A Proposed Public Option Plan to Increase Competition and Lower Health Insurance Premiums in California

Abstract

• Issue: A public option is a government-established health insurance plan designed to inject more competition into the market and improve coverage affordability over time. Despite widespread support, little progress has been made at the federal or state level toward creating such a plan. We propose a public option plan for California, Golden Choice, that would be based on the state’s “delegated model” of health care under which provider organizations accept the financial risk for delivering health care services.
• Goals: To assess the proposed plan’s competitive impact on premiums in 19 markets in the Covered California health insurance marketplace.
• Methods: Regression models using Integrated Healthcare Association and related data to estimate premiums; qualitative interviews with health plan and medical group leaders.
• Key Findings and Conclusions: Golden Choice would have the lowest premiums in 14 of the 19 Covered California regions and save $243 million ($1,389 per year per projected enrollee) in one year. Similar results were found when assessing the impact of public-employee HMOs as well as L.A. Care, the only county-based public option. Plan and medical group leaders reported that under Golden Choice, they could provide high-quality care while operating with premiums of 5 percent to 10 percent less than current plans. Moreover, a successful public option based on the delegated risk model would not require regulatory changes or mandates.

Introduction

Even though a “public option” health plan has support from the Biden administration as well as the majority of voters, little progress has been made in creating one at the federal level.¹ At the state and county levels, public options — simply, health insurance plans established by governmental entities — have been introduced to increase competition in the insurance market and improve affordability of health coverage over time. Governmental authorities can either directly administer these plans or establish a public–private partnership whereby the state sets requirements for private health plans to offer coverage.

Absent federal action, several states like Washington, Colorado, Nevada, and Minnesota have developed their own public option plans, with many other states in the process of developing plans.² These plans rely on price caps or regulations, such as a requirement that insurers offer a public option plan to participate in Medicaid.³ To date, however, they have had little success in attracting enrollment or increasing competition among insurers to lower premiums.⁴

We propose a different type of public option plan for California. It would be based on the state’s “delegated model” of health care: provider organizations accept the financial risk of delivering health services, and their earnings are linked to their ability to keep patient care costs within a budget. Below we describe this new approach to a public option, which we call Golden Choice, and evaluate its potential impact on consumers’ health insurance premiums.

The Case for a Public Option in California

The gap between the rate of health insurance premiums and average weekly pay is widening in California (Exhibit 1). From 2000 to 2021, health insurance premiums increased 251 percent while average weekly wages doubled. Premiums and deductibles have risen so much that they now are equal to as much as 12 percent of the state’s median income.⁵ This trend is even worse among Hispanic and Black Californians, whose incomes tend to be significantly lower than those for other racial and ethnic groups in the state.

In a 2022 survey, just over half (52%) of Californians reported they skipped or postponed care because of costs.⁶ Additionally, more than one in three (36%) reported having medical debt, with one in five (19%) of those with medical debt owing $5,000 or more. Among respondents with lower incomes, half (52%) reported having medical debt, compared with 30 percent of those with higher incomes. Latino (52%) and Black (48%) Californians were more likely to have medical debt than white (28%) and Asian American (27%) residents.

A public option plan also could help address the relative lack of competition within California’s private insurance market. In 2021, just two insurers, Kaiser and Anthem, accounted for nearly half of all enrollment. According to the U.S. Department of Justice and the Federal Trade Commission’s Horizontal Merger Guidelines, 21 of the 26 metropolitan statistical areas in California would be classified as highly concentrated and lacking market competition.⁷

How Golden Choice Would Work

The Golden Choice plan is designed to improve competition in health insurance markets and slow the growth of premiums. It’s designed to leverage the special characteristics of California’s health care delivery system, specifically the delegated risk model, in which insurers transfer some or all of the risk of the costs of providing care to medical groups and independent practice associations (IPAs).⁸ California’s medical groups and IPAs, one-third of which have more than 50 physicians, have extensive experience operating under a delegated model. They receive a risk-adjusted, per member per month payment for each enrollee, providing the organization with a predictable revenue stream and with incentives to develop innovative care models and continuously improve patient care.⁹

By forming a network of low-cost, high-quality integrated providers that accept risk, the new public option could offer a lower premium than many of the health plans currently available in the state. Not needing to turn a profit would further enable Golden Choice to keep premiums lower.

Currently, many provider organizations accept full risk for the total cost of care for both hospital and physician/outpatient care. Some accept professional risk, which applies to the physician and outpatient component, and others are paid on a fee-for-service (FFS) basis only. The full-risk provider organizations have a significantly lower total cost of care and higher quality scores than the FFS provider organizations (Exhibit 2).¹⁰ They also have higher quality scores than the provider organizations that only accept professional risk. In turn, the organizations that only accept professional risk perform better on both cost and quality than those operating under FFS.

