Health Insurance Exchanges Unlikely to Eliminate Brokers

The idea of connectors, exchanges, gateways and purchasing pools are far more than a fad, they’ve been around far too long. A purchasing pool was central to the Clinton Administration health care reform effort in the 1990s. They have been enacted in several states (although the California version, created in 1993, has since gone out-of-business). And they enjoy strong support across the political spectrum. That something akin to a connector, gateway, exchange or purchasing pool will be a part of whatever health care reform emerges from Congress this year is all but a certainty.

As with most concepts, the devil takes up residence in the details. Connectors, exchanges, gateways and purchasing pools are no exception. And it starts with what they’re called. There are technical differences among them, but for most purposes, especially political purposes, the distinctions are meaningless. So for simplicity sake, we’ll refer to all of them as exchanges.

What they are called, however, is unimportant. What matters is what they do and how they do it. I caused quite a few brokers some heart burn yesterday when, in passing, I wrote of exchanges “depending on how these are structured the only impact they may have is to crush innovation and eliminate brokers from the system.”  Insurance producers, quite reasonably, were concerned to read of this possibility.  So let me be clear: The bad news is that possibility is real. The good is that the possibility is far from certain.

Exchanges mean different things to different people. Some see them as replacing the chaos of an open marketplace with the structure of a regulator, controlled and confined market space. All health insurance products would be sold through the exchange. All health insurance carriers would be required to negotiate with the exchange concerning pricing and benefits. All information would be presented in a standard format with complete transparency being the ultimate goal. Carriers would compete solely on service and pricing. Consumers would come to the exchange to purchase their coverage. If they have questions they call or email an exchange employee. No independent brokers needed or wanted.

This kind of purchasing pool was central to the “managed competition” model of the Clinton Administration health care reforms. Fortunately for consumers and their brokers, this extreme exchange is unlikely to be a part of the final health care reform package.

At the other end of the spectrum is an exchange as an online information source. Think Orbitz, eHealth, Priceline or the like. The exchange does not negotiate with carriers nor does it set prices or benefits. It merely provides information about the benefit plans available in a region in simple, standard language. Consumers come to the site to research their options. If they have questions, and the sites online FAQs don’t suffice, the exchange lists resources local to the consumer – including and, maybe especially, independent brokers.

This kind of info-exchange is the least expensive for the government to maintain and the least disruptive of current distribution channels. There is a chance this is the kind of exchange will be a part of the final reform plan.

Odds are, however, what will be part of the final package will fall somewhere closer to the middle of the spectrum. The ultimate exchange will certainly provide side-by-side comparisons of various plans available in a local area. The insurance carriers have already expressed interest in establishing standard terminology and even common enrollment forms so this function will likely be non-controversial. The broad consensus seems to be that health plans should be available to consumers and employers outside of the exchange so there will be alternatives to the exchange. What’s not clear yet is whether the exchange will be given advantages. For example, Congress could decide premium subsidies will be available only to individuals buying coverage through the exchange.

Thanks in large part to the hard work of Janet Trautwein and her team at the National Association of Health Underwriters, brokers are highly likely to be explicitly permitted to sell products inside the exchange. The Senate Health, Education, Labor and Pensions Committee is refining their legislation which includes a “gateway.” This morning they accepted an amendment offered by Senator Orrin Hatch specifically identifying brokers as eligible to sell products within the gateway. Considering the Senate HELP Committee is staking out the most liberal position in the Senate, this is an important and significant development.

What has been most surprising – and disappointing – is the wide spread belief that the mere existence of an exchange will make it so easy for consumers to select the right health plan for their needs that anyone can assist them. Even conservative Republicans have put forward a proposal that would allow consumers to purchase coverage from their state’s Department of Motor Vehicles.  (The Hatch amendment does require entities selling within the exchange to be “licensed if appropriate.”) This reflects in part a political reality: if exchanges are to be worthwhile they need to reduce the cost of coverage somehow. One way to do that is to reduce the cost of distribution.

