American Experiment Testimony: A MNCare public option can only make the state’s health care system worse

Today the Minnesota House Commerce Finance and Policy Committee will hold a hearing on HF96, a bill to establish the MinnesotaCare public option. The idea is to provide a government health plan option that certain people can buy as an alternative to private health insurance. This is another solution in search of problem coming from the DFL-controlled legislature which can only make Minnesota’s health care system worse.

A public option was a central and very controversial part of the debate over the 2010 passage of the Affordable Care Act (ACA), also known as Obamacare. Despite having full control over Congress, Democrats never included a public option in the ACA. Nonetheless, a public option has remained part of the health care debate.

Many on the left claim a public option would increase competition in the health insurance market. Yet, a public option would only work by using the strong arm of the government to force your local hospitals and clinics to accept below cost, market distorting reimbursement rates. This is not fair or healthy competition.

If your hospital or clinic must accept the government payment rate, then they have to make it up somewhere. That usually means they must charge a higher rate to people with private health insurance. It might also mean they forgo investments to improve the quality and service level they offer to patients. In the worst case scenario, they may need to close their doors to the community if the government forced payment rates lead to ongoing financial losses.

I provided written testimony explaining why a MinnesotaCare public option would move the state’s health affordability programs in the wrong direction. The testimony focuses on the fact that Minnesota has already largely addressed affordability and access issues in the individual health insurance market through the Minnesota Premium Security Plan. This is a reinsurance program that subsidizes high-cost claims to lower premiums for everybody. America Experiment released a report last week documenting the success of this reinsurance program.

Importantly, the reinsurance program works by adding cost controls to lower premiums that take advantage of competition within the existing market. This means the reinsurance subsidy avoids the cost and quality distortions on the health care system that a public option would inevitably impose. Based on this success, Minnesota should build off reinsurance to address any remaining affordability and access issues versus the proposed public option that risks closing Minnesota hospitals and raises prices on people with private insurance.

Here is the full text of my written testimony:

February 7, 2023

Dear Members of the House Commerce Finance and Policy Committee:

February 7, 2023

Dear Members of the House Commerce Finance and Policy Committee:

My name is Peter Nelson and I am a Senior Policy Fellow at Center of the American Experiment. Thank you for the opportunity to provide comments today on HF 96. This bill would establish the MinnesotaCare public option and includes several transitional provisions to lower cost sharing and premiums while the state implements the public option. Establishing a public option would move the state’s health affordability programs in the wrong direction. To address ongoing affordability and access issues, Minnesota should build off the success of the state’s reinsurance program.

The Affordable Care Act’s affordability problems

The public option appears to be aimed at addressing several severe problems that the Affordable Care Act (ACA) imposed on Minnesota’s health care system. The ACA increased premiums, reduced the comprehensiveness of health insurance, narrowed health insurance provider networks, and adopted a subsidy structure that subjects people to a dramatic premium cliff when their income rises above the income eligibility threshold. From 2014 to 2017, average premiums in Minnesota’s individual health insurance market skyrocketed by 119 percent. This was the largest percentage increase in the nation and it dropped Minnesota’s individual premium affordability rank to 37th in the country.

Reinsurance successfully lowered ACA premiums and increased coverage

The state responded by implementing a reinsurance program which immediately reduced premiums and, by 2019, Minnesota’s individual market had the lowest average premiums in the country. Individual market premiums in Minnesota continue to be among the lowest in the country.

On top of directly reducing premiums with a reinsurance subsidy, Minnesota’s reinsurance program did so in way that mitigates a severe structural problem with the ACA’s subsidy structure that inflates premiums. The ACA’s premium subsidy structure creates inflationary pressure because the value of the ACA’s premium tax credit is tightly linked to the price of insurance premiums. This means the government generally pays the full cost of any premium increase. As a result, there’s little pressure on insurance companies to keep premiums down for subsidized people. The reinsurance program replaces a portion of the ACA’s inflationary premium subsidy with a reinsurance subsidy that adds incentives to control costs.

The dramatic success that Minnesota’s reinsurance program achieved is documented in a recent report I wrote to help inform these discussions. The report draws heavily on an independent evaluation of the program by the RAND Corporation, which was commissioned by the Centers for Medicare & Medicaid Services. This report finds that the reinsurance program reduced premiums for a benchmark plan by up to 36 percent and increased unsubsidized enrollment by 82,000 when compared to what would be expected without the reinsurance program. As noted, reinsurance adds cost control incentives, which is likely why the RAND Corporation finds a larger premium impact than the amount the reinsurance subsidy alone would provide.

Public option abandons effective subsidy and adopts inefficient market distorting policies

Despite the dramatic success of the reinsurance program, there are still affordability and access issues. Efforts to address these issues should work to build on the success of reinsurance. Moving in a different direction would abandon the effective and efficient cost controls built into reinsurance. Importantly, these cost controls take advantage of competition in the private market which improves the market and does not distort the market.  

A MinnesotaCare public option would abandon this success and move Minnesota in a completely different direction. To work, a public option would depend on the sort of government subsidies and price controls that will distort the state’s health insurance system and, as a result, undermine the efficient delivery of health care across the state. The public option subsidy structure relies on the same inflationary premium linked subsidy structure of the ACA. In addition, the only way a public option can compete is by setting provider reimbursements below the actual cost of delivering care. This distorts how providers must price services for private payers to fully cover the cost of their operations. This distortion will disproportionately impact providers in lower-income communities that rely more on state health program reimbursements.

Building off reinsurance offers a more stable long-term federal partnership

Many of the policies offered here will depend on a federal waiver which will put the long-term success of the program at risk. Unfortunately, the Biden administration has recently set a precedent for undoing waivers implemented under a prior administration. Biden revoked several Medicaid waivers and reopened the 1332 waiver application that was already approved in Georgia. A future administration may do the same if Minnesota pursues a highly controversial approach like a public option. By contrast, reinsurance has been implemented with bipartisan support in fifteen states. Therefore, we can expect the federal government to be a good faith partner in any efforts that build off this bipartisan approach.

The timing of this public option is also problematic considering Congress will need to address the expiration of the temporary expansion of the ACA’s premium subsidies at the end of 2024. How Congress responds will directly impact the federal framework which a public option would operate under. Reinsurance would likely adapt to any changes more easily.

Considering the success and long-term stability of reinsurance, I urge the committee to build off reinsurance versus pursuing the public option proposed in HF 96.

Peter Nelson
Senior Policy Fellow
Center of the American Experiment