Although not all physicians in California are organized to currently take on such risk, a number of technical assistance initiatives have been launched to provide them with the infrastructure and capabilities to do so.¹¹

In California, health maintenance organizations (HMOs) are regulated by the Department of Managed Health Care in accordance with the laws set forth in the Knox–Keene Health Care Service Plan Act of 1975.¹² Some medical groups have restricted Knox–Keene licenses from the Department of Managed Health Care to receive global per member per month payments that include financial risk for all hospital charges, thereby assuming both professional and institutional risk.¹³ Partial-risk plans are plans with capitation for only professional risk or institutional risk.

Assessing the Competitive Impact

We used non-Kaiser data from the IHA to estimate premiums for Golden Choice as a proof of concept.¹⁴ Utilizing the 19 markets in Covered California, the state’s Affordable Care Act (ACA) marketplace, we analyzed the potential impact overall and in each market region. Then, we adjusted premiums to compare the gold and silver plans on the Covered California marketplace to prototype premiums in Golden Choice from the IHA total cost of care data for 2019, prior to the COVID-19 pandemic. The premiums are for a 36-year-old enrollee, which is the average age in the IHA data.

We next assessed the effects of L.A. Care, a county-based plan that aims to reduce premium growth. Finally, we examined the impact on the commercial market using data from California Public Employees’ Retirement System (CalPERS) enrollees (see “How We Conducted This Study” for more details).

Golden Choice Would Be the Lowest-Cost Plan in Most Regions

When comparing gold plans, we found that Golden Choice would be the lowest-cost plan in 14 of the 19 Covered California regions and the second-lowest in three regions. We found similar results for the average silver plan (data not shown). To increase our confidence in our estimates, we tested the sensitivity of the prototype premium estimates by increasing them by 5 percent and 10 percent; we saw no change in the ranking.

Given the lower-cost premiums and trends found in other research, we estimated that 175,000 enrollees would switch from their current plan to Golden Choice, reducing total premiums in the first year by $243 million ($1,389 per switcher).¹⁵ In a separate analysis, we found that premium growth was 1.6 percent lower in markets with five or more insurers. If there had been at least five insurers in each of the 19 Covered California regions between 2016 and 2020, premiums would have been $288 million lower.

Additionally, in examining the ACA marketplace premiums in Los Angeles, we found that L.A. Care — the only county-based public option on Covered California — has offered some of the lowest premiums since 2014 (Exhibit 3). It offered the lowest premium for the first time in 2018, which resulted in a 4.8 percent reduction in the annual growth of premiums of all other plans in Los Angeles from 2019 to 2022. Savings amounted to $345 million across all plans in the L.A. market.¹⁶

In examining the CalPERS data, the Golden Choice premiums would be the second-lowest among HMO plans.¹⁷ For example, if enrollees switched from Blue Shield to Golden Choice, premiums would be $57 million lower a year.

Feasibility

We supplemented our analysis of health plan data with data on the adequacy of provider organization networks in the state to assess the feasibility of implementing the Golden Choice public option plan. The data show that there are medical groups and IPAs in all suburban and urban-dominated counties of the state, but fewer in some rural counties. Using a generally accepted primary care physician (PCP) panel of one doctor per 2,500 potential patients (or 4.0 per 10,000), we found more-than-adequate coverage overall (6.5 PCP per 10,000 enrollees) in most counties, but fewer than 4.0 in some rural counties.

We also gathered insights about the Golden Choice plan from interviews we conducted with seven administrative and clinical leaders of delegated model physician organizations and associated health plans (see “How We Conducted This Study” for more details). Reporting independently, each believed they could provide high-quality care, operating with premiums of 5 percent to 10 percent less than plans (and their associated provider organizations) currently on Covered California.

Discussion

Golden Choice, California’s public option plan, would have a substantial competitive impact on the cost of health insurance and the growth rate of premiums in the state’s ACA marketplace. Our prototype premium, based on the total cost of care for risk-based plans, demonstrates cost savings. Furthermore, the impact of L.A. Care provides convincing evidence on the effect of increasing competition in the ACA marketplace.

Golden Choice would not require any additional price regulation or market intervention. Instead, it would lower costs and increase competition in the health insurance market by leveraging California’s delegated model plans, which incentivize providers to focus on prevention and continuous improvements in the quality of care.

Despite these promising findings, there are still many unanswered questions, including whether the plan would be listed on Covered California, whether a new public agency would need to be created to administer the plan, and how attractive Golden Choice plans would be in the commercial market. Further, the health plan and practice leaders we interviewed emphasized the following: 1) the importance of enrollees choosing or being assigned to a primary care provider upon enrollment; 2) the need to include the social determinants (drivers) of health in risk-adjusting the premiums; and 3) the desirability of having all plans agree on a set of standardized quality measures to be reported.

Given the evidence on the competitive impact and feasibility of implementing the Golden Choice plan, one option for California policymakers to consider is applying for a Section 1332 waiver to capture much of the savings from the reduced growth of premiums.¹⁸ This type of plan also could be pursued by other states, especially those where a significant number of provider organizations are able to accept financial risk for providing care, similar to California’s experience with the delegated model.¹⁹