Why the Biden Administration Should Help States Develop Capitated Public Options

Building Back Better

President-elect Joe Biden has proposed a federal public option similar to Medicare as the centerpiece of his health policy agenda, though the details regarding the fundamental design of the plan remain unclear. Questions regarding how it will work, who will qualify for it, and how providers will be reimbursed are yet to be answered. Most fundamental, perhaps, is whether eligibility will be confined to the Affordable Care Act (ACA) marketplaces or also granted to those with employer-based coverage and/or low-income persons living in states that have not expanded Medicaid. The Biden-Sanders Unity Task Force calls for all Americans to have a public option available, but this may complicate passage by Congress.

Overall, 70% of the public supports a public option, with 90% of Democrats, 74% of Independents, and 40% of Republicans in favor. However, even if Democrats win both Senate seats in Georgia, resistance from Congressional Republicans, moderate Democrats, as well as the insurance, hospital, and physician lobbies make it unlikely that the plan will pass in the early part of Biden’s first term. It is more likely that the administration will move on expanding subsidies in the ACA marketplaces or potentially more bipartisan issues, such as ending surprise billing, augmenting price transparency, and controlling pharmaceutical prices. In this scenario, the administration may consider turning toward the states as “laboratories of democracy” to test and prove the viability and efficacy of a public option.

To examine this possibility, we begin by assessing two states that have made recent efforts to develop quasi-public options. Then we propose using risk-based capitation, discuss its advantages, and identify key states that might pursue a public option. Finally, we conclude with a review of what the Biden administration and the Secretary of Health and Human Services nominee, Xavier Becerra, can do to support state public option programs.

Quasi-Public Options in Washington State and Colorado

Several states have developed plans to reach universal coverage through a “quasi-public option,” with Washington State and Colorado being noteworthy. Washington State passed and signed into law a public option that empowers the state to contract with private insurers to administer a plan in the individual insurance market rather than offering a plan itself. Beginning in 2021, the plan will attempt to keep costs down by capping provider and facility reimbursement rates at 160% of the Medicare payment amounts. While the original goal was for reimbursement rates to be capped at 100% of Medicare, there was no appetite in the legislature to set rates that low, owing to significant pushback from hospitals and physicians. The ramifications of this higher payment rate is now becoming clear, as the average 2021 public option premium is even greater than the average 2020 ACA premium. If rates cannot be significantly lower than commercial prices, premiums will remain high, and the value of the public option will be lost.

Colorado’s plan is nearly identical to Washington’s, with reimbursement set at 155% of Medicare. Despite the efforts of the legislature, the ongoing COVID-19 pandemic has derailed the current proposal, which has been placed on hold until 2021. Regardless, the high reimbursement rate may pose a problem for premiums in the future. Both Washington’s and Colorado’s public options are structured to fit into the existing health care system using fee-for-service (FFS) payments. A key issue is that FFS provides incentives to raise utilization and, consequently, costs. Although price regulation is offered as the solution, particularly in hospitals, that strategy has been tried before and has failed.

Risk-Based Capitation vs. Fee-For-Service

The evidence that risk-based capitation plans produce better value is compelling.1-4 A recent Integrated Healthcare Association (IHA) analysis compared FFS, no-risk payments with risk-sharing capitation (see Table 1). The authors found that professional risk only and full-risk payments have higher quality scores than no-risk payments, with full-risk payments having the highest score. Pharmacy costs were 25% lower in full-risk models as compared to FFS; the total cost of care was 10% lower in risk-based capitation models. Also using data from the IHA, Scheffler and Shortell similarly found full-risk payments to be associated with lower costs and higher quality than no-risk payments. Halvorson and colleagues have recently proposed a risk-based capitation approach called the Better Care Plan; for more details see the Harvard Business Review. Either a federal public option like the Better Care Plan or state-level public options should be built on risk-based capitation rather than FFS.

Table 1: Quality Scores and Cost Values by Risk-Sharing Type

  Costs (per member per year)
Financial Risk Sharing TypesClinical Quality Composite ScoreTotal CostPharmacy CostMember Cost
No Risk60.1%$5,280$1,125$700
Professional Risk Only65.7%$4,732$936$234
Full Risk67.8%$4,755$841$259

Source: IHA Atlas 2018 Risk Sharing Infographic
Note: Data is risk adjusted at the individual level using the Hopkins Risk Adjuster

State Readiness

To determine which states could pursue a capitated public option, we examine four measures: HMO penetration, Accountable Care Organization (ACO) penetration, Medicare Advantage penetration, and percent of physicians who belong to a group with 30+ physicians (See Appendix). We classify states as either Tier 1 or Tier 2 based on how they score on these four measures. Tier 1 states have delivery systems with the highest scores on the four indicators that measure state ability to offer a public option using risk-based plans. Tier 2 states have lower scores on the indicators, but still have capacity to offer a risk-based public option. California, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, and Washington fall under Tier 1, while Hawaii, Illinois, New Mexico, and New York fall under Tier 2.

