The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

California Exchange Legislation Greatly Flawed and Should be Vetoed

Posted by Alan on September 24, 2010

How states implement exchanges will have a tremendous impact on the efficacy of the Patient Protection and Affordable Care Act. States can create exchanges that educate consumers, bring them innovative products, increase choice in the marketplace and encourage competition. On the other hand exchanges can be designed to drive consumers to handpicked carriers, stifle innovation, strangle competition, and reduce choice. Fashioning smart exchanges (that would be the first type mentioned) won’t be easy. Fortunately, states have time to get it right.

Which makes the California Legislature’s decision to create an exchange that will do more harm than good even more dismaying. Governor Arnold Schwarzenegger will need to decide whether to sign into law AB 1602 and SB 900 or veto the bills by September 30th (they can become law without his signature if he takes no action by that date). He should veto the bills and require the legislature to start over. There’s time and the need for a more thoughtful approach to California’s health insurance exchange.

AB 1602, authored by Assembly Speaker John Perez and SB 900, authored by Elaine Alquist, invests in a five member board the authority to create and operate the California Health benefit Exchange. The legislation law was supported by a broad coalition including Health Access, AARP, Blue Shield of California, Kaiser Permanente, Consumer’s Union and the SEIU. As originally drafted the legislation raised concerns, but took a more reasonable approach.

They were amended, however, in the last days before the California Legislature adjourned, in ways that will ultimately harm California consumers. The exchange board was given broad authority to set its own budget, sign contracts and create rules and regulations behind closed doors and without oversight. These concerns that are front-and-center in the efforts of the California Association of Health Underwriter’s and others to persuade Governor Schwarzenegger to veto AB 1602 and SB 900.

Other problems with the legislation is the empowerment of Navigators to assist consumers enrolling through the exchange. These individuals could wield great influence on individual’s purchasing decisions, but they are not required to be licensed. In addition, many are concerned that the exchange board could prevent independent brokers from participating in the exchange. Changes made at the last minute changed the legislation in ways that seem to run counter to a resolution recently enacted by the National Association of Insurance Commissioners which which calls on policy makers to “acknowledge the critical role of producers” and to include a role for them within exchanges.

Lawmakers need to determine the role of exchanges and strike a careful balance. Exchanges are generally regarded as a tool for simplifying the health insurance market. But simplify too much and through bureaucratic fiat as opposed to market demand, and the result will inevitably stifle innovation, depriving consumers of access to new and better plan designs.

Consider what would have happened had a five member board been empowered to determine product designs 10 years ago. Would they have created HSAs, one of today’s fastest growing types of health plans? Doubtful. And if they even considered the concept the decision would probably have been made on political grounds as much as economic ones. Would they have introduced value-based plans that reward consumers for visiting their doctors and taking healthy actions? Highly unlikely. (Full disclosure here, one of my consulting clients is SeeChange Health, a new insurance company that recently began offering just such value-based plans in parts of California).

AB 1602 and SB 900 empower the board of the Health Benefit Exchange a great deal of power to determine not just the types of plans offered within the exchange and which carriers can offer them, but also a tremendous amount of influence over what happens outside the exchange. One tremendous lever they’ll have to do so is their ability to determine, without public scrutiny or review, which insurers may participate in the exchange. They also have the ability to adopt major changes governing insurance coverage without public comment or legislative oversight.

Much has been written about how signing AB 1602 and SB 900 could be an an important part of Governor Schwarzenegger’s his legacy. Much has been written about how vetoing the exchange bills would reflect far better on the Governor’s service. Given his desire to fix what he frequently called “California’s broken health care system” the Governor no doubt would like to sign the legislation. And there’s nothing inherently wrong in giving the exchange board the ability to negotiate with carriers on behalf of those enrolling for coverage through the exchange. But those powers must be delegated in an appropriate way with an eye enhancing choice and innovation. AB 1602 and SB 900 fail to accomplish this.

All states need to be moving forward with creating their exchanges soon. It will take time to establish these operations, staff them and get them ready for business. However, lawmakers should also take the time necessary to get the legislation right. California lawmakers, in accepting last minute changes without public hearings, failed to do so. Starting over in January will still give them plenty of time to develop an exchange for the nation’s largest state that not only accomplishes the goals of such exchanges, but does so in a way that will nurture innovation over time.


