Colorado Public Option Update


Yesterday evening, the Colorado Department of Health Care Policy and Financing (HCPF) and the Colorado Department of Insurance (DOI) submitted a final report to Colorado Legislature regarding the development of a public health insurance option (the Public Option). In short, the final report’s recommendations closely resemble the draft recommendations issued in early October. However, after holding a number of stakeholder meetings, the HCPF and DOI leadership has elected not to move forward with a standard fee schedule but instead with a formula-based fee schedule that takes into account the inherent variability in hospital operations across the state. In addition, the final report provides added detail on proposed future activities, such as the development of an Advisory Board, use of shared savings under a Medicaid 1332 waiver, and the development of a more robust small group market.

Background. Pursuant to the passage of HB19-1004 earlier this year, HCPF and DOI have been working together to make available a Public Option in the Colorado individual health care insurance marketplace. This Public Option would resemble those individual plans offered by various carriers in the State, but would mandate adherence to a fee schedule instead of charges negotiated off a hospital’s chargemaster (an itemized list of gross charges developed by each hospital for various products and services offered by that hospital). Ideally, the Public Option would be anchored to reduced net hospital charges compared to current alternatives, and would therefore be more affordable.

Keys to the Final Report. While yesterday’s final report closely resembles the draft report issued over a month ago, there are some changes and added details worth considering.

  • The Final Report maintains a focus on hospital pricing (and pricing in general) as a lynchpin to the lack of health care affordability in the State. Considering where Colorado ranks in terms of hospital prices and profitability (#12 for the former, according to a John’s Hopkins University report: [] and #2 for the latter, according to Medicare cost report analyses conducted by HCPF and DOI), this seems appropriate. Items such as pharmaceutical pricing, physician reimbursement and waste received less attention, but could in theory be addressed in the future. Policy initiatives contained in the report omit those that would specifically enable hospitals to address administrative bloat and medical supply expense, instead leaving that to the hospitals to address on their own.
  • The Final Report maintains the draft recommendations of partnering with health care insurers to launch the Public Option. This also makes sense and will probably work. In an indirect way, the Public Option is essentially a coverage expansion, making health care more affordable for those that can’t or won’t purchase health care insurance for financial reasons. But for a proposed increase in the Medical Loss Ratio (MLR), insurance companies ought to be O.K. with the idea of underwriting more policies while avoiding the threat of wholesale disruption. From the State’s perspective, leadership gets to avoid budgetary expense and risk, as well as potential operational disruption (developing and managing a provider network, ensuring eligibility and claims administration is smooth year-to-year, etc.).
  • Instead of insisting that health care insurers build a network off of a fee schedule that averages between 175% and 225% of Medicare prices (yes, twice what Medicare currently pays hospitals for various services), HCPF and DOI recommend that hospitals be paid according to a formula that takes into key variables, such as 1) payer mix (e.g. does the hospital disproportionately serve the poor and indigent), 2) hospital designation (e.g. is the hospital a critical access hospital that needs to stay in business in the interest of Coloradoans), 3) margins, and 4) administrative expenses. This, in my opinion, is a better approach than “one size fits all”. There are inherent differences in hospital operations that tie to Colorado’s diversity statewide, and driving a universal fee schedule whose prevalence likely increases in the future puts vulnerable hospitals at risk of closure. Of note, the Final Report included an updated actuarial analysis of anticipated savings based on the new inputs highlighted above. Where the Draft Report pegged savings at 9-18%, the Final Report has the Public Option saving about 10% vs. current alternatives.
  • The Final Report speaks more specifically to the use of a Medicaid 1332 waiver to channel public option savings into greater affordability in the future. Under federal law, a state can apply for a waiver to direct savings it creates versus projected federal spending, rather than simply abide by the statutory formula. In this case, the State is contemplating using Public Option savings to improve subsidies for individuals between 200% and 250% of the Federal Poverty level (income of about $24-30K), as well as a create a subsidy for individuals between 250% and 400% of the Federal Poverty Level. As noted in both the Draft- and Final Report, these are the individuals who find it the most difficult to afford health care insurance and access the system, even if they have coverage. According the Final Report, the Public Option will create about $89mm in savings in 2022, the first year of availability.
  • Finally, the Final Report tantalizingly hints at the future of the Public Option. Specifically, the Report speaks to the development of options for employers with up to 100 employees. Today, many small employers do not offer coverage to their employees and there are issues that impede coverage for employees and families of those that do. Over the short-term, the Final Report recommends that small business employees be allowed to avail themselves of the individual Public Option. Further, it recommends that this access be extended to small business owners that choose to self-fund with stop-loss insurance. Over the longer-term, the Final Report speaks to the notion of developing a dedicated Public Option for the small group market with the help of health insurers that are participating in the individual market. While it will take time, the implication here is that the fee-schedule based, transparent model of shopping for health care will grow, and that health insurers will be called upon to act as agents of improved affordability for the State.

Broader Implications. As we head into a presidential election in which several Democratic candidates are recommending dramatic changes to the way in which Americans access health care coverage, it’s probably worth noting that Colorado could serve as a model for where we are headed. Colorado is one of the first states in the country to pursue a public option and, in my mind, one of the states with both a tractable plan and the mandate to get it done. Without question, what happens depends substantially on who is elected and why. However, it’s worth noting that the Trump administration is already moving to increase transparency around hospital operations and the contracts hospitals and doctors have with health insurers. Thus, whether we are negotiating Medicare for all, Medicare for all who want it, or a Trump-driven alternative, I think it’s reasonable to expect change in the coming years. In my mind, there are limits to what can be done about labor-driven savings, considering the availability and compensation of physicians and nurses, as well as structural constraints that govern the training thereof. As a consequence, we will likely focus our reform efforts on hospital pricing and efficiency, pharmaceutical pricing and unnecessary utilization. In that context, especially in light of how much of our health care bill is dedicated to hospital inpatient and outpatient spending, we will not be able to enact stochastic reform, but rather incremental reform; we can’t take a dramatic or one-size-fits-all approach without inadvertently affecting access or quality. In that context, an “opt-in” model underpinned by greater regulatory oversight (i.e. a public option, whether it’s called Medicare or not) is the most likely route forward. Colorado’s plan could certainly serve as a blueprint in this regard.

The full report can be found here:


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