Imagine for a moment that you are a 60-year-old making $50,000 a year, living in Glenwood Springs and buying your own health insurance. (Or maybe you don’t have to imagine because you are that person.)



Sorry to say it, but you, my friend, are in one of the worst jams in the American health care system — making too much to qualify for government insurance subsidies and too little to pay for insurance by yourself. The cheapest coverage you can find on the state exchange will still run you more than $1,200 a month, and your other out-of-pocket spending could put you above $23,000 in health spending per year, almost half of your annual income.



Lawmakers in Colorado are currently considering an audacious plan to eliminate this exact problem. The bill is based on a well-established idea of protecting insurers from the sting of their highest-cost claims, it has bi-partisan support and it is backed by a brand-new actuarial analysis.



But the specific plan has never been tried before anywhere else; it’s unclear how, exactly, it will work or what the ripple effects will be; and it’s uncertain whether the federal government will allow it to happen. Hospitals say it could be financially ruinous for them.



Welcome to the debate over reinsurance, the most tooth-and-nail health care fight at the state Capitol this session. No one knows how it’s going to end.

What is reinsurance?

The first thing to know about the bill is that its underlying premise is not at all controversial.



It’s actually a pretty simple principle: Most people are healthy most of the time and cost health insurers very little; it’s the rare expensive claims that drive up insurance prices for everyone. So reinsurance helps insurers cover those highest-cost claims, allowing the companies to reduce what they charge everybody.



Seven states have adopted reinsurance programs and paid for them through some combination of state funds, fees assessed on insurance plans and federal money. The federal money will be key later because it comes from dollars that the federal government saves when insurance premiums go down and the feds don’t have to spend as much providing subsidies to help people pay their premiums.



So what makes Colorado’s plan so controversial? The bill at the Capitol would fund the reinsurance program in a completely new way: by taking money out of hospitals.

Colorado’s model

Rather than gathering up a pool of money that can be used to reimburse insurers, Colorado’s plan would help insurers by requiring that hospitals charge certain people less.



The plan would only apply to people who buy health insurance on their own — the “individual market,” in the talk of the trade. That’s about 8 percent of people in Colorado, and everything that comes next applies only to those 8 percent.



Under the plan, insurers would keep paying for medical expenses as normal until a person’s total claims reach a certain dollar figure in a year — a threshold called the “attachment point.” After the attachment point, that person would enter the reinsurance program until their claims reach a cap.



Once in the reinsurance program, the state would dictate what hospitals can charge for services for that person, prices most likely greater than — but still linked to — what Medicare pays for the same services. The goal, as Colorado Insurance Commissioner Michael Conway said at the first hearing for the reinsurance bill, is to “take a little bit of the fat out of a system that is very fat.”



Michael Conway (Courtesy of the Colorado Division of Insurance)

“I honestly believe, in my heart of hearts, if we are going to drive true affordability across the system, we have to take money out of that system,” he said.



With insurers paying less for their highest-cost people, premiums will drop, the federal government will save money on subsidies and Colorado will ask the feds to allow the state to pocket those savings, allowing the state to kick in more money to help insurers cover their biggest claims.

What are the specifics?

But there aren’t a whole lot of specifics right now. The precise workings of the reinsurance program will be left up to Conway to develop through rulemaking.



Barring new amendments that put these specifics into the bill, here’s what Conway will decide: what the attachment point is; what percentage of claims the reinsurance program will pay; what the cap is; what prices hospitals can charge to people in the reinsurance program; and what hospitals will be exempted from the program because of financial concerns.



Conway says there needs to be some flexibility, given all the moving parts. But hospitals, which are vehemently opposed to this plan, say that makes it impossible to know what they’re getting into.



“I think there are still a lot of unanswered questions,” said Katherine Mulready, the Colorado Hospital Association’s chief strategic officer.