Of the Tier 1 states, California may have the highest degree of readiness to implement a risk-based public option because it has one of the most integrated healthcare delivery systems in the United States. Today, over 60% of Californians receive care from integrated providers, most of whom are reimbursed using risk-based capitation, and this percentage is growing. Medi-Cal is 81% risk-based managed care, and California has 80+ ACOs. A public option can compete in this environment against existing private plans and provide affordable coverage for the remaining 7.2% uninsured in California. Building on the strengths of California’s risk-based capitation reimbursement models, a public option would give individuals in the ACA exchange as well as employers another choice for their insurance plans.

Federal Steps to Support State Public Options

Currently, a major federal policy obstacle for state public options is the inability of states to capture the federal cost savings that they create. As premiums fall, so do premium tax credits, and the federal government, not the states, captures those savings. However, the Biden Administration could help states surmount this obstacle through Section 1332 of the ACA, which allows states that implement policies that reduce federal premium tax credit costs to file waivers requesting that those savings be passed along to them. In the past, states such as Oregon, Colorado, and Pennsylvania have utilized the 1332 waiver process to partially finance reinsurance programs. Compared with the Trump administration, it is more likely that a Biden administration would approve a 1332 waiver connected to a state public option.

State public options built on risk-based capitation can also lead to cost savings for employers, who can offer another plan to their employees that can help lower premiums through its competitive impact. With a public option built on attractive state rates that do not include the profit component of loading charges, individuals, employers, and the states themselves can benefit. The Biden administration and the secretary of health and human services should encourage states to develop a capitation-based public option that fits into their existing health care systems, which has benefits in itself and paves the way for a federal public option.

Technical Appendix


We would like to thank Stuart Altman (Brandeis University), Matthew Fiedler (Brookings Institution), Richard Frank (Harvard University), Brent Fulton (University of California, Berkeley), Sherry Glied (New York University), Jacob Hacker (Yale University), William Hsiao (Harvard University), Stephen Shortell (University of California, Berkeley), and Gail Wilensky (Project Hope) for their feedback and comments on this paper.

We are grateful to Taylor Wang for her invaluable work on all aspects of this paper.


  1. Scheffler, R. M., & Shortell, S. M. (2019). California dreamin’: Integrating health care, containing costs, and financing universal coverage [White Paper]. https://petris.org/wp-content/uploads/2019/02/California-Dreamin_White-Paper_Feb-8-min.pdf
  2. James, B. C., & Poulsen, G. P. (2016). The case for capitation. Harvard Business Review, 94(7-8), 102-11.
  3. Grieve, R., Sekhon, J. S., Hu, T. W., & Bloom, J. R. (2008). Evaluating health care programs by combining cost with quality of life measures: a case study comparing capitation and fee for service. Health services research, 43(4), 1204–1222. https://doi.org/10.1111/j.1475-6773.2008.00834.x
  4. Baker, A. (2001). Crossing the quality chasm: a new health system for the 21st century (Vol. 323, No. 7322, p. 1192). British Medical Journal Publishing Group.

Scheffler RM, Rice T. Why the Biden Administration Should Help States Develop Capitated Public Options. Milbank Quarterly Opinion. December 8, 2020. https://doi.org/10.1599/mqop.2020.1208

About the Authors

Richard M. Scheffler is a Distinguished Professor of Health Economics and Public Policy at the Graduate School of Public Health and the Goldman School of Public Policy at the University of California, Berkeley. Dr. Scheffler is the director of The Nicholas C. Petris Center on Health Care Markets and Consumer Welfare as well as the director of the Global Center for Health Economics and Policy Research. He has been a visiting professor at the London School of Economics, Charles University in Prague, the University of Pompeu Fabra in Barcelona, and at Carlos III University of Madrid. He has been a visiting scholar at the World Bank, the Rockefeller Foundation in Bellagio, and the Institute of Medicine at the National Academy of Sciences and a consultant for the World Bank, the WHO, and the OECD. Dr. Scheffler has been a Fulbright Scholar at Pontifica Universidad Catolica de Chile in Santiago, Chile, and at Charles University, Prague, Czech Republic. He also served as the president of the International Health Economists Association 4th Congress in 2004. In 2018, Dr. Scheffler was awarded the Berkeley Citation, among the highest honors the campus bestows on its community, presented on behalf of the Chancellor to individuals whose contributions to UC Berkeley go beyond the call of duty and whose achievements exceed the standards of excellence in their fields. In 2019, Dr. Scheffler was appointed by Governor Gavin Newson to the Healthy California for All Commission, charged with developing a plan to guide California toward a unified health care system.

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Thomas Rice holds the position of Distinguished Professor in the Department of Health Policy and Management at the UCLA Fielding School of Public Health. A health economist, his areas of interest include international health care systems, competition and regulation, behavioral economics, and health insurance. His upcoming book, Health Insurance Systems in High-Income Countries, will be published in 2021. He has also written books on health economics, the behavioral economics of health, and the US health care system. He was editor of the journal, Medical Care Research and Review, from 1994 to 2000, and is an elected member of the National Academy of Medicine. Rice has served as chair of the Board of Directors of AcademyHealth, chaired its Annual Research Meeting, and has received its Young Investigator Award and Article-of-the-Year Award.

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