Will State Public Options Deliver on Health Care Reform?

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States developing public options may offer the federal government valuable lessons in expanding access to care at a lower cost.

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During the 2020 Democratic primary race, the debate over how to reform the United States’ health care system took center-stage. Some candidates supported creating a single-payer system operated entirely by the federal government—often called “Medicare for All.” Others, including the presumptive nominee, former Vice President Joe Biden, supported instituting a public option to operate under the framework set up by the Patient Protection and Affordable Care Act (ACA).

But as the debate played out on the national stage, states continued as “laboratories” of health policy by opening the door to state-level public option plans. The Washington state legislature passed public option legislation last year and hopes to complete its roll-out later this year. In Colorado, state Democrats had successfully moved a public option proposal out of committee before deferring the legislation for a year in the wake of the COVID-19 pandemic, which has left hospitals, insurers, and other stakeholders unable to participate in the lawmaking process.

These states are notably crafting their public option schemes to avoid a regulatory veto from the Trump Administration. In so doing, they also raise important questions about whether public option plans will indeed increase access to health care while lowering costs, particularly in light of inequities further illuminated by the COVID-19 pandemic.

When the ACA was first introduced, it included a publicly funded “community health insurance option” that would offer individuals the opportunity to purchase coverage on the same terms as private plans offered on the ACA’s state-based marketplaces. Amid fierce opposition from congressional Republicans and the health insurance industry—and lackluster support from moderate Democrats—the federal public option was ultimately stricken from the ACA.

But where Congress failed to act, states could succeed.

In Washington State, officials predict that the public option plan could lower premiums by about 10 percent by capping the aggregate reimbursement rate for hospitals and physicians at 160 percent of the rate paid by Medicare. Before setting the bill aside, Democrats in the Colorado legislature unveiled a proposed scheme targeting hospital pricing expected to lead to savings estimated between 9 and 18 percent.

By targeting hospitals—which constitute about one-third of U.S. health spending—and other providers, these public option plans seek to deflate the price bloat that has long scourged the U.S. health care system. In theory, lower prices paid to health care providers for services should mean lower costs to consumers in the form of premiums.

The Washington public option is designed for individuals purchasing on the state’s insurance marketplaces, regardless of income, who do not have coverage through an employer or a different government health care program, such as Medicare, Medicaid, or TRICARE. This group of consumers is estimated to make up around 4.5 percent of Washington’s population. In Colorado, anybody who would be interested in purchasing individual health insurance could buy the plan; early estimates found that between 4,600 and 9,200 people could enroll in the first year.

Both Washington and Colorado chose to design their public options as public-private partnerships, meaning that the states would design a plan to compete on their insurance marketplaces, but private insurance carriers would administer the plans. This design has been described as “a privately-administered plan with publicly influenced payment rates.” Unlike the “purist” understanding of a public option, in which a state funds and operates a plan to compete in the marketplace, the states would have regulated plans marketed and sold by private insurers to consumers.

In Washington, the state’s Health Care Authority procures standardized plans from private insurers in a government-contracting system in which private insurers will take on the financial risk for paying for enrollees’ care. Not only do Washington regulators set the cost-sharing rates at which consumers can be charged for deductibles and copayments, but plans also have to comply with value and quality standards, such as certain value-based reimbursement schemes. Regulators have already received submissions from insurers for the public option and reportedly plan to release more information by the end of June.

In Colorado, the scheme would be somewhat more coercive: All insurers who sell individual health plans, both on and off of the ACA marketplace, would be required to offer the state-standardized public option plan. Colorado regulators predicted that it would cost the state $750,000 to launch the state-standardized plan, and less than $1 million each year to oversee the plan.

The public-private partnership scheme appears to be a feature, not a bug, as it may excuse the states from having to obtain a federal waiver—known as a “section 1332 waiver”—that would otherwise be required before the states could modify their insurance marketplaces.

