Source: HealthAffairs

January 17, 2025

Insurance premiums are high and variable—having increased 121 percent since 2004—in part due to limited competition among both providers and insurers. At the same time, increases in out-of-pocket spending and slower wage growth have placed further strain on household budgets and government finances. For individuals without employer-sponsored insurance or who do not qualify for Medicare or Medicaid, the Affordable Care Act (ACA) exchanges provide a critical coverage option, offering income-based subsidies to help reduce premium costs.

However, with the potential expiration of the expanded subsidies under the IRA, many low-income individuals ineligible for Medicaid could face significantly higher premiums, further exacerbating affordability challenges and potentially leading to an increase in individuals without insurance. In addition, ACA Exchange plans face the same financial pressures as other sources of commercial insurance—increases in premiums that are driven by provider prices.

In an effort to add competition to insurance markets and provide a backstop against provider prices, some states have either introduced or proposed public option policies, most commonly for ACA Exchange plans. Public option plans aim to offer lower premiums through cost containment measures, such as caps on provider prices or premium savings targets: Presumably, these lower-premium plans will prompt private insurers to negotiate better rates and improve offerings to stay competitive. To date, only four states—Washington (2019), Colorado (2021), Nevada (2021), and Minnesota (2023)—have passed legislation to offer public option plans on the ACA exchange, with only the Washington and Colorado programs currently in effect as of the end of 2024.

The Role Of Colorado’s Public Option In Tackling Rising Premiums

The introduction of Colorado’s public option was motivated by underlying individual market pressures. Individual market premiums were increasing 20-30 percent on average in 2017 and 2018, due to a combination of factors, including the elimination of the individual mandate, the phase-out of the ACA’s reinsurance program, the expiration of cost-sharing reduction payments, and insurer exits. Enrollment in the individual market declined during this period. In 2020, Colorado implemented a reinsurance program, which covers a portion of high-cost claims, as an initial strategy to reduce premiums in the individual market. Previous studies have found that reinsurance programs are associated with reductions in individual market premiums by about 10-20 percent. However, reinsurance does little to address the underlying drivers of health care spending, which are primarily high and rising hospital prices.

Prices charged by hospitals and other health care providers in Colorado have been higher than in neighboring states. As US medical spending is driven by provider prices, these prices and provider market concentration in Colorado limit the ability of insurers and purchasers to lower premiums. As a way of “bending the cost curve” and improving affordability, the Colorado public option includes a mandate to reduce inflation-adjusted premiums on Colorado Option plans by 5 percent annually over the 2023-2025 period from their 2021 baseline.

Starting in 2026, Colorado Option premiums cannot increase more than medical inflation. To limit the impact of provider and hospital prices, the public option also includes a provision that allows the State to proactively reduce provider prices if insurers are unable to meet the premium reduction goals for their Colorado Option plans. An important policy goal of these requirements is to not just provide an affordable insurance option for Coloradans, but to also create a benchmark that encourages non-public option plans to restrain provider price growth. This “spillover” mechanism may be equally important, as it may allow for cost-reducing impacts of the public option program to extend beyond plan members.

While Colorado has been an innovator in public option plans, Washington launched its public option in 2021, and Nevada plans to offer its public option in 2026. Last year, MaineMinnesota, and New Mexico also passed legislation to either create or explore the feasibility of implementing their own public option plans. As states seek to ensure that Exchange plans remain affordable and add competition to existing markets, several are closely monitoring Colorado’s experience to inform their own efforts.

How Colorado’s Public Option And 1332 Waiver Serve As Models For Other States

Colorado was the first state to use a “1332 Waiver”—a State Innovation Waiver that enables states to secure additional funding for innovative approaches to improve health care affordability or accessibility under the ACA—to support its public option plan. Colorado utilizes funds from its 1332 Waiver to lower premiums and out-of-pocket costs through its reinsurance program and state-based subsidy programs. Washington and Nevada followed Colorado’s lead and applied for 1332 Waivers to extend subsidies to individuals who were previously ineligible. Similarly, Minnesota, which passed legislation last year to establish a public option, has been authorized to submit a 1332 Waiver to launch the program in 2027, pending approval.

To ensure adequate participation by both insurers and providers, Colorado included some key provisions, such as requiring that all insurers in the individual and small-group market offer Colorado Option plans in every area where they operate. Additionally, the Division of Insurance has the authority to require hospital participation and set reimbursement rates for hospital and other providers through a public hearing if insurers are unable to meet premium targets for their Colorado Option plans. These measures have contributed to higher enrollment in Colorado’s public option compared to Washington, which initially did not include mandatory participation requirements for health insurers. In designing its own public option plan, Nevada has adopted similar participation requirements and premium savings targets for its plan.

Further, Colorado’s approach demonstrates success in lowering premiums of more affordable individual market plan options: the lowest and second-lowest-cost silver plans. The second-lowest-cost silver plan serves as the benchmark for ACA subsidy calculations and identifies the amount of premium tax credits for which individuals and families with incomes between 100 percent and 400 percent of the federal poverty level are eligible. If individuals select a plan with higher premiums, they must pay the difference, but if they select a lower-premium plan, they pay less overall.

In other analysis, we found that relative to 2020, monthly inflation-adjusted premiums for the lowest- and second-lowest-cost silver plans in Colorado are more than $100 lower than the corresponding premiums in comparison states. These reductions apply to all individual market plans, including non-public option plans. These reductions are in strong contrast to trends observed in other markets, in which over this time period health care costs and premiums have increased by nearly 10 percent annually. By creating a backstop against the adverse consequences of rising hospital and health-care provider reimbursement rates, which drive overall health care costs, early evidence indicates that the Colorado public option is a potentially viable option for bending the cost curve and improving health care affordability.

Conclusion

These early findings offer some encouragement about the viability of public options. Although Colorado and Washington are the only states with existing public option programs, several other states are in the process of either implementing or designing a public option program. While similar in spirit, these public option programs are likely to be tailored to the unique needs of each individual state. At the same time, the future of 1332 Waivers is uncertain. Although it is only in its infancy, the Colorado Option is an innovative approach to providing affordable coverage while constraining premium increases that result from increased hospital and provider prices.

Authors’ Note

Preparation of this article was supported by the Commonwealth Fund, a national, private foundation based in New York City that supports independent research on health care issues and makes grants to improve health care practice and policy. The views presented here are those of the authors and not necessarily those of the Commonwealth Fund, its directors, officers, or staff.