Colorado’s public option health plan would pay hospitals 155% of Medicare rates

Polis in May 2019 signed into law a bill (HB19-1004) that directed state officials to create a public health insurance option. Colorado’s Department of Health Care Policy and Financing (HCPF) and Department of Regulatory Agencies in November 2019 released the 102-page proposal. Under the proposal, the state would structure the public option as a public-private partnership by requiring all insurers selling individual health plans both on and off Colorado’s health insurance exchange to offer a public health insurance option. The proposal stated that the plans would be available to “all Colorado residents who buy their own individual health insurance,” and individuals who qualify for federal subsidies to purchase exchange plans would be able to apply those subsidies to the public option plans.

The proposal called for the public option health plans to be available on the state’s individual market by January 2022 and later expanded to the small group market.

The proposal also called for private insurers administering the public option health plans to contract with providers. However, while the proposal would require all hospitals to participate, the proposal did not indicate what would happen if a hospital does not participate.

In addition, the proposal did not specify payment rates for hospitals under the public option plans. The proposal stated that hospitals would be reimbursed by the plans at a rate set by a “clear, public, and transparent formula” established by regulators, lawmakers, and members of a yet-to-be-formed advisory board.

Polis unveils proposal with hospital reimbursement rates

On Monday, Polis announced an updated plan to implement the state public option that includes a formula for determining hospital payment rates. The formula would set the base hospital reimbursement rate at 155% of Medicare payment rates. However, that reimbursement rate could increase based on certain criteria, as well as annual data provided by state hospitals to the Colorado Hospital Association and the Colorado Healthcare Affordability Sustainability Enterprise board.

For example, the Denver Post reports that reimbursement rates for critical access hospitals or individual hospitals that are not part of a larger care network would be 20% higher than the base rate, and 40% higher for hospitals that fit both criteria. Hospitals that treat a large number of patients covered by Medicare and Medicaid also would get reimbursed at a higher rate, according to Conor Cahill, a spokesperson for Polis.

The proposal notes that the average hospital in the state “break[s] even” at a payment rate of 143% of the Medicare rate, meaning the public option plans’ reimbursement rates should allow hospitals to generate a small profit—even at the base rate of 155%. But the public option reimbursement rates would be lower than the rates hospitals typically receive from private health plans. For example, a RAND report found that private insurers in 2017 paid Colorado hospitals about 269% of Medicare rates—and some hospitals received payments twice that rate.

The proposal estimates that the public option plans’ lower reimbursement rates would allow insurers to sell the plans at monthly premiums that are between 7% and 20% lower than the private health plans on the individual market in Colorado. Consumers in rural areas might see even bigger savings, according to the Denver Post.

Next steps

According to CPR, state officials in the next several days are expected to release a new bill detailing the state’s public option plan, including the reimbursement formula and an analysis of the payment rate. State lawmakers then would have to approve the bill in order for the plan to take effect.

Colorado officials do not need the federal government’s permission to implement the public option plan. However, officials are working on a so-called “state innovation waiver” request to help cover some of the costs. Officials plan to submit the waiver for federal approval in the winter of 2021.

Hospitals, health experts raise concerns

Some health experts and hospitals are wary of the new proposal, especially since state officials haven’t yet released the new public option legislation in its entirety.

Katherine Mulready, SVP and chief strategy officer for the Colorado Hospital Association, said the association is unsure of the bill’s total potential impact, but estimated that payment cuts to hospitals under the plan could average between 25% and 56%.

“We always like to see what it looks like in black and white before we pass judgment,” Mulready said. “However, what we have heard directly from the sponsors and certainly from the governor’s office is that the proposal will include hospital rate setting with pretty significant cuts to hospital reimbursement that are not acceptable to Colorado hospitals and really shouldn’t be acceptable to Colorado consumers, either.”

Mulready added that such large payment cuts could force hospitals to increase costs for state residents enrolled in other types of coverage. “These cuts have real impacts to hospitals and the care they can provide their patients,” she said.

David Markenson, president of the Colorado Medical Society, added that physicians are willing to consider cost cuts under the new plan as long as the proposal considers access to and quality of care. “Cost, while important, cannot be looked at in isolation,” he said.

But some experts praised the new proposal, noting that the payment rates outlined in the plan are higher than what a lot of rural and critical access hospitals currently receive.

Adam Fox, director of strategic engagement for the Colorado Consumer Health Initiative, said the plan balanced the need to support hospitals that operate on thinner margins while still bringing down costs overall. “We need to make sure that the rural hospitals and the critical access hospitals get what they need, but we also need to address some of the outrageous costs from some of the mega-hospitals,” he said.

State Rep. Dylan Roberts (D) said the public option legislation likely will receive bipartisan support once it’s released. “The formula is just one part of the bill, so it’s not safe to just look at that and assume that’s how the state option is going to be accomplished.” He added that, under the latest proposal, “The average Colorado hospital can cover all their costs” (Wingerter, Denver Post, 2/24; Daley/Cleveland, CPR, 2/24; Hindi, Denver Post, 2/22; Colorado’s Health Insurance Option Hospital Reimbursement One Pager, 2/24).