Next year, Colorado will be the second state in the nation to introduce public option-style plans to its private insurance market, following Washington. These “Colorado Option” plans will be offered by private health insurance carriers but are subject to more stringent regulations than traditional plans—including, most notably, requirements to increasingly reduce premiums each of the first three years plans are offered. State officials recently spelled out how to calculate the target rates for 2023 and released the premium each carrier must aim to meet by county and market. Colorado seeks to collect the federal savings generated by these premium reductions through a Section 1332 Waiver and use the funds to make coverage more affordable for state residents.
Colorado’s public option-style law, enacted in 2021, mandates that all carriers in the state’s individual and small-group markets offer Colorado Option plans in each county in which they operate starting in 2023. Among other parameters, such as requirements to have culturally responsive networks and standardized benefits, Colorado Option plans must meet legislatively set premium reduction targets.
In the first year of the program, carriers must offer Colorado Option plans at rates that are 5 percent lower than their 2021-inflation adjusted rates for the same geographic market; in years two and three the rates must be 10 percent and 15 percent lower, respectively. Beginning in year four, 2026, rate increases will be limited to medical inflation, which historically has hovered around 2 percent. (An exception from these targets applies to coverage cooperatives, such as the Peak Health Alliance, that have already achieved and maintained 15 percent or higher rate reductions.)
The law gives carriers flexibility in how they achieve these rate reductions, but hospital and provider reimbursement rates are the likeliest source of savings. Beginning in 2024, if carriers cannot meet these premium reduction targets (or the law’s culturally responsive network requirements) because of a failure to come to agreement with certain hospitals or providers, the insurance commissioner can hold a public hearing and ultimately require participation in Colorado Option plan networks at specified reimbursement rates (subject to legislatively established floors).
Premium Rate Reduction Targets
Colorado officials recently adopted rules establishing how the state is calculating the premium rate reductions each carrier, as well as any new market entrants, must meet. The main takeaways are below:
- The state will calculate a 2021 baseline premium for a 21-year-old non-tobacco user on a county, metal-level, and market basis, which will then be subject to certain adjustment factors, accounting for things like changes in state requirements for member cost-sharing and essential health benefits.
- To establish the maximum premiums for Colorado Option plans, the baseline premiums will then be adjusted to account for medical inflation (based on the ten-year average Consumer Price Index for All Urban Consumers (CPI-U) for medical services, annualized) and the required rate reduction (5 percent, 10 percent, or 15 percent, depending on the year) will be applied.
- If a carrier is offering a Colorado Option plan in a county where they did not participate in 2021, the maximum premium will be the weighted average (based on enrollment as of April 1, 2021) of the maximum plan premiums for all the carriers that offered plans in that county in 2021.
- Carriers must file premium rates for their Colorado Option plans at or below these state-calculated maximums, or else notify the commissioner of the reasons why they are unable to meet the requirements.
(Check out this Wakely report for more details on the methodology.)
Based on the new rules, Colorado published maximum premium targets for 2023 for the individual market (existing carriers/new entrants) and small-group market (existing carriers/new entrants). Don’t read too much into these numbers, though—neither the 2021 baseline premiums nor the 2023 targets reflect reinsurance, which can further reduce premiums. Indeed, in 2022, reinsurance resulted in an average of 24.1 percent premium savings across carriers in the individual market. When filing their 2023 rates later this month, carriers will need to calculate rates that meet these premium targets before applying further reductions to account for reinsurance—meaning that the actual premiums consumers will see should be lower than the published targets. On the other hand, carriers could fall short of these targets. The insurance division asked carriers to file notices indicating whether they can meet the targets by May 18, 2022, but at the time of this writing these are not yet public.
Section 1332 Waiver
Implementation of these premium rate reduction targets also depends on the federal government’s approval of Colorado’s Section 1332 Waiver Amendment Application. This waiver amendment will authorize plan-level rating variations to accommodate the premium reductions for the Colorado Option plans and complements recent federal approval extending Colorado’s reinsurance waiver.
Specifically, Colorado seeks to waive components of the ACA’s single risk pool provisions. This would allow carriers to attribute the savings Colorado Option plans generate through reduced provider reimbursement rates to Colorado Option plans only, rather than applying them to the carrier’s market-wide index rates for all of their non-grandfathered individual or small-group market plans.
Colorado proposes directing the federal pass-through savings from the Colorado Option premium reductions to the Colorado Health Insurance Affordability Enterprise (HIAE). This state entity accepts funding from a variety of sources to further subsidize health insurance in the state. The HIAE is currently designing a subsidy program for Coloradans that are ineligible for federal premium tax credits due to their immigration status and also anticipates using pass-through funds to reduce cost-sharing for individuals that qualify for federal premium tax credits.
Colorado anticipates that the amount of pass-through savings attributable directly to the premium reduction targets and enrollment effects will be small in 2023a 1.3 percent decrease in premiums and 0.8 percent increase in enrollment in the individual market. This is because Colorado assumes that carriers will continue to offer their other plans which are not subject to nor immediately affected by the targets for Colorado Option plans. But the metrics are expected to increase more than ten-fold by year five of implementation—with 13.7 percent decrease in premiums and 11.5 percent increase in enrollment in the individual market—both because the premium reductions increase and because Colorado assumes that carriers may begin to negotiate lower reimbursement rates that extend to all of their plan offerings and not just their Colorado Option plans. Colorado projects these changes will result in $13.3 million in federal savings in 2023, growing to $147.9 million in 2027.
Colorado is hosting several stakeholder meetings between May 25th and July 13th regarding the law’s requirement for public hearings if carriers do not meet their premium reduction targets beginning in 2024. These hearings, if they occur, are likely to be very contentious, and we expect the stakeholder meetings about the hearings to be well-attended and raise important concerns and considerations. If carriers are going to achieve the law’s premium reductions, they will need to be able to successfully negotiate lower reimbursement rates with health care providers, which, in turn, will likely depend on providers viewing the potential for the state to step in and set reimbursement rates through these hearings as a real possibility.