Exchanges Need Brokers

I’m at the National Congress on Health Insurance Reform meeting in Washington, DC. One of the speakers today was Shawn Nowicki of HealthPass and the Northeast Business Group on Health. They run an exchange for small businesses in the greater New York City area.

Mr. Nowicki offered some real-world, practical advice to policy makers at the state and federal level responsible for establishing exchanges under the Patient Protection and Affordable Care Act and what it takes to make them successful. Given the great concern expressed by some of those offering comments on this blog about whether brokers will have a role in these exchanges, I thought readers might appreciate hearing Mr Nowiki’s thoughts on the subject.

Mr. Nowicki made clear involving brokers is critical to the success of an exchange – not just when it comes to selling health plans within the exchange, but “throughout the process.”  He noted that brokers drive the individual and small group market. Employers and consumers, he noted, have a personal relationship with their broker and trust them (implying brokers are more trusted than the exchange, the government, or carriers – an observation I think most objective observers would agree with).

Mr. Nowicki implicitly acknowledged that if brokers are excluded from exchanges, many small groups won’t even consider them. He went on to urge those who dismiss the importance and value of brokers to “reconsider their rhetoric.”

Ultimately the states will determine what role brokers play in the exchanges – and results will vary. Some states, like California, have already taken steps that appear to be anti-agent. Both Democratic and Republican lawmakers around the country too often have express the belief  that exchanges will be a panacea allowing consumers and small businesses to buy coverage simply and easily without an “intermediary” (or a counselor and advocate, as I would describe our role). Which means no matter how pro-business a state’s reputation, brokers need to bring to the attention of those creating and defining the exchanges the insights of people such as Mr. Nowicki.

As I’ve discussed in the past, buying health insurance is different than buying a book or airline ticket. Put simply, health insurance is complicated, expensive, rarely shopped for, very personal and extremely critical to one’s health and financial security. This is not a purchase to be made lightly. Consequently, consumers and small businesses want an expert to help them make the right choice. This is especially true for business owners who are not just making a choice for their own families, but for the families of their employees as well.

As Mr. Nowicki noted, however, brokers are important not only at the time of sale, but after the purchase as well. Exchanges may standardize some aspects of the market, but their very existence is an added layer of complexity. When a problem arises, who is an employer to call? The carrier? The exchange? What happens when, as it inevitably will, the carrier and the exchange each point the finger of blame for that problem at the other.

Today, brokers help level the playing field between consumers and the more powerful carriers. In the future their expertise and experience will help level the playing field between consumers and the more powerful exchanges.

States will take varying views on the role brokers should play in the exchange. As Mr. Nowicki made clear, the toll – and consequences – could be high for hose who minimize that role.

California Exchange Legislation Greatly Flawed and Should be Vetoed

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.

Why Health Insurance Brokers Will Survive Reform

Economists call it “disintermediation.” Normal people call it “eliminating the middleman.” Whatever term used, there’s widespread concern among brokers that health care reform will push them out of business. As David Gonzalez wrote in his comment on a previous post, "It’s time to pack up now, at least until further notice. The days of the broker, much like travel agents, are now gone.” This belief, which other commentators share, rests on the assumption that the exchanges created by the Patient Protection and Affordable Care Act, the medical loss ratio minimums carriers must maintain as of 2011, the potential commoditizing of health plans and an array of other provisions in the new law will make brokers unnecessary and/or unaffordable. There’s a lot of open issues concerning health care reform, so those predicting doom for producers may be right. But I don’t think so.

As I wrote in my previous post, anyone making predictions about what will happen due to passage of the PPACA is making, at best, an educated guess. That post described my two Law on Laws, which, taken together, in essence holds that laws as passed by lawmakers are not the final word on a law. Yes, there will be exchanges, but there are also likely to be robust markets outside of these markets. And there could (and should) be room for brokers to help consumers inside exchanges. Will there be? We just don’t know yet.

