Colorado’s Emerging State-Directed Insurance Plan

Jared Polis won the governorship in Colorado last year in part by campaigning as a champion of single-payer health care. Now in office, and with his party in control of both chambers of the state legislature, Polis is pursuing an idea that is more modest and yet not inconsequential: a state-directed insurance option in the individual market. The emerging Colorado plan, which is scheduled for implementation in 2022, might be an indicator of where the single-payer and public option debates are headed in other state capitols — and perhaps nationally too.

 

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Polis’ original idea was to work with other western states and establish a regional single-payer health system, with the participating state governments fully in charge of running a combined insurance plan for all of their citizens. However, as political leaders in Vermont discovered, states face significant obstacles when trying to establish any variant of the single-payer idea. A major problem is that self-insured employer-sponsored plans are regulated by federal law and are outside of the control of state governments. It is difficult to establish a meaningful government-run single-payer plan with such an important and large segment of the market operating under separate rules.

The size and political influence of Medicare is also a barrier. Advocates of single-payer argue that they want to extend the positive features of Medicare to the entire population but Medicare beneficiaries themselves want to be left alone. So too do state and local government employees, who today get private coverage paid for by their respective agency employers. If Medicare beneficiaries and state and local employees are exempted from a single-payer plan, the share of the market that is included shrinks to a size that is not much more than the combined enrollment of Medicaid and the individual market.

Given these realities, Colorado’s elected leaders pivoted to a state-directed option as a more pragmatic pathway to enhancing the public role in the market. In May of this year, the Colorado legislature passed, and the governor signed, a bill which called on key state agencies to develop and submit a plan to the legislature for implementing what is being called a “state option.” The first draft of that plan was released in early October and includes the following recommendations:

  • State-Directed, Privately-Administered Insurance. Colorado is not considering a true public option. The state rejected that approach because of the budgetary risk associated with running a plan itself. Instead, state officials are recommending contracts with private insurers to administer plans that operate in accordance with state directives. Participating insurers would assume all of the financial risk, and would have some flexibility when setting the premiums they would charge for coverage.
  • A Voluntary Option in the Individual Market. All state residents would be eligible to enroll in the plan on a voluntary basis, but, initially, it would be offered only in the individual insurance market (both on and off the exchange). The draft report suggests the state would seek to open up enrollment to the small group market at a later stage, and perhaps eventually to the large group market too. Consumers eligible for premium tax credits and cost-sharing subsidies provided by the Affordable Care Act (ACA) could direct those subsidies toward coverage provided by a state-option insurer. Wakely estimates enrollment in state option plans would be modest initially – somewhere between 4,600 and 9,200 in the first year. This estimate assumes no migration from other plans offered on the exchange because premium-credit enrollees, who have income-based caps set on their premium payments, do not benefit directly when switching to lower-cost plans.
  • A Required Offering by Insurance Carriers. The draft plan recommends requiring all insurance plans (over a certain unspecified measure of size) to offer the state option.
  • Plan Design. The draft plan indicates the state intends to pursue benefit designs that make the product more attractive to consumers than other offerings. The state option would provide coverage for additional primary and preventive services before enrollees have satisfied their plan deductibles. 
  • Payments Tied to Medicare Rates. The key to making the state option a lower-premium option for consumers is the benchmarking of provider payments to what Medicare pays for the same services. Today, commercial insurers pay much more than Medicare for medical care. In Colorado, insurance payments to hospitals are nearly 3 times the rates paid by Medicare. The draft report recommends tying state option payments for hospitals and other facilities to somewhere between 175 and 225 percent of Medicare rates. Wakely estimates this provision would lower premiums for coverage by 10 to 18 percent relative to other offerings in the market.
  • A 1332 Waiver. State officials plan to submit a waiver request to the federal government to capture the savings they believe will occur under the plan. If state option plans are able to offer coverage at a lower premium than other options on the exchange, the federal government’s costs for premium credits might fall (assuming some migration from higher cost plans). The state would like to use whatever is saved to make state option plans even more attractive. There is no guarantee of federal approval of such a request, nor of a timely decision.

While the draft report fills in some of the key details about how the plan would work, there are a few open questions. In particular, would physicians and hospitals be forced to participate in the state option? The report says only that if access is impaired in certain regions, the state might compel participation to ensure patients can get needed services. Compulsory participation is a highly controversial idea — so controversial that it could greatly complicate passage of the final plan in the Colorado legislature.

Colorado’s draft plan for a state option signals the intent of elected officials to move forward with an aggressive plan, but it is not a done deal. The state legislature must still approve key parts of the program’s design. The battle seems likely to center on whether the new state-directed plan, which is optional for consumers, will be optional for the hospitals and physicians who care for them too.

James C. Capretta is a resident fellow at the American Enterprise Institute.