In his 2020 presidential campaign, Joe Biden proposed to establish a “public option”—the choice to buy health insurance operated by the government, rather than from private insurance companies. The idea made little headway in Congress, but Colorado recently secured a waiver to use federal funds to set up its own public option, and Nevada, Washington, and other states have moved to establish similar arrangements.
Democratic politicians have long argued that a public option may slow the growth of health-care costs. But as states work to implement these proposals, legislators have been consistently more eager to expand funding for medical services than to squeeze hospital revenues. Public options have therefore proved more expensive, rather than more affordable, than standard private insurance plans. This has made them less appealing to consumers but has nonetheless given states an opportunity to demand inflated subsidies from D.C.
In his presidential campaigns, Bernie Sanders advocated the wholesale replacement of private health insurance with a “single-payer” system, whereby the federal government would become the sole permitted purchaser of essential medical services. But many voters feared that this would raise their taxes while reducing their access to care. Sanders’s more moderate opponents tended to endorse a “public option,” which would make available a health-insurance plan administered by the federal government alongside existing private alternatives.
Some progressives hope that tax, subsidy, and regulatory advantages could quietly turn a public option into a de facto single-payer system. But so long as alternatives remain available, any new public plan faces the same trade-offs that constrain private plans with which it must compete.
A public option doesn’t automatically reduce insurers’ administrative costs, which mostly result from assessing the legitimacy of reimbursement claims made by medical providers. In fact, state public options all use private insurers to process claims. Nor can public options easily purchase care at a discount: if they pay less than the market rate, physicians will simply opt to treat patients from private plans instead, while hospitals will similarly resist attempts to cut their revenues.
These problems are increasingly apparent. The public option in Washington State struggled to draw hospitals and has thus been unavailable in most counties. After it hiked rates to entice them, public plans were priced higher than those of private competitors, and so attracted few enrollees.
In Colorado, legislation requires insurers to offer a Colorado Option plan in every county where they do business on the individual market. These plans must reduce premiums by 15 percent in 2025, after which the premiums may go up only at the national rate of medical inflation. If the insurers can’t get hospitals to control their spending, the state insurance commissioner can step in and fine the hospitals.
The state argued that this intended reduction in premiums would generate $214 million in savings in federal subsidies for exchange plans. Not waiting to see whether these savings materialize, the Centers for Medicare & Medicaid Services awarded the funds to Colorado through an Affordable Care Act waiver to expand subsidized benefits for the plans. As a result, Colorado Option plans will cover out-of-pocket costs that otherwise would have been associated with primary care and mental-health visits. The state will also provide federally funded health-care services for recipients currently ineligible for direct federal subsidies or Medicaid, due to an offer of employer-sponsored insurance to relatives or the lack of lawful permanent immigration status. (That measure entitles low-income “undocumented residents” to comprehensive medical benefits without premiums or out-of-pocket costs for primary care, mental health, or substance-abuse treatment.)
But the Colorado Option’s capacity to generate savings is highly suspect. Its enacting statute requires provider networks to be at least as broad as already-existing ones, increasing the negotiating power of providers to push up reimbursement rates. And it establishes specific statutory reimbursement floors, at levels up to 195 percent of Medicare fees—in many cases exceeding rates that insurers currently pay hospitals.
By contrast, the legislation is vague about reducing payments to providers. It specifies only that the insurance commissioner may impose lower rates on hospitals if insurers fail to meet premium or network targets. No such authority applies in the first year of operation, and only a single insurer has met the cost-reduction target. Nor is it clear that rising health-insurance costs, driven by expanded benefit packages and volumes of procedures, can be offset by cuts in payments for each procedure. As a result, Colorado Option plans on offer for 2023 will cost more than standard plans available on the individual market.
If left to its own devices, Colorado would surely soon abandon its public option. The post-ACA individual market is already struggling to attract insurers, and three more carriers exited Colorado recently. But federal taxpayers, not the state of Colorado, will be on the hook if the Colorado Option fails to generate the savings promised in return for the waiver funds. Following the Inflation Reduction Act, 74 percent of enrollees on the individual market receive federal subsidies, which increase automatically to meet any increase in premiums. In the past, oversight of health-care waivers has typically been poor, and the Government Accountability Office has concluded that “demonstrations have increased federal costs without providing results that can be used to inform policy decisions.”
For all the claims that the public option will slow the growth of health-care costs, the experience of hospital politics and federal aid to states suggests that stepped-up regulation of hospital pricing is more likely to drive them higher still.
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