The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Health Insurance Exchanges are No Miracle Cure

Posted by Alan on October 6, 2009

That health care reform would include an insurance exchange has been all but a given for months. Democrats and Republicans alike are enamored with the idea of creating a marketplace in which individuals, small business and maybe larger enterprises could shop for health insurance. There are differing opinions as to whether these exchanges simply help purchasers compare plans on an apples-to-apples basis by presenting benefits and rates in a common format and language (along with providing common enrollment forms and the like) or whether they should also negotiate benefit and pricing with carriers and help users select and purchase coverage. What is rarely brought up is that exchanges are effective only if they are innocuous or cheat.

By innocuous I mean they serve simply as a data resource, providing consumers basic information in a common format and using a common terminology. Don’t get me wrong. This would be an extremely valuable service. Numerous brokers provide this kind of information today, but they’re hamstrung by the differing language and descriptions used by carriers. By forcing health plans to adopt a shared language, consumers would enjoy greater clarity when determining what plan to buy.

By cheating I mean that the playing field needs to be tilted in the favor of the exchange or it will not either deliver the intended value or last very long. That’s not the point of an op-ed in the New York Times by Cappy McGarr, who helped launch Texas’ version of a purchasing pool back in 1993, but it’s a fair conclusion. (Note: you may need to register with the New York Times web site to view the article, but registration is free. And my thanks to reader Nosedoc for bringing this opinion piece to my attention).  Mr. McGarr describes the failure of purchasing pools to take hold last decade in Texas, California, North Carolina and Florida. He blames their failure on cherry picking by private carriers outside the exchange, claiming these carriers signed up “all the small businesses with generally healthy employees and offload(ed) the bad risk … onto the exchange.”

From what I saw of the California version of a purchasing pool, Mr. McGarr claim is accurate in defining the problem, but wrong in describing the cause. California’s purchasing pool (called the Health Insurance Plan of California, or HIPC) did attract groups with higher claims. But this wasn’t the result of carriers directing expensive insureds to the pools as claimed by Mr. McGarr. Instead it was the direct result of a decision taken by the HIPC’s administrators.

Outside the HIPC, private carriers were required to accept all small groups applying for coverage, but could adjust rates up or down 10 percent based on a group’s risk profile. Virtually all of them did. The HIPC could have used this legal rating band, but its leadership chose not to do so. (The members and staff of the agency responsible for the HIPC were bright, well intentioned individuals, but they were reacting, at least in part, to public policy concerns, not a business needs). This meant low risk groups found the market outside more attractive and high risk groups found the offerings within the HIPC more attractive. The result is neither sinister nor should it be unexpected.

When competing against the private market, exchanges will have other disadvantages. For example, government agencies must hold open and public meetings. This is a good thing, the government shouldn’t operate behind closed doors. But it’s also a cumbersome process. Businesses need to adjust quickly to changing circumstances, move quickly to seize unexpected opportunities and to avoid unanticipated dangers. Government enterprises are restricted in their ability to take fast action; private companies are not.

So how can exchanges compete with a vibrant market beyond their jurisdiction? One way is to give the exchanges advantages over the private market; the other is to hobble the private market. For example, the legislation making its way through Congress offers premium subsidies to lower income Americans. yet those subsidies can only be used within the exchange. Why? If coverage outside the exchange meets the definition of acceptable coverage, shouldn’t consumers have the choice to use their subsidies on whatever plan they determine best fits their needs? Lawmakers claim to support consumer choice, but here’s an example of where members of both parties are willing to restrict that choice. Other methods of tilting the playing field? Force carriers to participate in the exchange. Limit what they can do with their non-exchange products.

Mr. McGarr’s suggested solution is to require private carriers to accept all applicants (an idea nearly everyone, including the private carriers agrees upon) and to prevent them from adjusting rates based on health status. He notes, however, that enforcement will be challenging and then makes an interesting proposal: instead of creating exchanges to foster competition, create a public plan.

As regular readers know, I’m not a fan of public plans. But it is interesting to think about the trade-off. If a public plan was required to play by the same rules as private carriers (no fair simply reimbursing providers a percentage of Medicare rates) and be self-sufficient, would that be worse than creating exchanges that lawmakers will find ways of benefitting through a tilted playing field?  After all, if exchanges are to have a significant impact on the cost of health insurance, they will need to negotiate rates with doctors and hospitals. But that’s not what they do. It is, however, what public plans do.

