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Colorado’s public health insurance option puts a bull’s-eye on hospital profits. But some rural facilities could make more.

The state’s proposed payment formula gives high priority to independent and critical access hospitals, though some who would benefit question what the consequences will be

The entrance to Lincoln Community Hospital in Hugo. The hospital, which is community owned, opened in 1959. (Provided by Lincoln Community Hospital)
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Situated in the small Eastern Plains town of Hugo, the 60-year-old Lincoln Community Hospital is one of the most affordable in Colorado.

A study last year found that it currently charges privately insured patients on average only slightly more than the rate that Medicare pays for the same services, giving Lincoln Community the third-lowest prices of any hospital in the state. It is also community-owned and a specially designated “critical-access hospital,” a title bestowed on small, remote hospitals that provide vital services to rural areas.

All of those things should work to its advantage when lawmakers on Thursday finally introduce the much-awaited bill to create a public health insurance option in Colorado. The proposal comes with a government-dictated formula setting out the prices hospitals can charge to people covered by the public option.

For most hospitals across Colorado, this will mean a pay cut — sometimes a significant one. That’s how the proposal intends to create big savings for health consumers, and that’s why many hospitals so vocally oppose the idea.

But rural, independent hospitals like Lincoln Community could be in for a huge raise.

Kevin Stansbury, Lincoln Community’s CEO, said his early estimates show the public option plan would pay his hospital double the Medicare rate, a roughly 60% increase from what it gets now. In a back-of-the-envelope analysis, The Colorado Sun found at least 10 hospitals — all rural — that appear certain to see higher payments under the public option than what they currently receive from private insurance companies. And there could be more.

State Rep. Dylan Roberts, the Avon Democrat who will be one of the sponsors of the public option bill, said it’s “absolutely true” that the bill was written with the goal of paying rural hospitals more.

“Not only were we never going to introduce a bill that hurt our rural hospitals, we wanted a proposal where some could be rewarded for their current position,” Roberts said.

Read more health stories from The Colorado Sun

But Stansbury is wary of the proposal, questioning whether it will actually be able to lower insurance prices in his community and whether it will encourage insurance companies to send more people to hospitals in the city getting paid a cheaper rate.

“Off the top (the public option) would seem like it would be a good thing for us,” he said. But, he added, “we have some concerns about that.”

His skepticism about his hospital’s potential windfall underscores the ongoing tension between public option supporters and health care leaders in Colorado. Even when supporters say the public option will be a good thing for parts of the health care industry, industry members don’t trust that lawmakers understand all the implications of what they’re doing.

The website for Connect for Health Colorado, the state’s health insurance exchange, shown in October 2018. (Eric Lubbers, The Colorado Sun)

How the price formula works

To consumers, Colorado’s public option would look an awful lot like every other insurance plan.

Rather than being government-run, it would be administered through private insurance companies, which will sell the plans in the individual coverage market. The “public” part of the public option is the price formula, which state officials unveiled last month.

MORE: Colorado is forging ahead on new health care models while the nation waits

The formula implements what is known as Medicare reference-based pricing. That means it lists prices as a percentage of what Medicare pays for the same service.

Medicare and Medicaid generally pay hospitals less than what hospitals need to break even on a service. The state estimates that means hospitals need to charge privately insured patients 143% of the Medicare rate in order to make up for the shortfall. In other words, if Medicare pays $1,000 for a service, the break-even price hospitals have to charge privately insured patients is $1,430.

To give hospitals a little extra margin, the state set the payment floor for the public option at 155% of Medicare’s rate. No hospital would be paid less than that.

But hospitals can make more if they meet certain criteria. So, independent hospitals would receive a 20 percentage-point bump, as would critical access hospitals. Hospitals like Lincoln Community that are both get an extra 40 percentage points.



Hospitals that treat large numbers of patients on Medicare and Medicaid are eligible for more, and hospitals doing a better-than-average job of controlling their costs could get additional bumps. Hit the trifecta, and some hospitals could get more than 200% of the Medicare rate for caring for a public-option patient.

But it’s unclear how many hospitals will actually reach that.

The state has not released a hospital-by-hospital estimate of what the payment formula will mean. Roberts said that will happen soon.

In the meantime, hospital leaders say they are at a loss to calculate precisely what the public option’s pricing formula will mean for them.

“It really only tells a half-story,” Katherine Mulready, the Colorado Hospital Association’s chief strategy officer, said of the formula. “There are a lot of variables.”

Spokespeople for two large Colorado hospital systems — UCHealth and Centura Health — both said in statements that their hospitals don’t have enough information to calculate the public option’s impacts. Both systems have hospitals along the Front Range and in rural areas of the state.

