Payment Reimbursement and Managed Care

Hospital payment cuts fund state public-option plans

October 25, 2019 2:13 pm
  • A Colorado public option would limit provider payments to between 175% to 225% of Medicare rates.
  • A recently passed public option in Washington will pay healthcare providers 160% of Medicare rates.
  • Washington will allow providers to opt out of such plans, but Colorado may not.

Two states furthest along in efforts to implement a so-called public-option insurance plan would use deep cuts in provider payment rates to fund it.

A growing number of states and federal lawmakers have proposed varying versions of government-backed insurance plans as a way to lower consumer costs and restrain overall healthcare spending growth. But advocates only now are detailing the mechanisms to fund such plans, which some healthcare leaders describe as a way to undercut commercial insurance plans and move to a single-payer model. 

A proposal issued this month by several Colorado agencies, which were tasked by a recent state law with developing a public-option insurance plan, would limit provider payments to between 175% and 225% of Medicare rates. The plans would be managed and sold by private insurance carriers. The rates would represent a sharp reduction from the approximately 289% of Medicare facility-fee rates that commercial insurance plans currently pay, according to a report commissioned by the state.

“The big question, of course, is whether all the carriers will participate and if all the hospitals in the state will agree to accept these reduced reimbursement rates or if additional legislation, possibly mandates, will be required,” said Pam Nicholson, senior advisor for BDC Advisors.

The proposal drew concerns from the Colorado Hospital Association that it “appears to be the first step toward price control or rate setting, as well as an intent to make provider participation mandatory,” said Chris Tholen, executive vice president.

A law enacted in Washington state requires state-created plans to be sold by commercial health plans on the state’s Affordable Care Act (ACA) marketplace, along with those carriers’ own plans. The state-backed plans will pay healthcare providers 160% of Medicare rates.

Details of the state plans

The key components of the Colorado proposal include:

  • Requiring certain commercial health plans to administer the public-option plans and contract with providers
  • Allowing individual-coverage plans to be sold both on and off the ACA marketplace starting in 2022
  • Requiring plans to cover all ACA “essential health benefits”
  • Using an 85% medical-loss ratio
  • Seeking an ACA innovation waiver to lower out-of-pocket costs
  • Sending a final proposal to the legislature by Nov. 15
  • Prohibiting state taxes from being a funding source for the public-option plans
  • Giving the state authority to require health systems to participate in the plans if needed to create adequate networks

Key provisions of the Washington public option include:

  • Requiring all health plans on the state’s ACA marketplace to create a “standardized plan” for each metal-tier
  • Requiring such plans to meet all ACA care coverage requirements
  • Requiring a study of the merits of offering only standardized plans by 2025
  • Capping rates for certain rural hospitals at 101% of allowable costs under Medicare
  • Allowing providers to not participate
  • Lifting the cap on provider rates if adequate networks cannot be formed

Other states consider similar approaches

In May, Connecticut lawmakers proposed but did not pass legislation to create a public health plan by 2021. The proposed plan would be offered in partnership with an existing health plan and would aim to offer premiums that are at least 20% less expensive than existing options.

In 2018, New Mexico enacted a law to study four options that would improve affordability and access, including a public-option plan.

Among federal proposals are four public-plan bills, two Medicare buy-in bills and a Medicaid buy-in option. Several Democratic presidential candidates also have backed creation of a public-option plan, including frontrunner Joe Biden.

Credit warnings accompany public-option proposals

Earlier in October, a Moody’s Investors Service report warned that any public option would result in a credit-negative decline in the operating margins of hospitals, although the magnitude would depend on how many people with private insurance transitioned to public coverage.

Moody’s noted that although operating margins for Medicare patients vary across institutions and geography, they generally are negative. Meanwhile, aggregate private-payer margins were +45% in 2016, according to American Hospital Association data.

A “limited” pubic option would be expected to affect hospitals by:

  • Decreasing some hospital payment rates in the nongroup population
  • Providing a modestly negative credit effect
  • Spurring other nongroup-market health plans to cut hospital payment rates to compete
  • Resulting in a small decrease in uncompensated care because more uninsured would be enrolled

An “expansive” public option would be expected to affect hospitals by:

  • Creating a substantial credit-negative
  • Converting a larger share of hospital payments from higher commercial rates to Medicare rates
  • Spurring many hospitals to cut expenses significantly, particularly for labor
  • Increasing mergers and acquisition as smaller hospitals seek economies of scale


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