21 Responses to “California Exchange Legislation Greatly Flawed and Should be Vetoed”

  1. Ann H. said

    I can’t get over how much I learn from you guys, whether you see the world darkly or not. I remember when the banking industry became allowed to sell insurance and we all feared for our jobs, and when COBRA became law and we feared our individual sales would plummet.

    I agree with Rick that govt exchanges and their navigators are inefficient bureaucracies, giving us ample opportunities outside the exchange. But producers of INDIVIDUAL insurance are hit harder by this than producers of group insurance. I do mostly group insurance, but AZ has mostly very small businesses and they might also go to the exchange. Curt brought up the issue of subsidies being allowed only through the exchanges. Why must that be? Many states have credits where the state verifies eligibility then pays the subsidy to the insurer, without controlling the site of purchase. This issue is a big red target for insurance agents to aim for. It’s up to AGENTS to tell Congress after the elections, because insurance companies don’t care where their plans are purchased. Fortunately, a hot issue with Republicans and Tea Partiers is reducing big govt, its intrusion in private enterprise, its restriction of private choice, its control of freedom of speech (or freedom of advice). Some say exchanges simplify, so maybe career politicians don’t realize most agents have quoting engines similar to E-Health Insurance, whom they just asked to run the govt quoting system. Let’s educate them that private enterprise already does this function and we don’t need the redundancy of big govt. Since liberals passed this law behind closed doors in a big hurry, it might be easier to remove some portions (like exchanges) than we think. We have support, because states don’t want to start nor maintain exchanges, and most people don’t want to buy through the govt and navigators. Agents aren’t really in the cross hairs of liberal politicians anyway, the insurance companies are. Our position as consumer advocates AGAINST insurance companies is attractive to liberals. The NAIC recently reaffirmed our value to HHS. Let’s fight, but let’s not rely on insurance companies and their lobbyists to do this for us, because they don’t care if the purchase is facilitated by YOU, or by e-health insurance, or by exchanges.

    A few weeks ago, someone (Curt? David? I can’t remember) called me a “soldier”, which I thought was funny. Whether you see these issues darkly or not, we agree that the issues need improvement. Yes, dangit, I’m a soldier, but repealing the govt’s right to be an insurance agency may make the sun shine brighter on your business, too! Let’s fight it.

  2. Curt Cella said

    Alan sorry for the many posts but here’s something that my friend Dave Gonzalez will love:

    See how everyone at the top of the food chain remains intact and everyone at the bottom (The agents) end up as chum….?

    …and so it goes….

  3. Curt Cella said

    By the way: IF CA goes through with its plan to have an Exchange completely manned by NON-licensed agents please tell me again why I need one? Oh yeah that’s right: It’s just another great sneaky form of taxation and the support of yet another government entity (The CA DOI). Seriously: Why continue the charade of licensing and CEs if someone can get hired on a Monday and be a “helper” at the Exchange by Wednesday? Am I the ONLY one who sees this for how wrong it truly is?!

    • Alan said

      Curt: you see the blindingly obvious. And we all see it. You just interpret things far more darkly than many of us. Remember back in 1993 when California launched the Health Insurance Plan of California? Lot’s of folks sounded just like you claiming a state-run plan would drive private carriers — and agents — out of business. Especially since the HIPC added a 5% commission to the bill of anyone using an agent (or, put another way, the same product was 5% cheaper if a group purchased coveraged direclty from the HIPC).

      What happened? Two-thirds of employers buying coverage in the HIPC used a broker, voluntarily paying 5% more than the one-third who did not for the same coverage. Why? They wanted the services provided by brokers and were willing to pay for it.

      Those who saw AB 1672 as the end of brokers were proven wrong. Yes, change was required, but in the end, AB 1672 benefited both consumers and the brokers who serve them.

      There is a lot in the PPACA and in California approach to its exchange that brokers need to be concerned about. But there will no doubt be new opportunities for brokers created by the new world, too. I don’t know how it will turn out, but then again, neither do you nor anyone else.

      One response to this situation is to see the worst possible outcome and strive to make everyone else accept that outcome as inevitable. Another response is to recognize change is coming and to prepare for it while seeking to help shape that change. (There are other responses as well, but let’s focus on these two for now). You seem to be following the former — not only do you see the (brokers’) world coming to an end, but you seem annoyed that others aren’t accepting this interpretation, too. Others, and I’m among them, are more optimistic.

      Your response seems right for you. The other approach is right for others. Neither is morally superior and only time will tell which is the wiser.