While it is true standardizing terminology will make health insurance coverage easier for consumers and employers to understand that doesn’t mean genuine expertise isn’t needed. We’re not talking about books sold on Amazon. You buy the wrong book and you’re out a few bucks and some time. Buy the wrong health insurance and your health and financial security is in jeopardy.

Even in Congress there is an understanding that one size does not fit all consumers. If your health insurance doesn’t fit you can’t take it to a tailor for adjustments. You live with your choices for some time. Orbitz may be a great way to compare the cost of air fare just as an exchange may make comparing the price of health plans easier. Data concerning health care is already easy to come by and an exchange may make it even more accessible. But data is not knowledge. That requires expertise and a deep understanding of the market. Which carrier is having service problems? What specifically does a particular consumer need from their coverage. What factors should be considered to assure the consumer is receiving the highest value for their premium dollars? The clerk at the DMV may be very bright and eager to help, but is unlikely to have the knowledge to provide meaningful advice. Qualified, licensed and professional brokers do.

What does this mean for brokers? First, those who are simply pushing paper, who fail to listen to their clients and provide expertise, who are adding no value to the products they sell will be out of business sooner rather than later. The exchange will see to that.

For brokers who add value, however, there should be a bright future. Their compensation will change, especially if all Americans are required to have basic insurance coverage. Fees may supplant, or at least stand alongside, premium-based commissions. As long as there are real options available to consumers in a competitive market place, there will be a need for advisor, counselors and advocates. There will be a need for expertise. Brokers who play these roles and who perform the alchemy of turning data into knowledge will prosper, even if new distribution channels are created by reform.

The market pays for value. Brokers deliver value. The existence of a health insurance does not, of itself, change this legitimate dynamic. Nor should it. The key will be what kind of exchange is created. It doesn’t matter what it’s called. What matters is what it does – and how it does it.

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Questions McCain and Obama Should Answer on Health Care Reform

Senators John McCain and Barack Obama final debate tonight at Hofstra University will cover a host of issues. Health care reform is should be a major topic of discussion. The financial insecurity Americans feel in the face of the current economic crisis is exacerbated by concerns over health insurance. Can they afford the coverage they have? Will they be uninsured — and uninsurable — if they lose their job?

How the candidates approach health care reform says a great deal about their approach to governing. Senator McCain’s plan is primarily market-driven and uses the regulatory powers of government lightly. Senator Obama’s approach relies more heavily on government intervention and more dramatically regulates carriers, pharmacies and health care providers.

Neither of their health care reform plans are very detailed. And I’ve written before, they demonstrate the candidate’s attitudes and principles towards reform mor than dogmatic policy; they are a starting point for debate rather than specific legislative demands. I’ve also pointed out that both reform packages contain serious flaws. So the two Senators have a lot of explaining to do. Here’s a few questions that would be a good start:

Senator McCain would allow benefit plans approved for sale in any state to be sold in every state. This would lead to a rush to the bottom as carriers file their plans in the most lenient state they can find. It would mean that voters in a state would have no say in how health plans sold to them are regulated. How would Senator McCain mitigate these inevitable outcomes? Does he think states have no right to regulate health insurance sold to its citizens?

Senator Obama would require carriers to sell policies to anyone applying for coverage and prevent them from excluding pre-existing conditions. Yet he does not require adults to buy coverage. They could simply wait until the need for medical care arises and then buy insurance. It’s the equivalent of waiting until after your car hits a tree to buy auto insurance. New York and New Jersey have similar rules. It’s no surprise that the average cost of individual coverage in those states is twice that in California. Senator Obama claims his top priority is to make health care coverage more affordable. How does he reconcile this contradiction?

