Weekly Health Policy Briefing 04/23/2026

How should prices be set in health care? The economic marketplace theory is basically that you get buyers (doctors) and sellers (patients) in a room; they bargain, agree on a price, and eventually the market clears: sellers and buyers pair off, creating a market price.

This happens in some corners of health care, but it isn’t at all universal. Sometimes, the buyers of healthcare are, for example, gunshot victims who aren’t really in a position to shop or bargain. If you’ve been shot in the chest, you are pretty much a price taker, so the price discovery mechanism breaks down. Similarly, some people don’t have insurance, but we’ve decided as a country that hospitals should still be required to treat them, so sometimes a provider is required to be a price taker, in this case, the price being what the industry euphemistically refers to as uncompensated care.

There are lots of little and big ways that price discovery and normal market mechanisms break down in health care; probably the biggest perversion is the third-party payer system we have. Because prices are so high and most people most of the time have not been shot in the chest or have some horrible cancer, it makes sense to pool risk via insurance. So insurance companies are doing the bargaining with the doctors rather than with individuals. In response, providers have grouped together in medical groups and hospitals because, in this case, market power is really what determines the price. This gets a bit “snake eating its own tail” because the high prices beget consolidation, which begets high prices, but it’s also hard to imagine a world without third-party payers.

A weird quirk of this third-party payer system, where the price discovery really breaks down, is that for idiosyncratic reasons, most hospitals use contract labor for things like anesthesiology or to staff doctors in the ER, so, for example, sometimes the insurance company and the hospital will have an agreement, but the anesthesiologist does not. Since these contract laborers often form what I think you could fairly call, in the economic sense and with no value judgment attached, something approximating a cartel, the prices the provider charges are quite high.

The No Surprises Act, among other things, was designed as a remedy, and from a patient’s perspective, it’s worked quite well. I have gotten a surprise bill from an anesthesiologist, replied to said bill with the DC Office of Health Care Ombudsman and Bill of Rights in carbon copy, saying basically, “you aren’t allowed to do that,” and the matter was resolved.

But from an insurance company’s perspective? Not so much. Sarah Kliff and Margot Sanger-Katz in the New York Times (gift-linked):

If you can get an 18-29x premium for a procedure through the IDR process, you’re probably going to go for it. But it strikes me as a real tragedy of the commons situation where the next policy iteration is going to involve some sort of price setting, maybe Medicare rates or a percentage of Medicare rates, which, uh, I don’t think they’ll be wild about.

When you hear the term “public option” with respect to American health care, you are completely forgiven for checking the calendar to make sure it isn’t 2009. The substantive portion of the debate over an American public option has been over since the Senate Democrats left it out of what became the Patient Protection and Affordable Care Act.

The mechanics of this sort of public option are simple. Rather than a single-payer situation (like France) or a market of private plans (like Switzerland), the government would operate a health plan that competed with private plans in the market. A certain sort of market-oriented Democrat finds this to be an aesthetically pleasing solution to some of the market failures of a pure single-payer system or private market approach. The public option becomes a de facto rate setter that the private plans can free-ride on, but the public option doesn’t need to throw off profits, so the private plans really have to be more efficient than the government plan. A nice feature of this system is that it requires less regulatory scrutiny of health insurance plans since the public option, in addition to being a price setter, also acts sets service standards. If the public option has a good network, limited prior auths, and a well-staffed call center, the private plans need to have those things too, to effectively compete.

Or at least that’s the theory. There are a lot of ways you can imagine it going sideways. The closest thing we’ve got as a test case is sort of the reverse with Medicare adding a private option in the form of Medicare Advantage, but the analogy isn’t perfect and there isn’t much of constituency in Washington, D.C. for a public option. The left wing of the Democratic Party is focused on Medicare For All, Republicans seem to be coalescing around HSAs and ICHRA, and there aren’t many folks eager to pitch a sort of weird, disruptive hybrid that health insurers and hospitals would both hate.

Confusingly, at the state level, legislators in Washington state, Colorado, and now, Nevada, have been experimenting with something they call a public option, but it isn’t, really. Rather than the state operating a plan that competes with private insurers, states ask, cajole, or jawbone private or non-profit health plans to offer a “public health insurance option” and then require them to meet premium reduction benchmarks.

In Nevada’s case, they required the Medicaid Managed Care Organizations in the state to submit bids, sort of a “nice MCO business you got there, be a shame if something happened to it” situation.

I try to check my personal biases and beliefs at the door on matters of health care policy and financing, so I feel the need to admit to a certain fondness for the Berkeley public option paper, which had a big impression on me in my youth. For that, and other reasons, I’ve tended to take a pretty dim view of these not even quasi-public options at the state level. What is, essentially, telling the insurance companies that they better save money just doesn’t seem like it would work very well.

But as I set about researching to write this week’s HPB, I read a report from Colorado’s Division of Insurance prepared by Mathematica and you know what, in very heavily caveated and nuanced terms still very early on in the experiment, it seems like it does: “Relative to average premiums for non-Colorado Option consumers in 2022, these effects correspond to a decrease of 3.4 to 7.8 percent.”

These aren’t life-changing dollar amounts or anything, but they are real, statistically significant savings relative to the non-public option plans on offer. In a moment where substantive health care policy innovation at the federal level seems unlikely, it will be interesting to watch states see what they can do.