Tuesday, October 6, 2009

Are Insurance Exchanges The Answer For Health Care Reform?

A much less hyped idea for health care reform that may have a good shot of passing is that of health insurance exchanges. Individuals could join a pool to purchase insurance as a group to get competitive rates and avoid individual scrutiny for pre-existing conditions. The larger the pool, the greater the potential for economies of scale. For more on this, see the following post from Economist's View that discusses insurance exchanges in detail.

Most of the health care reform proposals being considered by congress include some form of health insurance exchanges. What are they and why are they needed?

...The idea of an insurance exchange is relatively straightforward. If you work for a big company or, say, the federal government, every year you choose from among a set of insurance plans--all of them conforming to some minimal standard, all of them available to you regardless of pre-existing medical condition. They've been chosen by your human resources or benefit department, who--ideally--have some clue about what they're doing, more at least than you do.

If, by contrast, you work on your own or in a small company, then you may have just one choice--or no choice at all. Affordable coverage probably won't be available to you if you have existing medical problems; even if you're healthy, the coverage you get could have major gaps or be otherwise unreliable. It'd be good to know which policies work and which ones don't. But unless you happen to be an actuary or insurance broker yourself, chances are you're clueless when it comes to navigating this complex world.

It's you, the individual or small businessperson trying to buy insurance, for whom the exchanges are being created. They're basically regulated marketplaces, where you get to choose from among insurance plans more or less the same way folks in large companies do. Your premiums should be more affordable, since now you're part of a large bargaining group. You should be able to get coverage regardless of preexisting conditions, since insurers can't pick and choose which exchange customers to cover. And you should have the peace of mind that the coverage is good, since you know it's been screened by the exchange.

Do we have any experience with exchanges?

The concept has been around for a while... And ... one state, Massachusetts, managed to create such an institution three years ago, when--as part of a more comprehensive health reform plan--it started a pair of insurance pools for small businesses and individuals who couldn't get coverage through employers.

The results, so far, are encouraging. People once unable to penetrate the private insurance market because of income or medical condition can now go online and select from a menu of insurance options--all of them covering essential services and providing solid financial protection, for rates not previously available. And although overall medical costs in Massachusetts have continued to rise,... premiums for ... the insurance option that the exchange manages most closely ... have risen at a far slower rate.

There are both weak and strong forms of exchanges:

The strong version is national, or at least regional. It's open to everyone: The unemployed, the self-employed and any business, no matter the size, that wants to buy in. There's risk adjustment to reduce the incentive for cherry-picking. The huge pool of users gives the exchange tremendous advantages in scale, simplicity and standardization (experts say that you need at least 20 million to fully achieve these benefits -- easy in a national exchange but harder in a regional or state-based one). With so many potential customers, insurers are eager to participate, and they will bid aggressively to ensure they're included in the market and compete aggressively to make sure they're successful within it. Over time, the combination of increased efficiencies and greater competition drive down costs, which will lead more employers to use the exchange, which will in turn give it more scale and bargaining power. You could easily see this exchange slowly emerge as the de facto American health-care system. And not through government fiat. Through consumer choice.

The weak version is state-based. It's open to only the unemployed, the self-employed and small businesses. Risk adjustment, if it exists at all, is crude. With such a limited pool of applicants, insurers aren't driven to compete, and the efficiencies of scale and competition are minimal. It never really grows, and instead exists as a marginal policy to mop up those who aren't covered by employers. Sort of an outlet shopping model for health-care, accessible only to the few able to get there.

Which version are we likely to get?

The bills moving through Congress all set up exchanges modeled more or less on what Massachusetts has done. But there are a few critical differences ... in how the exchanges would select which plans to offer...

In the bills that passed three House committees and the Senate Health, Education, Labor, and Pensions (HELP) Committee, the exchange would be a "prudent purchaser." In other words, it would have a staff that bargained with insurers to bring down premiums--and that made sure all plans lived up to strict guidelines for coverage and customer service. In effect, any insurer that wants to offer coverage through the exchanges has to get the equivalent of a "Good Housekeeping Seal of Approval" from the administrators. This is precisely how it works in Massachusetts.

By contrast, the Senate Finance bill envisions much weaker exchanges. Instead of choosing which plans to make available, the exchange administrators would, by law, have to accept any plan that meets a relatively minimal set of standards.

Jon Kingsdale, who runs the Massachusetts exchange, calls that a recipe for "policy disaster," as consumers faced a dizzying array of more expensive, less regulated choices. "It would be like telling your grocery store they have to offer every single kind of bread baked by every single bakery. ... The exchanges would be nothing more than an automated Yellow Pages." ...

Massachusetts senator, Kerry,... proposed to fix it by giving the exchanges the same powers envisioned in the House and HELP bills. But when Kerry introduced his plan last week, he couldn't get the votes to pass it. The reason, several sources on Capitol Hill say, was opposition from Olympia Snowe, the Maine Republican... Snowe seems to be concerned that a more aggressive exchange would amount to more government--which, in fact, it would be. But, as Massachusetts has shown, sometimes more government is exactly what health care needs.

Here's a bit more:

...Congress must also decide whether the exchanges would have any authority to decide which plans are offered and at what price, said Paul Fronstin, a policy analyst with the Employee Benefit Research Institute... “The exchange can have a more active role if it negotiate rates,” he said, “but it is not clear what is going to happen.”

In Massachusetts, for example, the state’s exchange, called the Connector, negotiates directly with the state’s private insurance companies in offering a small number of state-subsidized plans — similar to what an employer does when it screens the policies offered to its work force. ...

Jon Kingsdale, the executive director of the Commonwealth Health Insurance Connector Authority ... said the agency’s ability to negotiate on behalf of 180,000 customers who required state subsidies was a reason it achieved a 6 percent reduction in the cost of premiums this year.

But the Connector would be less effective if it had no say over which plans were offered on the exchange, said Mr. Kingsdale, who criticized the Senate Finance committee’s proposal, for example, as potentially creating little more than “an automated yellow pages.”

Because formulating an effective exchange is so difficult, some policy analysts are still arguing that only a new government-run competitor could create a powerful enough force in many parts of the country to offset the home-court advantage many insurers already wield. ...

And finally:

Chances are reasonably good that Kerry's vision of reform will prevail... But it's not a sure thing, which is why this seemingly narrow question deserves a lot more attention. Exchange design doesn't get the attention of controversies like the public option, abortion, or supposed death panels. In the long run, though, it could be far more decisive in whether reform works.

What is the bottom line to all of this? If exchanges are the way we are going to go, then how they are designed is essential. If we let lobbyists and misguided fears about government intervention stop us from giving the exchanges the breadth and authority they need, then they won't be effective.

This post has been republished from Mark Thoma's blog, Economist's View.

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