      So in answer to your question: no, you’re not the only one who sees what’s happening. Nor are you the only one who interprets it the way you do. But there are equally valid, reasonable and reasoned alternative interpretations. Let’s agree to disagree as all of us move forward in our own way to deal with the coming changes to our industry.

      • Curt Cella said

        Alan – no doubt if I check back here tomorrow I’ll spot LOTS of thumbs up for your pithy reply. Tsk Tsk Alan – I can tell I’ve gotten under your skin but frankly Alan it sure seemed like you just now read the Exchange Bills for our state?!

        The BIG difference between what you described above and what we face now is that today you have BOTH the state and the Federal guv lined up against us. I think you are very convenient in what you choose to address and what you choose to ignore. The tax credit and the requirement to buy through the Exchange is HUGE Alan – it is quite simply the next best thing to government-supplied healthcare.

        A better name for this blog would be ‘Health Reform Through Rose-Colored Glasses 101 for the Agent Who is About To Have His Head Handed To Him’

        Dave Gonzalez where are ya buddy?! Help me out here!

        • Alan said

          As I said, you’re entitled to your opinion — about health care reform and this blog. But no Curt, you’re not getting under my skin — if you were I’d just delete your comments ;-). I’m just amazed by your passion for trying to convince everyone that doom is inevitable. I’ve not seen such a committed effort of this kind in quite some time. As I’ve said more than once, your take on all this isn’t unreasonable nor is it exceptional. Your desire to have everyone agree with you and you’re continued hammering away at the same point in comment-after-comment-after-comment is what’s surprising — and is what inspired my response.

        • Curt Cella said

          Hammer away at the same point? Uhhh….well that’s a stumper there Alan: This is ‘The Alan Katz Health Care Reform Blog’ is it not? The more I thought about your article the angrier I got Alan: Your article simply fails to take into account the following obvious fact:

          Even if the current Governor vetoes the legislation before him the next governor will be Jerry Brown who will absolutely sign it. And this is the crux of my problem with the commentary I see here Alan: There’s really no sense of outrage or urgency from many of the posters here: They have utterly convinced themselves – with your help – that this effort will end like previous efforts. It won’t Alan and I simply believe – beyond a shadow of a doubt – that this will not end well for the vast vast majority of brokers. Your title is wrong here Alan:
          It is not The Alan Katz Health Care Reform Blog from One Broker’s Perspective. As one of your previous posts pointed out you really aren’t in that part of the game anymore Alan – you are working for insurance carriers. So to me your posts sound more like Neville Chamberlain than Winston Churchill.

          If you’re amazed by my passion that this is serious business Alan, I am equally amazed at your passion that it is not. (Or maybe I shouldn’t be? After all even after every last broker is gone, you’ll still draw a handsome paycheck as an industry consultant…won’t you?)

  4. Curt Cella said

    By the way Alan – in case I missed it I’ll apologize – to my knowledge you have never addressed the fact that the federal legislation specifically set up one key criteria to assure the Agent would be cut out of the loop come 2014: The federal tax credit eligibility criteria specifically states that the person who goes outside the Exchange for their insurance loses their tax credit eligibility.

    Now why would that be…? To help ensure the use of the Exchange to the exclusion of current channels.

    If I read one more post here about how servicing the client is our biggest contribution to the marketplace I will literally run screaming into the night. Hey! Folks! You gotta have clients in order to service them! Unless you folks are secretly working up an entirely new model for health insurance agents wherein we are paid to just be remote service centers for folks who don’t want to spend an hour on hold waiting to talk to their health insurance company (For those of us who have cable TV you’ll know what I’m talking about!) I suggest you actually start reading the readily avaialable information that is out there about just how devastating Health Reform is shaping up to be for agents who actually liked serving the individual market.

  5. Curt Cella said

    Well thank God you woke and smelled the napalm on this one Alan. Every agent in California should be scared %#^@less right about now. Our Governor will do what he always does: The WRONG thing.

    Both these bills need to be tossed and a more intelligent approach taken. This was a total rush job and – of course leave it to the morons in Sacramento – totally took the approach of using the seed of health reform to grow the single most anti insurance agent legislation possible.

