How to Compare Impacts of Capped Provider Payment, Public Option

March 17, 2021 - While both public option and capped provider payment rates have the potential to produce savings, the solutions differ in how they would impact insurer marketplaces, a recent analysis from the Urban Institute found.

As high healthcare spending continues to haunt the payer industry, policymakers have been exploring various avenues for increasing savings. A handful of states have implemented or considered implementing a public option to achieve these ends and so has the new presidential administration.

Public option proponents argue that this policy can decrease health care spending by setting provider reimbursement rates far below private health plans’ rates. Its influence on the premium tax credit benchmark could also lower federal subsidy expenditures. Furthermore, public option plans may be able to have lower administrative spending.

In contrast, advocates for capped provider payment rates would restrict the amount that health plans can reimburse providers in certain markets with the goal of lowering premiums across those markets. The cap could also decrease premium tax credits. Medicare Advantage is a model for this approach.

There are three challenges that these approaches share, according to Urban Institute’s experts.

READ MORE: Nevada Explores Potential State Public Option Models, Impacts

First, policymakers would have to grapple with how to set the payment rates for affected markets. This would involve political maneuvering, but in most models, Medicare payment rates provide an appropriate baseline. Median commercial insurance payment rates could be an alternative benchmark.

For this hurdle, policymakers will have to determine how rates should vary, the timeframe for achieving payment rates, and the payment rate’s growth rate for the future.

Second, provider participation will be challenging to secure in any structure that intends to lower payments.

“The objectives of broad provider networks and cost containment intrinsically compete against each other,” the researcher acknowledged.

One solution would be to tie providers’ participation in other markets, such as public payer markets, to the public option or capped payment market. This would likely be unpopular, though.

READ MORE: CO Public Option Bill Paused, Unemployment Rises Due To COVID-19

Lastly, both approaches would have to determine which markets would become capped or offer a public option. Individual health insurance markets are the most typical recommendation, but the report pointed out that applying the public option or payment rate cap to employer-sponsored health plans could produce greater savings and broader impact.

Geography or the intensity of competition could also inform which markets would benefit the most from one of these solutions.

The time and resources required to build the product can be more limiting for public option plans than for the capped provider payment approach.

Additionally, the public option would require a risk-bearing entity to contract with providers as well as administrators and the plan would have its own unique structure and set of review, oversight, and marketing systems. In comparison, the capped provider payment approach is simple and fast.

Public option plans may also drive insurers away from affected markets if private payers cannot undercut the public option payment rate or if the public option has a broader provider network than competitors can achieve. Conversely, the capped provider payment rate approach could give new payers leverage in the affected markets, thereby attracting more payers into these markets.

READ MORE: Managed Care Organizations Show How Public Option May Lower Premiums

The researcher modeled these approaches in the contexts of two Affordable Care Act marketplace regions in California, one of which boasted eight payer competitors and the other of which had two payer competitors.

In the noncompetitive space with two insurers, a public option would be the lowest premium silver option—with lower healthcare spending causing the public option plan’s premium to be 26.3 percent lower than the lowest-cost plan currently on the market and prescriptions drug rebates bringing the public option’s cost down another 6.9 percent.

Under a public option, competition on the noncompetitive marketplace would grow, the benchmark premium would fall by around $92, and the differential between highest and lowest silver plan premiums would increase and the differential for the bronze tier would diminish.

If the state capped provider payment rates at Medicare levels for private payers in the noncompetitive region, premiums would fall across all medal tiers and the benchmark premium would be significantly lower than it would be under a public option plan. Higher-priced payers would be attracted to the market.

In the competitive region, a public option would be the lowest-priced silver option, but it would not impact private payers’ premiums.

If the same area introduced a provider payment rate cap for private payers at Medicare levels, all premiums would be impacted. Prescription drug savings could be 6.9 percent while the cap on higher-priced plans could produce 28.3 percent savings. Premiums would be lower than they currently are and the cap would be lower than public option.

Ultimately, Urban Institute’s report found that both solutions had the capacity to lower federal subsidy costs and improve affordability for consumers, but the impacts on private health plans and benchmarks varied, and competition within the selected markets had a significant influence on the outcomes.

“This analysis highlights the importance of clearly identifying the goals of a reform such as a Marketplace public option or capped provider payment rates,” the report concluded.

The researcher recommended considering goals such as federal cost containment, consumer affordability, whether affordability should be based on the subsidized or unsubsidized cost, and the expected effects on private payers.