Colorado hospitals agreed to pay $40 million to fund a program to reduce insurance costs, but they’re balking at a proposed requirement that they pay it earlier than expected.

The Colorado Hospital Association, a trade group that represents most of the state’s hospitals, filed a lawsuit against the Division of Insurance on Tuesday. It argued the division violated public comment rules and overstepped its power by threatening to suspend hospitals’ licenses if they didn’t pay on time.

“The state didn’t follow the law,” said Julie Lonborg, senior vice president of the hospital association.

Gov. Jared Polis signed a bill last year to create a reinsurance program to lower what people buying on the individual market pay for health insurance. Reinsurance involves governments supplying a pool of money that acts as a backstop, so that if insurers have to pay more than a certain amount for a customer’s medical expenses, they get some of that money back. That allows them to offer lower premiums, because they aren’t on the hook for all the costs of care if people with expensive medical conditions buy coverage.

The law set a goal of reducing insurance premiums in the individual market by 15% to 35%, with a goal of reducing costs more in the most expensive areas, like the Western Slope. In October, the governor’s office released an estimate that premiums would fall 20% statewide, on average. About 251,000 people buy insurance through the individual market in Colorado, according to the law’s fiscal note.

The reinsurance program would start reimbursing insurers after they spent $30,000 on a customer’s medical bills, and cut out once spending reached $400,000 in a year. The reinsurance fund would pay a percentage of the spending between those two bookends, ranging from 45% for customers on the Front Range to 85% for those living in the western half of the state.

The hospital association didn’t oppose the plan as the General Assembly debated it. While hospitals would pay a fee to help support the program, they also might benefit if more people bought the cheaper insurance plans, and the hospitals then didn’t have to provide as much uncompensated care.

People buying insurance won’t see lower insurance bills until next year, and the hospital association said its members anticipated they wouldn’t have to pay until the new fiscal year starts July 1. A draft regulation from the Division of Insurance would require that payments come in by June 30, pushing them into the current fiscal year, when hospitals haven’t budgeted the money to pay them, the association said in its lawsuit. Some small, rural hospitals would have until Sept. 30 to pay.

Lonborg said hospitals aren’t opposed to paying the $40 million, but to paying it early. While the regulation was marked as a draft, it also said it was effective Jan. 1, meaning hospitals have to deal with it now, she said.

“Our sole issue with (the Division of Insurance) is that they’re trying to collect the money early,” she said.

The Division of Insurance declined to comment on the lawsuit’s specific allegations, but said in a statement that it would defend the program.

“The Division is disappointed that the Colorado Hospital Association has taken this step, clearly motivated by protecting their bottom line,” the statement said. “CHA is, unfortunately, attacking a program that is working and will save Coloradans thousands of dollars this year on their health care.”

The hospital association alleged the Division of Insurance moved the payment deadline up by a day to avoid the Taxpayer’s Bill of Rights, which requires the state to pay back tax funds above a certain cap. The law’s fiscal note says the fees are exempt from the TABOR limit, but Lonborg said that was incorrect. The Division of Insurance has previously said the funds won’t count toward the TABOR cap.

“We don’t believe that you (balance the budget) on the backs of hospitals,” Lonborg said.

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