payment rates. Financial hardship already has put every essential rural hospital in Colorado at risk of shutting down, according to a report from Navigant Consulting. Reducing reimbursements further could prompt health care providers to close.

This cycle, of escalating private insurance premiums and surging enrollment in the state option, would repeat until private insurers went out of business. Eventually, Colorado’s public option would be the only option.

That’s bad news for the 2.8 million Coloradans with employer-sponsored coverage — and the more than 400,000 state residents who currently purchase their own health insurance on the individual market.

Sally Pipes is the president, chief executive officer and Thomas W. Smith fellow in health care policy at the Pacific Research Institute. Her latest book is The False Promise of Single-Payer Health Care (Encounter). Follow her on Twitter @sallypipes.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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