Section 1332 waivers permit states to experiment with state-based-marketplace policies that could ultimately save the federal government money by reducing spending on subsidies such as the premium tax credit or the small business tax credit. To qualify for such a waiver, the state must be able to show that the modification would fit within certain “guardrails,” which include maintaining the same level of coverage, covering around the same number of people, and remaining deficit-neutral. If the state does qualify for a section 1332 waiver, any savings to the federal government generated by the program “pass through” to the state, meaning that the state could use the shared savings to advance the program.

By structuring the public option plan as a private-public partnership, the states would avoid having to develop, fund, and operate a full-fledged insurance plan from scratch. For a state to offer its own plan on its marketplace, the plan would need to meet all of the statutory requirements of a “qualified health plan.” A qualified health plan must not only offer “essential health benefits,” but also must be licensed in its state of operation. State insurance regulations often require plans to have adequate financial reserves and to offer competitively priced products, for example. If a state-sponsored plan cannot independently comply with these state insurance regulations, a section 1332 waiver is required to offer it on the marketplace.

In using the infrastructure of existing insurance companies to administer the plans, states like Washington and Colorado avoid the administrative burden of preparing and submitting a section 1332 waiver application to the federal government.

If Washington and Colorado did fully fund their own plans and had to submit section 1332 waivers, it is not clear whether the Trump Administration would approve them. Most of the current section 1332 waivers exist for state reinsurance programs, and the Trump Administration has rejected some applications for 1332 waivers. The Trump Administration has also suggested that it would be inclined to use the section 1332 waiver authority to authorize non-ACA-compliant plans to compete against ACA-compliant plans on state marketplaces. Even though the Administration has appeared to take an expansive understanding of its powers to grant 1332 waivers, some experts argue that it has done so mainly to undermine, not enhance, the affordability of ACA-compliant plans.

But if a Democrat such as Joe Biden wins the presidential election in November, states may feel more comfortable shaping their public options to rely on federal pass-through funding.

Much of the popular dialogue surrounding the public option focuses on the ability of public option plans to compete with private plans on the marketplace. But legitimate questions arise as to the ability of public options to actually deliver on the promise of lowering costs while increasing access for consumers.

For the Washington public option, participation on the part of providers is optional, meaning that doctors and hospitals that think the plan’s 160 percent aggregate cap on reimbursement is too low can opt out of the plan’s networks. Insurer participation in the state’s procurement process is also optional—though the legislation requires the state to contract with at least one insurer to provide at least one public option plan in each county in the state.

Because provider participation is optional, it may very well be difficult for procured plans to build adequate networks for their enrollees, especially in light of the fact that most private insurance companies pay providers, on average, upwards of  double what Medicare pays for the same services.

Furthermore, even though the primary cost-containment method is aggregate caps on provider reimbursement, Washington regulators may waive the 160 percent cap if procured plans cannot form an adequate network but can nevertheless lower premiums by 10 percent through other cost-control mechanisms. Although Washington regulators have already received applications from insurers for its public option, there is little information about what those insurers’ networks look like. Ultimately, Washington’s public option scheme may not exert enough pressure on private actors to produce lower health care costs.

Colorado’s public option proposal, which would require participation from hospitals and from insurers offering individual plans both on- and off-marketplace, could see greater success in bringing down costs. Since 2009, profits for Colorado hospitals have increased by 280 percent. To address rising prices from hospitals, Colorado regulators released hospital-specific reimbursement caps calculated using a formula that considers factors such as whether the hospital is a critical-access hospital or cares for a high percentage of Medicare or Medicaid. By the state’s estimates, the hospital-pricing formula would save Coloradans purchasing the plan up to 20 percent on premiums. Colorado’s plan would also require 85 cents of each premium dollar to be spent on enrollees’ care rather than on administrative fees or profits, which is a five-cent increase from the federal standard. By requiring more of the premium to go toward care, this helps to keep premiums lower for consumers.

With Washington’s public option slated to begin enrollment on November 1—just two days before the presidential election—voters are unlikely to be able to evaluate whether the public option plan would make effective federal policy. Furthermore, Colorado’s deferral of the plan may lead to substantive changes depending on who wins the presidential election.  But these plans may nevertheless offer important lessons for how the federal government might in the future expand access to health care across the United States.