Legislative leaders and Gov. Jared Polis have rightly identified increasing competition and improving affordability as core priorities for the proposed public option health insurance program.
Whether or not it will achieve these goals could hinge on an important question that has been drowned out in this largely ideological debate: should all health plans in the market be required to participate, as Gov. Polis has proposed, or should there be a competitive bidding process by which a single plan is selected as the public option for each region of the state?
While it may seem trivial, this distinction is vital due to the esoteric manner in which premium subsidies for middle class families under the Affordable Care Act are calculated.
In brief, because the amount of the subsidy is determined by the premium of the second-lowest cost “silver” plan, affordability for subsidized shoppers increases as the gap between the cost of that benchmark silver plan and other, cheaper options widens.
Because of this, cost-cutting programs that are not carefully designed can have the perverse effect of shrinking that gap and increasing costs for subsidized consumers (which includes those with annual income of up to about $100,000 for a family of four). This population represents 76% of people who enrolled via Connect for Health Colorado in 2019.
In a Health Affairs article last September, David Anderson of Duke University and I found that adopting an approach where a single public option plan is selected for each market in Colorado could reduce the premiums middle class families pay by as much as 73%.
By sharp contrast, spawning multiple public option plans could increase premium costs for these households by as much as 16%.
Subsequent analysis by actuaries at Wakely Consulting drew a similar conclusion. They found that the single public option plan strategy could reduce premium costs by as much as 83% while the multiple public option plan strategy could increase those costs by up to 4% for the subsidized population.
This is precisely the dynamic that consumers were confronted with during the recent open enrollment period, when many realized that the newly adopted reinsurance program had caused their premium payments to go up.
Supporters of the multiple public option plan approach respond that the state could use funding from a federal waiver to remedy the adverse impact on the subsidized population, but that strategy is contingent on: (1) President Trump losing his reelection bid (he has already expressed opposition to rate-setting waivers); (2) an untested public option waiver surviving an inevitable legal challenge from industry opponents; (3) federal officials agreeing with Colorado’s savings assumptions; and (4) state officials agreeing on targeting these savings to middle class subsidies.
In other words, it’s a highly risky strategy to accomplish the same outcome that could be achieved with the single public option plan approach, which does not require a waiver.
The single plan approach will also drive competition among insurers that should enhance the value of the public option for all.
If insurers are required to compete for the unique status of being the public option, they will be under significant pressure to innovate their benefit design and other features to win this opportunity. Forcing all insurers to be public options does not create these competitive forces.
Some counter that other health plans will reduce their premiums to compete with the single public option, which would generate the same unintended affordability consequences for the middle class that would occur under a multiple public option approach.
But that argument assumes that hospitals that have been pressured to discount their prices for the public option plan would then turn around and do so voluntarily for other plans. That’s a dubious assumption, based on recent messaging from the industry.
To further protect against the devaluation of premium subsidies, the state could achieve hospital-related cost savings by implementing a “best-price” policy in lieu of setting hospital-specific rates.
Under the best-price approach, hospitals could compete to provide the public option the steepest discount below their market rates.
The state could still be afforded authority to mandate best-price rates from hospitals if participation is inadequate to generate meaningful savings.
Another critique of the single-plan approach is that it will not resolve Colorado’s problem of 22 counties having only one insurer.
The opportunity to enter a market as the single public option plan, however, increases the incentive insurers have to come into these noncompetitive areas.
Mandating that the sole insurer that is already there be a public option has the opposite effect; it creates a disincentive for a new plan to enter that market.
Regardless, under either the single or multiple public option plan approach, the state could be given authority to mandate a second plan participate in these counties if necessary, as the governor has requested.
Finally, some object to the single public option plan strategy by suggesting it will drive existing insurers out of the market. Currently, however, the Colorado Association of Health Plans is strongly opposed to the public option in large part because all plans would be forced to participate.
Narrowing that market-wide mandate to just apply to select counties should be more conducive to maintaining or growing plan participation in the state.
Evidence from across the country also shows that health insurance markets will bear the presence of a plan priced 8-10% below the competition; that is the case in about 25% of counties nationwide.
The actuarial analysis referenced above predicts a public option that offers such a discount will capture 26.8% of the individual market statewide. That’s a substantial but not destabilizing portion.
This may seem wonky and complex, and it is. In this case, however, good policy is also good politics.
Only if the public option proposal will deliver real savings to people who need it most, while driving new competitive forces in the market, will it pass this spring in the face of vigorous industry opposition and bring sustainable relief to Colorado families.
Billy Wynne is the Chairman of the Wynne Health Group and Executive Director of the Public Option Institute. Previously, he was Health Policy Counsel to the U.S. Senate Finance Committee. He lives in Greenwood Village.