Not that we have a choice, but if we did, which would you choose? An exchange? Or a public plan?


12 Responses to “Health Insurance Exchanges are No Miracle Cure”

  1. Gregory Weinman said

    Health insurance exchanges are a favorite idea of mine. Congressional meddling, mandates, etc., is the real problem.

    I worry about what Congress may ultimately propose because most health care discussions are overly concerned with insurance rather than care. I also think the debate focuses too much on prepaid health care instead of health insurance. The American people deserve real reform not more federal mandates.

    Congress should create a bill to repeal the McCarran-Ferguson Act of 1945 and replace it with federal regulation that culls the best from California and New York rules to enable health care offerings across state lines. There would certainly be a ready pool of regulators available from redundant state agencies. This regulation should require guarantors (insurance companies) to identify their subscribers and their subscribers’ annual cost to the IRS so that tax credits could be automatic.

    In a separate bill federal legislation should create a health care exchange, Massachusetts or Vermont style. Such an exchange should allow guarantors to offer plans having no federal mandates beyond guaranteed coverage the insurance industry already agreed. There should be no mandates on premiums, deductible amounts, co-pay amounts, coverage limits, types of coverage, covered services, … Instead, Health and Human Services would evaluate each plan offered listing in summary all benefits and all costs with an easy 800 number for those who struggle to comprehend. Insurance regulators would also compare plans offering their HHS “Regulator’s Choice” awards to the best offerings. I believe the insurance industry would eagerly compete as they do for Medicare part ‘C’ and part ‘D’.

    In another bill Congress should eliminate the income tax deduction for business sponsored health plans. The bill should introduce a new FICA payroll tax program levying 4% of income up to $2000 total tax that could be payable to any recognized health care plan chosen by the individual. Additionally, Congress should offer a refundable tax credit (over and above the new FICA levy) for expenses paid to any recognized health care plan. And, most of all, Congress should expand health savings accounts to everyone administered by any qualified retirement account administrator.

    I think those bills would bring competition back into the health care marketplace lowering costs across the nation. It seems evidently true for Medicare part ‘C’ and part ‘D’. Congress could take a year or more to examine the structure of subsidies enabling those in the second and third quintile of income to purchase a health plan within their budget. The first quintile of income is covered by Medicaid. The fourth and fifth quintile of income represents professionals of which I am one.

    • dave said

      A joke.
      There are places now where people can go to “shop …?”
      Why do we need govt. coming in, bogging everything down and basicaly offering NO continued service to the insured?
      This is a socialist plot to eventually replace private insurers as is being done with the auto industry and banking.
      Let freedom ring.

  2. jonnie gates said

    wake up care has become a municipality. goverment offers protection from living in society. if my house catches fire i get the same protection as the rich, why should i not be protected from contracting illness due to society? Illness is global now and spreads with more ease than ever. So, the defference between swine flu and mexico attacking the us border eludes me.

  3. We have something similar in Massachusetts and the only choices are the high priced plans. When the five major insurers saw that people that were self-employed or those who were not sick were choosing plans with $2500 deductables they went to Beacon Hill and had the rules changed.

    • Dave Wood said

      The exchange is a great idea, especially since Obama care will drive most small businesses to cancel their subsidized policys for their employees and funnel them into the subsidized exchange. This will increase the costs for the Federal govt. and lower them for small businesses.

      What Americans and Obama are missing is the fact that there are two main drivers of high cost in American health care today. 1. the poor status of our health ie. obesity, high stress levels, older age, etc. and 2. the inefficient, wasteful, and unfair employer pays system we currently have.

      So what does Obama care do for item 1 above? Almost nothing, thus ensuring our future health care costs to rise and rise as more Americans get the bill for our obesity, stress, and old age.

      What about item 2 above. Obama care not only does nothing to lessen the burden of the lame system, HE DOUBLES DOWN ON IT!!!
      That is, Obama does not lighten the load of paperwork, billing, and multi govt. handling of payments, he in fact makes all that paperwork, billing, and bureaucracy more complicated, more cumbersome, and more expensive for us all.

