Colorado is trying to pass something that they are calling a public option. Public options have become an almost catch-all term for a wide variety of programs that may be trying to solve a wide variety of problems (some of which are mutually contradictory). I think the problems that Colorado is trying to solve is competition in rural areas and a desire to bring down gross premium levels for the ACA individual market in the short term and the entire health insurance market in the long term. Those problems (little rural competition, and high price levels) are real. They are also really hard to solve.
Premiums can be brought down in one of three ways:
- Reduce administrative overhead
- Pay for fewer services
- More cost sharing (lower actuarial value)
- Restricted list of services covered
- Don’t cover people with expected high costs
- Get the population healthier
- Pay less for services
Reducing overhead is popular but there is not a ton of squeeze left between a well run ACA insurer that is engaged in active case management and Medicare fee for service (FFS) which pays claims with minimal case management. It is quite plausible that Medicare FFS has too little administrative overhead even if the average ACA insurer has too much. The possibility region of optimal overhead might not be that big.
Paying for fewer services is the old, pre-ACA way of making money in the individual market: don’t cover a lot, charge a high deductible, and work really hard to hopefully prospectively but if need be retrospectively avoid covering people likely to generate big claims. The ACA has significant problems with high cost-sharing, especially in the bronze and silver (non-CSR) plan variants. I don’t think Colorado wants to go this route of exacerbating cost sharing as a barrier to care. Getting the population healthier is likely a mutli-year climb in the most optimistic scenario and that has significant free rider problems for any single insurer that wants to spend overhead cash on improving population health.
Finally, paying less for services is the final way to reduce premiums. There are two basic ways to pay less for services. The first is to use competition effects to build a narrow(er) but adequate network where price concessions from some clinicians and hospitals are gained by the promise of a lot of volume of work. The other is to use administratively set prices like in Medicare to drive down compensation rates. 97% of all licensed docs take Medicare because Medicare and Medicare Advantage control enough volume of frequent utilizers to make the business case worthwhile. States with a public option scheme can attempt to develop a large bolus of linked business to drive better rates for a public option by requiring any clinician that wants to be in-network for the state employee health plan and Medicaid to be in the public option network at the administratively set rate. The ACA individual market is fairly small and fragmented so it is unlikely to have enough mass or expected demand to drive great rates on its own.
So I’m scratching my head when I saw this report out of Colorado:
— Marianne Goodland 📰 (@MGoodland) May 25, 2021
If participation is voluntary, then the public option has little leverage to get good pricing from clinician groups.
How is this different than a major insurer running their own network?