Within this context of uncertainty, what we can address is whether health insurance is enough like basic travel arrangements to result in doing away with medical insurance producers. Are health insurance brokers about to become as extinct as travel agents supposedly are?

For the record, according to the American Society of Travel Agents there were more than 86,000 full time travel agents in the United States in 2008 with another 30,000 independent contractors (most likely part-timers). There were no doubt many more prior to the rise of Expedia, Travelocity and the like, but this is still a significant number. True, they no longer are spending as much time on simple travel needs as before, but are presumably helping consumers with more complicated arrangements.

However, not every product or service is as vulnerable to disintermediation as the sale of airline tickets and hotel rooms. A bit over a year ago I put forward in this blog Katz’ Theory of Disintermediation, an attempt to identify the factors that determine whether the Internet will eliminate the sales force in an industry. The theory holds that it is the interrelationship of six factors that provides the answer:

  1. Complexity (how well is the product or service understood – or able to be understood – by consumers?)
  2. Purchase Frequency (how often do consumers shop for the product or service?)
  3. Significance (how personal and critical is the product or service to consumers?)
  4. Cost (how expensive is the product or service?)
  5. Installation Requirements (how much on-site service is required to install or use the product or service?)
  6. Abstraction (how easily can a description of the product or service be digitized and posted online?)

Let’s see how this plays out with travel and health insurance. For travel we’re looking at a basic business trip from point A to point B with a hotel stay in between. Throw in a rental car if you like. For health insurance we’ll consider a straight-forward individual plan – no HSAs or other complications. We’ll score Basic Travel and Health Insurance on a scale of 1-to-10 with 1 being low concerning a factor (e.g., not complex at all) and 10 being high (e.g., really complicated).  The higher the score the less likely a sales force is to be disintermediated. (There’s nothing precise about my scoring. Please feel free to substitute your own. Or get really sophisticated and weight the various factors. What I’m trying to show the relative likelihood of travel agents and health insurance agents being disintermediated. Your calculations may vary).

Complexity: There’s no question what a seat on an airplane entails or what to expect in a hotel room. Some may have more or less features than others, but the basics are the same. Health insurance is a different matter. Many consumers don’t know the difference between HMOs or PPOs, co-insurance or deductibles. And don’t even mention formularies. Score: Basic Travel 2 / Health Insurance 8

Purchase Frequency: Many people travel several times a year. Few folks shop for health insurance more than once a year or three times a decade. Score: Basic Travel 3 / Health Insurance 8

Significance: When it’s your one vacation a year, your travel plans are pretty significant (and you’re more likely to employ a travel agent). But picking the right airline for a quick business trip from Chicago to New York and back isn’t all that important – the differences between one airline and another aren’t that substantial. Choose the wrong health plan, however, and the repercussions on a family’s health and financial security can be profound. Score: Basic Travel 3 / Health Insurance 9

Cost: Most travel is a few hundred dollars – not a rounding error, but not likely to send a families finances into a death spiral. In 2008 the average health insurance premium for family coverage was $13,770 in the United States. This cost has no doubt increased in the past two years. Score: Basic Travel 2 / Health Insurance 7.

Installation Requirements: Not really a factor for travel. You show up at the airport, go through security-line hell, sit in a too-small seat in a stuffy metal tube and the next thing you know you’re five miles high going 600 miles per hour. Installing health insurance can be a bit more involved (if less scenic). Consumers may need educating on what their plan does and does not cover. They may need to learn how to find an in-network doctor (and why), how to file a claim (which may be to a different place for medical care and prescriptions). Score: Basic Travel: 1 / Health Insurance: 6

Abstraction: Describing an airline seat or hotel room online is pretty simple. Same with describing a health insurance plan. (The terminology may be complex, but the information is easily presented). It’s not like there are tires to kick. Score: Basic Travel 1 / Health Insurance 1 

Totals: Basic Travel: 13. Health Insurance: 39

Based on this exercise (one admittedly reeking with false precision) one would predict that those selling basic travel are far more likely to be disintermediated than those selling medical insurance.