Colorado state Rep. Julie McCluskie, D-Dillon, introduces Gov. Jared Polis at a town hall meeting in Frisco on Feb. 1, 2019, as state Sen. Bob Rankin, R-Carbondale, looks on. (John Ingold, The Colorado Sun)

How much money are we talking?

The lack of specifics makes it hard to know, but hospitals are probably looking at bringing in more than $200 million a year less than what they currently do.



Conway’s office commissioned an independent actuarial analysis that looked at 12 different scenarios — tinkering with all the variables within Conway’s discretion. The analysis found that a reinsurance program could reduce premiums statewide for people in the individual market by 19 to 21 percent, allow 10,000 to 12,000 more people to afford insurance, cut $215 million to $245 million in hospital costs and bring in $121 million to $139 million in federal funding.



Vince Plymell, a spokesman for the Colorado Division of Insurance, said the analysis, using 2017 numbers, found that about 15,000 people in the individual market would have been eligible for a reinsurance program that kicked in at $20,000.



The analysis put prices in the reinsurance program between 30 and 50 percent above what Medicare pays. (In Colorado, Medicare pays about 70 percent of what hospitals say they need to break even on a service, although hospital critics say efficient hospitals can break even at Medicare prices.) Currently, according to the analysis, hospitals in Colorado are charging people in the individual market 235 percent of Medicare prices for inpatient treatment and 375 percent of Medicare for outpatient treatment.



“We have been very dedicated to making sure that fee schedule, that reimbursement rate, is fair to our providers,” state Rep. Julie McCluskie, a Democrat from Dillon and the bill’s sponsor, said during the bill’s first hearing.



Another thing jumps out of the analysis: In only one of the 12 scenarios could the state fully cover the program with just hospital cuts and federal dollars. In most cases, the state falls between $5 million and $15 million short. But in the worst scenario, the state would need to come up with an extra $40 million a year to make the program work.

Children’s Hospital Colorado, in Aurora, is pictured in October 2018. (Courtesy of Children’s Hospital Colorado)

Hospitals make a counteroffer — with a catch

That hospitals wouldn’t be psyched about being forced to accept lower prices is pretty obvious, but they also agree that there is fat in the system that can be cut away. The issue is where those cuts happen.



Without knowing the specifics of the plan, Mulready said the hospital association can’t gameplan for which hospitals would be most vulnerable. It’s possible, she said, that hospitals would cut back on their highest-cost services to avoid being in the reinsurance program. (The bill allows Conway to exempt financially vulnerable hospitals, and he said he expects an amendment that will tighten the guidelines for that.)



But, with hospitals under fire at the legislature and from state regulators for their ballooning costs, Mulready said the hospital association is willing to strike a deal. It’s called the SAVE Colorado initiative, with SAVE an acronym for Systemic Affordability and Value Efforts. Mulready said the initiative would push Colorado hospitals to cut costs across the board — through embracing payment reforms that encourage efficiency — to the tune of $1 billion a year.



In addition to SAVE Colorado, hospitals would also be willing to put in some cash upfront to fund a reinsurance program so long as insurers kick in some money as well.



“We can do reinsurance,” Mulready said, “but let’s do reinsurance right.”



But, Mulready said, if the reinsurance bill passes as is, SAVE Colorado would have to be reconsidered.

What comes next

The measure, House Bill 1168, is scheduled to be debated by the full House on Thursday. It still needs approval in the state Senate before it could head to the desk of Gov. Jared Polis, who has said he supports the plan.



But there’s one final hurdle it would need to clear even after becoming law. In order for Colorado to get those federal dollars that help pay for the program — and, thus, in order for the program to work at all — the state has to submit to the feds a special application called a 1332 waiver.



It’s not clear whether the feds would approve that application. Why? The answer comes in something both Conway and Mulready agree on, though with different points of emphasis.



“Nobody’s done this before,” he said. “It’s brand new.”



“What we’re looking at here,” she said, “is completely untested.”



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