Healthcare Policy Researchers: State “Public Option” Experiences Mixed

Sept. 16, 2021
Healthcare policy researchers have examined the “public option” initiatives in Washington, Colorado, and Nevada, and come away with a very mixed, nuanced analysis of how well they’ve gone

At a time when discussions around expanding health insurance to more Americans continue, despite potential political blockage, a team of healthcare policy researchers has examined the experiences of the states of Washington, Colorado, and Nevada, with the concept of the “public option.”

Writing in an article published online on September 15 in The New England Journal of Medicine online, and in the Sep. 16 print issue of that publication, Erin C. Fuse Brown, M.P.H., J.D., Katherine L. Gudiksen, Ph.D., and Jaime S. King, J.D., Ph.D., write in “State Public Option Plans—Too Modest to Improve Affordability?” that the development of state-level “public options” involves considerable complexity—and, so far, inconsistency.

The authors’ affiliations are with, respectively, the Georgia State University College of Law (Atlanta); the University of California Hastings College of the Law (San Francisco); and the University of Auckland, Auckland Law School (Auckland, New Zealand).

The article’s authors begin by explaining the “public option” plans created by legislatures in Washington, Colorado, and Nevada, have been significantly narrowed in scope, as they’ve evolved forward, meaning that, at its core, a public option plan, which is “a government-sponsored health plan that pays providers publicly determined rates and is offered to a substantial proportion of the private health insurance market,” can be shaped in any number of different ways.

Importantly, the authors note, “The effectiveness of a public option at both reducing premiums and controlling overall health care costs hinges on lawmakers’ ability to significantly curb provider payment rates. Designed to place competitive pricing pressure on private insurance plans, public option plans can offer lower premiums than private plans by setting or negotiating lower provider payment rates than those paid by private plans and often benchmarking them to Medicare rates. The cost savings can expand if private plans then reduce their provider rates to compete with the public option; in that sense, the creation of a public option applies a soft cap to the provider rates in the private insurance market. Though a public option may not be the only or best policy tool for reducing systemwide costs, it is a significant policy development warranting assessment of its potential as a health care reform model.”

What’s more, what the three states’ leaders refer to as “public option” plans, need to have asterisks associated with their descriptions. As they write, “Washington wrote the state public option playbook that was followed by Nevada and Colorado. All three states chose to have their public option administered by private health insurers rather than by the state (see table). Privatized public insurance is not new — as evidenced by Medicare Advantage and Medicaid managed care plans. What makes these plans ‘public,’” they write, “is the degree of state regulation and publicly determined spending controls, whether those are provider rate caps or premium reductions. Washington’s public option is available to all lawfully present residents who obtain their insurance on the Affordable Care Act (ACA) marketplace, which allows federal premium subsidies to be used for purchasing the coverage. The public options in Colorado and Nevada will be offered to any state resident (not just those lawfully present) and sold both on and off the marketplace, thereby expanding accessibility to residents who are ineligible for marketplace coverage.”

The challenge? “The biggest challenge that state public option plans face is limiting provider rates — the key to affordability. All three bills started out with strong rate controls, but these withered in the face of hospital opposition. Washington State ultimately set its cap at a generous 160 percent of Medicare rates, and as a result, public option premiums have not been cheaper than those of private plans. Even with such modest rate regulation, many areas in Washington lacked a public option plan because hospitals refused to participate. The state therefore amended the law in 2021 to require hospital participation.”

Indeed, they write, “Perhaps learning from this struggle, Colorado and Nevada are requiring their public option plans to reduce premiums by at least 5 percent and to limit future growth rates, leaving the industry players to decide how to achieve these cuts. Both states mandate hospital participation and are allowed to assume greater control of the public option — by means of hospital rate caps in Colorado and direct administration of the public option in Nevada — if private negotiations fail to control costs.”

These experiments in health insurance financing offer healthcare policy lessons for those who would consider them, the authors write. “These three modest public option plans may not be bold enough to reduce health care costs for the states or consumers — yet. But they are a start, and if the states can establish the public option framework and then slow growth or ratchet down rates over time, they could ultimately expand coverage and improve affordability. If successful, this strategy could provide a model for other states and even the federal government.”

Finally, it’s clear that, with the fiscal challenges facing both states and hospitals and health systems, the path forward appears difficult. The authors conclude thus: “Though states face more fiscal and legal constraints than the federal government, all must contend with the biggest challenge: political opposition from the health care industry to any threat to its revenues. Hospital profit margins were soaring before the pandemic,5 but the politics of curbing rates became more difficult as hospitals struggle financially (and sometimes heroically) in the face of Covid-19. As pandemic relief funds are dispersed and hospital profits return, the challenge is to convince the public, purchasers, and policymakers of what these innovator states already know: we cannot improve health care affordability, whether through a public option or otherwise, without taking on hospital prices. It’s time to face Goliath.”

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