    The simple fact is that the people voting on this legislation do NOT have a clue what they are voting on. Most are taking their cue from very simplistic far left socialized medicine lobbyists. They simply have no clue how the insurance industry works and the value add provided by agents every single day. Of course, we’re also getting no help from the insurance carriers who are picking the absolute wrong time to bail out on child-only plans without any kind of attempt to explain to the public why their hand has been forced on this issue. The simple fact is that insurance companies will still sell plans and still keep raising their premiums. The Exhanges will do nothing to stop that trend. Between the stupidity of the CA state legislature and the total lack of concern for the agent community on both sides of the equation, your average agent is screwed.

    Of course on the plus side we can now look forward to even more state government employees! That’ll mean more taxes to pay for their salaries and the best benefits any adult will likely find in a near bankrupt state like California. It just keeps getting better….

    Side note: Alan – I note that in the latest Jerry Brown commercial he says no new taxes without voter approval (Uhhh yeah right….I’m sure by voter approval he means that ‘well hell you voted for me; that must mean you approve of higher taxes!’) Also have to laugh about returning more government to the local level: I’m sure the folks in Bell can attest to how well THAT’S working out…. BTW: Is that a tacit admission that legislators at state level are a hopeless mess and a lost cause? If so can we disband government at state level or at least make it a money saving part time gig as in other states?!?!?)

  6. Ann H. said

    A good post, again, Alan. You’re a sage, and a wealth of information. What happens in California is important to us Arizona and those in other states. Rick, from the last post is in Pennsylvania. He’s brilliant and to the point. The exchanges are sluggish and bloated with irrelevant data. Adding unionized, unlicensed navigators makes it worse. Those agents that work inside the exchange and outside it are the smartest.

    Let’s look at recent history. We already have government “exchanges” of sorts. The government wants to be our insurance agency. They want to drive traffic to handpicked players, and then control them. One of the first government “exchanges” was The brilliant idea turned into a slow-moving giant. On you can compare supplements in your area. Yeah, sure you can. You can enter your data and get a list of a bzillion health plans and drug plans, with mathematical calculations of what’s right for you. Dizzying. Nobody buys a supplement from the results from They call a broker, or else in frustration they just flip a coin and pick a plan then contact the insurer direct.

    The next government “exchange” is the new web site that David Gonzales referenced in a prior post. It’s likewise a bloated giant. It has a section for “healthy individuals” (the clients we normally serve), where they can enter their age, some personal choices and zip code, and then be directed to a list of health plans. I don’t know about CA, but the AZ list of carriers in the individual market is funny. Madison National Life??? Independence American Insurance Company??? Freedom Life Insurance Co.??? What? I hope consumers don’t say, “Hey, why choose Blue Cross, Aetna, Humana, Cigna, Health Net… or another major player and let’s try a smaller player!”. But recommends all those carriers equally.

    These exchanges are violating the very laws and ethics that we, as licensed insurance agents, follow daily. We serve the best interest of the client on a case-by-case basis. We help the client make good choices and avoid pitfalls. I clicked through to choices from a MAJOR PLAYER and found more problems. Plan designs were recommended equally, even though some have limited Rx, limited copays, etc. How does a bloated govt website help a client make good choices? I found broken links, plans with no rates attached, difficulty comparing one plan directly to another. Then of course is the problem that the govt website ultimately drives a consumer directly to an insurance company’s website for purchase.

    The government is driving business to handpicked players and then trying to control them. HHS told insurers that if they raised premiums or reduced the benefits on Medicare supplements after suffering cuts in govt reimbursement, then HHS would make sure they were not allowed to sell in the Medicare market for year 2011. HHS recently announced that insurers were restricted in freedom of speech, and if insurers told their clients that rates must increase to pay for healthcare reform provisions, then HHS threatened to disallow those insurers to be in the exchanges when they open in 2014. This government is creating a mandated marketplace, handpicking players in that marketplace, then controlling them and threatening them. Government has no place in free enterprise, it has no right to control a marketplace like that, and no right to threaten to put insurers (or us) out of business if we don’t tow the government line.

  7. Rick said

    SEIU = unionized navigators = consumers union = more bureaucracy = a less competitive exchange = more opportunity for brokers outside the exchange.

    Do I seem to make sense?

    • Curt Cella said

      None. See above. The Tax credit for buying within Exchaneg is HUGE. (ANd I can’t emphasize that enough.

      • Rick said

        Curt, I’m not from CA and therefore unaware of the tax credit for buying within the CA Exchange you refer to.

        In order to qualify for the IRS described Small Business Health Care Tax Credit a business need not be in any Exchange at present.