True, none of this means lawmakers and regulators won’t purposefully or inadvertently put health insurance brokers out of business, but they’d have to work at it. And I’m hopeful wiser heads (in legislatures and agencies as well as in the real world where employers and consumers live) will prevail and prevent that from happening.

I hope this will be the case because I strongly believe professional producers add substantial value to the health plans they sell. And it would be a real loss to consumers to lose that value.

HHS’ Technology Problem Presents a Real Opportunity

Opportunities sometimes arrive unexpectedly, usually alongside a problem. Health care reform will be no different. A problem facing the Department of Health and Human Services in implementing  a standard database of health plans brings with it an opportunity to eliminate unnecessary spending in the current system and unleash a new wave of sales innovation.

As reported by Tony Romm, writing for The Hill’s technology blog, Hillicon Valley, in less than 60 days HHS must develop a “standardized format” to present health plan information to consumers. Roughly a month later, federal officials are supposed to launch a website providing this information to consumers on a state-by-state basis. In other words, HHS has until July 1st to build what the Hill calls “a central, online health insurance information hub.” The feds will maintain the insurance information site until the states implement their insurance exchanges in 2014.

90 days is not a lot of time to build a new high-tech tool, especially for a bureaucracy like HHS – a heavy-user of technology, but not a dedicated technology organization. But building the quoting engine is the least of their worries. The tough part of the job is be coming up with a way to feed disparate data into a single platform. And when it comes to how insurance companies present their rates and benefits, “disparate” understates the case.

Today health insurance companies are free to develop rate tables in any format they desire. They also have tremendous discretion in how they describe the benefits they offer and to some extent, what benefits they describe.The Babel-esque result is that providing apple-to-apple comparisons among carriers is an extremely labor intensive, subjective task. The idea of creating a standardized information hub is designed to bring some order to this chaos.

And, fortunately, HHS doesn’t have to start from scratch. Quoting systems are a highly-evolved, well-established technology (I’ve been involved in developing more than a few over the past few decades). Several companies have already built effective small group and/or individual quoting systems in use in multiple states. Some of the best known are Connecture, eHealthinsurance, HealthConnect, Norvax, and Quotit. These firms and their competitors already do what HHS is supposed to deliver: provide consumers and their brokers information about available health plans from multiple carriers using a single interface and presenting the carriers’ distinctive information in a common format.

HHS will be hard pressed to meet their tight deadline building a quoting system from scratch. Obtaining one from an established vendor is the only way they’ll deliver what the new health care reform law demands on time.

Enter opportunity. HHS is unlikely to simply lease a third-party quoting system. Instead they will buy a system. Then they will seek to make their purchase the industry standard. One way to do that would be to make the system open source – available for anyone and everyone to build upon.

The biggest operating cost incurred by quoting system providers like those mentioned is not building the quoting technology: it’s inputting and maintaining the rate and benefit information. Each company is required to translate the unique templates and descriptions used by the carriers into a standard format. From an industry point of view this is nonsensical, especially when one realizes the eventual result is pretty much the same: a report displaying carriers’ rates and benefits.

What’s happening with quoting insurance rates is reminiscent of what occurred in the auto industry when the government required them to deploy catalytic converters. Each car company spent many millions of dollars creating a proprietary device. Yet do you know anyone who has purchased a car based on the design of its catalytic converter? Think of how much automobile manufacturers would have saved if they’d come together to create a common device. This would have freed them to compete not on an invisible commodity built into every car, but on design, price, quality and a host of other more meaningful elements.

Similarly, the quoting system vendors are spending considerable sums taking the same information and translating it into their proprietary platforms. The arrival of standard formats and of open source programming will free them to devote their energies on building what truly differentiates them: the myriad products and services they’ve built around their proprietary quoting systems. It is the case management, marketing, HR, client-communication, and other applications with which they’ve surrounded their quoting systems that makes each one unique and adds value.