      My prediction is that half of the uninsured will be insured in the next decade, but costs will be DOUBLE what the predictions are. Health care costs will be double the inflation rate. Federal deficits will cripple the dollar causing capital to flow over seas instead of in house, which will cause our unemployment rates to be high, perhaps 8% in 2011 when Obama faces reelection.

      We should just do the exchange, the best practices for Medicaid and medicare, and allow interstate insurance, as well as the insurers must take all policy, and perhaps some reforms for malpractice. NO SUBSIDYS NOW. We cant afford it.

      • dave said

        I’m with you on all but your suggestion that the “exchange” would help.
        There is no shortage of places to shop for health insurance.
        Why would this be “cheaper / better” in any way?
        Subsidy’s are unavoidable when you consider what is being tossed around. GI,no medical underwritting …
        Selling across state lines will lower rates in some states but only raise them in others.
        Where does the money come from? people think eliminating private insurers and letting the govt. take care of things will guarantee converage and save money.
        It will add cost and reduce options.

  4. Jim Sugden said

    I agree with Alan’s assessment of the actual reasons that programs like the HIPC have failed. Their administrators have confused good intentions and social engineering with good business sense and in so doing brought these cooperative experiments to ruin.

    On the topic of Exchanges, however, there are two addiitonal important points to consider. Business sense tells me that a single unified point of contact (an Exchange) is probably the most efficiant way to deliver subsidies. It would centralize and standardize the process of qualifying applicants, presenting options, applying for and billing coverage and crediting governemnt subsidies. Addiitonally, if applied to the group market, an Exchange would centralize the billing process, allowing employees to shop for and select policies and then have them placed on their employer’s unified list bill, administered by the Exchange. In this respect an Exchange functioning as a clearinghouse would have a significant advantage over other, private web-based shopping sites.

    If government is going to compete against the private market, it would be foolish not to exploit its competitive advantages, namely, consolidation, standardization and the ability to mandate behavior. We don’t have to like it, but if we’re going to compete with Exchanges we’d better be aware of these issues.

    • Alan said

      Jim, thanks for your comment. And I think we’re in violent agreement. The exchanges should exploit its competitive advantages and those would include consolidated billing, common application forms for multiple carriers, and certain efficiencies. That’s fair competition. By focusing on the problems purchasing pools have had I may have created the impression that exchanges bring no advantages to the market. That’s not the case. Indeed, exchanges have a lot to offer.

      The concern I was expressing in the post is that the government is likely to give their exchanges unfair advantages. If exchanges are more efficient in administering subsidies, that’s a fair market advantage. Limiting the use of those subsidies to the exchange would, in my mind, be an unfair advantage.

      If exchanges win in the marketplace on their own merits, well, that’s business. The contest, however, should be fair. My guess is we’re in agreement on that point.

      For example, an exchange might be a more efficient way to manage premium subsidies, but that shouldn’t prevent subsidies from being used outside the exchange.

      • dave said

        “The concern I was expressing in the post is that the government is likely to give their exchanges unfair advantages. If exchanges are more efficient in administering subsidies, that’s a fair market advantage. Limiting the use of those subsidies to the exchange would, in my mind, be an unfair advantage.”

        Ah, yeeah …
        That’s their plan. To phase put private insurer’s by offering subsidy’s and tax breaks to “exchange only plans.”

        What a laugh this whole thing is. Total back door operation. Call it what you want. First it was … “the public option.” Couldn’t finagle that so now its … the “exchange.” The govt. couldn’t care less about Joe six pack’s healthcare expenses. Go ahead put up your exchange, lump all people together regardless of health prior to approval, the state they live in, etc. NY, OH, TX, Fl. … you can buy from anywhere. You’re gonna love it folks when your premiums are doubled and you have to wait forever to be treated. But it will be worth it because you will have succeeded in shutting down the “evil, greedy” insurance companies by handing over yet another aspect of our lives to the govt.

        I almost hope it happens at this point just to watch the entire thing implode. With any luck this whole “promise” is just a stall tactic to get re elected in 2012. If we are lucky.

  5. Rick said

    I would rather compete with the public plan playing by the same rules. However, how could a public plan be structured to guarantee that it would forever not cheat?

  6. Alison said

    Point heard.

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