Senator McCain wants to treat the value of health insurance as taxable income to workers and replace this with a tax credit of $2,500 for an individual and $5,000 for a family. In many ways this would be a more fair and progressive use of the tax code than the status quo. After all, higher paid executives are in higher tax brackets, and consequently receive a bigger tax deduction, than their lower paid colleagues. This would change under Senator McCain’s plan. Executives would be hit with a bigger tax bill, but receive tax credit as everyone else. Given a more progressive system, why does Senator Obama reject this approach?

The tax credit in Senator McCain’s plan is supposed to make buying coverage affordable for America’s families. However, medical inflation increases at a far greater rate than general inflation. Senator McCain’s tax credits don’t increase with inflation at all. Since the cost of medical care is the primary driver of health insurance premiums, the tax credits will cover a smaller percentage of premiums over time. Eventually, the tax credits won’t offset enough of the cost (let alone offset the impact of losing the tax deduction). How would Senator McCain deal with this problem?

Speaking of health care costs, how do Senators McCain and Obama intend to tame that beast? Yes, they both support a greater emphasis on prevention and leveraging technology. Everyone does — and these steps will have an impact. However, an aging population demanding the latest technology for an increasing number of ailments will soon overwhelm this benefit. So, beyond the obvious and widely shared solutions, does either candidate offer any unique approach to controlling rising medical costs?

Senator McCain’s tax credits would allow individuals to purchase coverage in the marketplace; Senator Obma would drive consumers into a government-run “exchange.” What do they like about the other’s approach? What don’t they like about it?

And wouldn’t it be fun to hear them talk about consolidation among hospitals, which in some communities have created health care monopolies? Or discuss whether for-profit health insurance companies have any place in America’s health care system?

The odds of any of these questions being addressed is small. Really, really small. Intead, all we’re likely to get from the debate tonight are snippets of their stump speeches. These will express their mutual desire to  make health care coverage accessible and affordable. Then they’ll attack the other’s approach as “the same deregulation that got us into the banking mess” or “a big step down the road to socialized medicine.”

We deserve to hear more about their health care reform plans. Even a little in-depth dialogue on the subject would be nice. Unlikely, but nice.

NFIB Calls for Health Care Reform

The National Federation of Independent Businesses describes itself as “The Voice of Small Business.” And what they’re saying is that, when it comes to America’s health care system, small businesses are fed up with the status quo. They recently posted their health care reform proposal and, while there’s not a lot that’s changed in their proposal, the desire for changes rings through loud and clear.

The NFIB health care reform proposalis built around 11 principles. Notable among them is that all Americans should have access to quality care and protection against catastrophic costs. And while there’s a role for government in providing a saftey net to enable low income Americans to obtain coverage, they make clear “[t]his does not mean a government-run, single-payer system.”

Instead, the NFIB believes “Americans should receive their health insurance and healthcare through the private sector. Care must be taken to minimize the extent to which governmental safety nets crowd out private insurance and care.” They call for affordable coverage that is portable. “Americans should be able to move throughout the United States and change jobs without losing their health insurance.”

In getting specific concerning their reform proposals they call for allowing small business to create multi-state purchasing pools. These Small-Business Health Plans could be sponsored by a variety of organizations including, not surprisingly, the NFIB. This is one of the more controversial aspects of the NFIB reform package as many believe it would undermine state consumer protection laws, creating an unlevel playing field between the pool and non-pool health plans in any given state.

The NFIB’s other provisions include promotion of Health Savings Accounts, full deductibility of health insurance premiums for individuals and the ability for individuals to purchase coverage across state lines. This latter element reflects a component of Senator John McCain’s health care reform plan and is also controversial. It could defeat consumer protections enacted by states as carriers rush to offer plans under the most lenient state regulatory scheme.

While state health care reform proposals will continue to be debated in capitols across the country, my take is that meaningful change will require Federal action. Which means the proposals of advocates like the NFIB will, and should, be part of the debate. And it means proposals from other advocates will be coming fast and furious as a new administration takes shape.