“We are anxiously awaiting the release of the draft public option bill to understand its impact on consumer choice, accessibility and affordability for Coloradans,” said Joel Malecka, a spokesman for Centura. “What has been released so far is insufficient for us to adequately comment on the impact to our communities and hospitals.”

St. Anthony Summit Medical Center (Courtesy of Centura Health)

Winners and losers

But it is possible to get a sense of which hospitals could be paid more and which could be paid less.

Last year, the nonpartisan Rand Corp. published a study on hospital prices relative to Medicare rates across the country. The study found that Colorado hospitals, on average, charged privately insured patients 269% of Medicare rates, making Colorado’s prices the sixth-highest of the 25 states included in the study.

The study also broke down prices by hospital. In Colorado, they ranged from the 115% of Medicare rates charged by Aspen Valley Hospital to the 573% of Medicare charged by Colorado Plains Medical Center in Fort Morgan.

In simplest terms, the hospitals that stand to lose the most money are the ones currently charging the most — especially since many of those hospitals won’t be eligible for a number of the rate bumps in the state’s proposed formula.

MORE: Colorado hospitals hate the plan to cap their prices. Here’s how they want to control health costs instead.

Fifty-one Colorado hospitals in the Rand study charged more than 200% of Medicare rates, on average. Of the 27 hospitals in the Rand study that charged more than 300% of Medicare rates, only four are independently owned and only three are critical-access hospitals. (One is both.)

Overall, an actuarial analysis released along with the formula, estimated the public option formula would slash prices at hospitals by 40% on average.

Leaders of some of those hospitals have begun to warn about what happens if the public option cuts their payments that significantly.

“If a rate is set at 175% to 200% of Medicare,” Lee Boyles, the CEO of St. Anthony Summit Medical Center in Frisco, said at a recent forum, “that’s going to have some real drastic implications for the services we provide.”

St. Anthony Summit Medical Center CEO Lee Boyles speaks at a public forum in Frisco on Feb. 21, 2020. (John Ingold, The Colorado Sun)

St. Anthony Summit, which is owned by Centura, was the second-most expensive hospital in Colorado in the Rand study, charging privately insured patients 503% of Medicare rates on average. Boyles said the hospital has been working to reduce costs. But he said that’s difficult in Summit County — where the hospital, which is one of the county’s biggest employers, has to add 100 people to its staff every winter to handle ski injuries.

“I’ll be the first to raise our hand,” he said. “Health care is astronomically expensive. … But when I’m looking at the public option, honestly being selfish I guess, I look at what is it going to do for Summit County?”

On the other end of the spectrum, each of the 10 hospitals The Sun identified as likely to be paid more is a critical-access hospital and all but one is independent. Six are located on the Eastern Plains, with the rest scattered across the mountains and the San Luis Valley.

A sign outside Saint Joseph Hospital in Denver, photographed on Oct. 22, 2019. (John Ingold, The Colorado Sun)

Lingering unknowns

Stansbury said the state has left significant unknowns in the payment formula. For starters: What exactly is the Medicare rate?

Medicare rates aren’t uniform across hospitals. The federal government calculates its payment for each hospital based on a handful of unique characteristics. State officials say that variability will be preserved in the formula.

But Stansbury said Lincoln Community’s Medicare rate changes every six months. “It can change pretty dramatically, honestly.”

Does that mean the public option rate will fluctuate that often and significantly, as well?

“I just want someone to tell me what Medicare rate they’re going to be using,” Stansbury said.

There are other concerns. The actuarial analysis released last month, using a different set of numbers than the Rand study, estimated that hospitals in Colorado are currently charging patients who have private health insurance that they buy on their own 280% of Medicare rates, on average. But a previous analysis by the same firm put that number at 254% of Medicare rates. An analysis released even earlier put the number at 289%.

“Part of the challenge we’re having in estimating impacts,” Mulready, with the hospital association, said, “is it’s really hard to understand how deep the cuts will be if you don’t understand the status quo.”

The most recent analysis estimated that Coloradans who buy the public option will save an average of 12% on their premiums — and slightly more on the Eastern Plains. But Stansbury wonders how that can be if his hospital and others around him are going to be paid more.

“Mathematics would assume those rates would go up,” he said.

Roberts said insurance companies, by paying less at bigger hospitals, will be able to distribute the savings around the system. But Stansbury said the proposal needs to create incentives for insurance companies to keep care local. Otherwise, insurers will send all their patients to the least-expensive hospitals in the public option formula.

Already, Stansbury said there is a trend of insurers sending patients to freestanding facilities hours away to get scans rather than letting those tests happen closer to home at Lincoln Community.

“We think that’s bad for patient care,” he said, “and we also think it’s bad for our long-term viability.”

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