These are entrepreneurial companies we’re talking about. Dollars currently spent on translating carrier information into their proprietary platforms will be diverted toward creating new ways of helping brokers assist and support their clients. Meanwhile the standards will help carriers reduce their administrative costs. By making the quoting system architecture open source other entrepreneurs could enter the field, bringing their new approaches to the market.

The Department of Health and Human Services cannot duplicate in three months what these enterprises have spent years refining. Nor should they try. Instead, HHS should quickly pick one of the current systems and establish it as the industry standard.

Will this cost-saving opportunity change the world? No. But when it comes to wringing costs out of the health insurance system, any opportunity is welcome.

Four Problems with the Governor’s New Health Care Proposal

The Governor’s revised health care proposal is a substantial improvement over what he originally put forward in January of this year. I’m impressed with the Administration’s willingness to listen to concerns and to try to address them. As I’ll be writing about the proposal a great deal in the next several days I thought it would be appropriate — and easier — to address my four biggest concerns in a separate post (this one). That way I don’t have to recite them in each of these future posts. (Warning: The bill is complex and I haven’t thoroughly digested it yet, so I reserve the right to increase this list later).

Problem #1: The Purchasing Pool.
Having a state-purchasing pool for individuals enrolled in state programs like MediCal and Healthy Families makes sense. A pool for individuals receiving premium subsidies through tax credits doesn’t. Purchasing pools have repeatedly shown themselves unable to bring down the cost of coverage, but they can distort the marketplace. Further, they can  become an irresistable magnet for expanding state interference in the market (I personally believe the state’s role in health insurance is to regulate the market, not to participate in it).

If the Governor insists on a pool that goes beyond MediCal and Healthy Families, however, there should be legislative language to thwart the natural tendency of regulators and state agencies to tilt the playing field in the favor of the pool. After all, when the umpire picks up a bat and steps up to the plate, he’s rarely called out on strikes. If there is to be a pool for those receiving premium subsidies it should be voluntary (which it is in the Governor’s plan) and it should have no artificial advantages over the private marketplace. This needs to be made clear in the legislation.

Problem #2: Minimum Coverage
The Governor’s January proposal outlined the minimum coverage individuals would need to obtain. In the October version he instead calls for the Secretary of the Human and Health Services Department to develop the minimum package. The problem is, without knowing what this coverage will look like it’s impossible to determine the impact the reform package will have on individuals’ pocketbooks and the state’s finances. I appreciate the political challenge in defining a minimum package in the legislation itself, but that’s the responsible course and the Governor should take it.

Problem #3: Enforcing the Mandate to Buy
I personally support requiring carriers to accept all applicants for coverage, regardless of their health (something called “guarantee issue”), but only in the context of a mandate for individuals to buy coverage. Otherwise there’s no reason for anyone to get insurance until they’re on their way to the hospital. It’s the equivalent of allowing people to buy auto insurance after their wreck is in the body shop. New York and New Jersey’s health care systems work this way and it’s a major reason why New Yorkers and residents of New Jersey (what are residents of New Jersey called? New Jersians?) pay 350% more for their individual health insurance policies than do Californians.

The Governor’s proposal is a bit vague on how it would enforce the mandate to obtain coverage. It allows late applicants to buy only the minimum benefit package (although, as noted in Problem #2, it fails to define what that is). But as enforcement goes, this is downright weak. The Administration a more robust plan. As I have before, I strongly encourage them to consider the enforcement mechanism outlined in CAHU’s Healthy Solutions health care reform plan.

Problem #4: The 85% Medical Loss Ratio
I understand the motivation behind the Governor requiring carriers to spend 85 percent of the premium they take in on health benefits (in insurance speak this means an 85 percent Medical Loss Ratio or “MLR”). If individuals are going to be required to buy insurance, they should know their money is being used efficiently. An 85 percent MLR would seem to address this concern. Unfortunately, the unintended consequences that could result more than offsets the intended benefit.