        • Ann H. said

          Rick, I believe Curt meant the Subsidy that’s funded by us taxpayers. In 2014 PPACA’s subsidy kicks in, and it’s for those under 400% of the Federal Poverty Level only if they purchase their insurance through an exchange. Anyway, that’s the way the law is currently written.

        • Curt Cella said

          Well Rick – please don’t take offense but you just crystallized a huge problem within the broker community and especially the ones reading this blog – you simply don’t know what’s in the Affordable Care Act legislation. The federal government – in concert with the State Exchanges – is setting this up as a rigged game: Brokers like you, me and Ann will be on the outside looking in.

        • Ann H. said

          Lest I am misunderstood, please let me reiterate that I agree with Rick that we will have lots of selling opportunities whether there’s an exchange or not. And let me also reiterate that I tried to clarify for Rick that Curt’s unfortunate choice of the words “tax credit” would be better understood if he had said “subsidy”, as that’s what the law calls it. I do not feel that either of you “simply don’t know what’s in the Affordable Care Act” as Curt said, nor do I wish to be offensive by my posts.

        • Curt Cella said

          Sorry Ann BUT it is called a tax credit.

          Look for yourself:

        • Rick said

          Curt, I’m coming from the group side and always look for silver in the manure pile. Administrating the CA Exchange will be a bureaucratic board and most likely the navigators will be unionized and paid by salary with generous benefits. The navigators will be rewarded for going to the office bathroom or standing by the water cooler with their voice mail on. Curt Cella has to provide for his own benefits and paid on commission that only rewards when a sale is made and the customer satisfied to renew. Don’t you believe the disparity of your efficiency and the cumbersome service and high expense of the Exchange will offset most, or all, of those PARTIAL tax credits for a family of 4 making less than $88k per year that you fear? Let me reference words of the proposed Pennsylvania Exchange “small employers will also be able to shop for plans. However, if you have no medical conditions, purchasing coverage outside the Exchange may be a better option”. Curt, it does not take much imagination to realize why that wording is there.

      • Curt Cella said

        Rick – I may not be following your logic here but I’ll try: All health plans regardless of where they are purchased cost the same “X” amount of dollars. Lower overhead is never a factor in marketing a health plan. Secondly I have stated this before: This ‘battle’ will be fought state by state. If you folks in PA have a more broker-friendly Exchange than the one in CA, that wouldn’t surprise me one iota. Heck I think in some strong Republican states the Exchange will be little more than an informational portal.

        Getting back to your original premise: All things being equal and presuming most four member families earning in the $80’s likely itemize why in the world wouldn’t they take advantage of ANY tax credit that is on the table?
        (Here again I may be missing something in your comment so my bad if that’s the case…)
        If my interpretation of your comment is correct I think you represent the majority of brokers here who are not connecting the dots in the bigger picture: With Health Reform and the Exchanges in place the drive to commoditize health plans will be a lock. There is a huge rap against health plans today that they are needlessly complicated and contain ‘loopholes’ that ultimately work to secretly screw the consumer. If you read about how the plans in the Exchanges will look it’ll be Vanilla all the way babeeee! If you imbed the notion in the consumer’s mind that this is now easy easy easy and just simply like picking one of 4 or 5 plans within the space of 30 seconds and getting on with your day, you have effectively commoditized the entire sales process and removed the need for a broker.
        Please don’t get me wrong: I certainly don’t advocate that – the REALLY big shame of this is that we should have been heading in the direction of HSAs which would have made outstanding plan vehicles for so many and would – on a large scale – have brought consumer buying power to an arena (Our health care system!) that badly needed it. A democratic-controlled Congress was hellbent to destroy great concepts like the HSA and I think they’ll get their wish.

        And herein lies the fundamental difference between Democrats and Republicans: Republicans credit consumers for having brains and strive to do more to empower them to drive change in capitalistic markets. Democrats think all consumers and the virtual entirety of the American public are retarded and need the helping hand of Big Government to help them because – Lord knows – we’re just too stupid to figure this stuff out on our own…

  8. Underwriterguy said

    This may be off topic, and, if so, perhaps you will address the issue in a different post. Do you see Obamacare stimulating a move to self insurance in the small group market? I’m thinking that the MLR issue will prompt carriers to move the size requirements for self insurance downward. From my reading, self insured plans and stop loss are exempt from the new law. There might be some creative combination of HSA’s and low attachment points that could make self insurance very attractive. Or at least that’s my question.

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