First, this proposal may drive up the cost of insurance. Since most administrative expenses are fixed costs, if the 15 percent of premiums left to cover them is insufficient carriers will have two options: eliminate administrative activity or increase premiums. The latter will be the easiest and, in many instances, the most reasonable approach After all administrative costs are not by definition bad. When a problem arises, as they do in any organization, having a customer service rep to talk to is a good thing, although it is also an administrative expense. So if a carrier wants to compete on service, it needs what it needs to cover the cost. Since 15 percent of a $100 per month policy is $15; but on a $200 premium it’s $30, the right thing to do might be to eliminate the less expensive plans.

The second unintended consequence of the 85 percent MLR provision is that it may diminish choice in the individual health insurance market segment, exactly where competition is needed most. After all, if you’re going to require people to buy coverage, you want a robust marketplace where robust competition drives down prices. The Governor’s proposal goes a long way to making the 85 percent Medical Loss Ratio fair by applying it to all of a carrier’s business. Yet the fact remains that administering coverage to individuals costs more than providing coverage to large groups. So carriers with a greater than average share of their business in the individual market will have a tougher time meeting the MLR requirement than its competitors whose business is primarily large group business. And new carriers will first need to develop a strong large group presence in the state before entering the individual market if they are to have any chance of complying with this law. This may inadvertently result in carriers shifting resources to attracting large group business and away from the individual market.

Personally, I don’t think the MLR requirement is necessary (although I see the political benefit of it). If the Governor won’t eliminate this from his plan, he should at least add language which instructs and empowers the regulators who will enforce it to encourage increased competition in the individual market space.

So, these are my four biggest problems with the Governor’s October plan. There’s much in it I support: expanding state programs; premium subsidies through tax credits; the fact it would eventually lead to universal coverage; and the cost containment elements; and wellness provisions to name just five. Maybe I’ll write about these later. For now, I just wanted to go on record with my concerns.

And I’m curious, what are yours?

Note: This blog represents my  personal opinions. It is not an official blog of the California Association of Health Underwriters (of which I’m a Vice President) or any other organization. In this case, however, it should be noted that CAHU shares these same four concerns

Schwarzenegger Health Care Reform Redlines Lower Income Californians

Several health care reform proposals call for subsidizing insurance premiums for those earning too much to qualify for state programs, but not enough to afford typical premiums. Governor Arnold Schwarzenegger’s health care plan and CAHU’s Healthy Solutions plan are two examples of initiatives taking this approach.

There’s a significant difference between these two plans concerning how these subsidies can be used. Under the Governor’s proposal, those receiving subsidies can only use them to purchase coverage offered through a state-run purchasing pool called an “Exchange.” Under the CAHU reform plan, subsidies can be used in the open market. The distinction is significant.

By redlining subsidized Californians into a state purchasing pool the Governor’s plan limits their choice. The only real beneficiary is the agency running the pool: they’re guaranteed a clientele whether they “earn” it or not.

The CAHU proposal calls for subsidizing health insurance premiums for those earning 400% of the Federal Poverty Level or less. And it gives them the same freedom and choice as their neighbors not earning subsidies.

Imagine a legislator introducing a bill limiting Californians receiving food stamps to use them in a state run grocery store. The outcry from the left and right — and from the Governor’s office — would be loud and swift. What’s the difference here? Maybe the subsidies should be called “health stamps” to make things more clear.

Just because someone needs help paying their premiums doesn’t mean they should be denied the same rights, choices and access to innovation available to everyone else. The Administration’s current course of segregating subsidized individuals into a state run purchasing pool is neither fair nor needed. Redlining is redlining. The state should root out such behavior, not promoting it.  The time has come for the Governor’s team to rethink this part of their health care reform plan.