Health Insurance Exchanges are No Miracle Cure

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?

Compromise on Public Health Plan Not Easy to Find

If Congress is to enact comprehensive health care reform on anything approaching a bi-partisan basis, Democrats are either going to have to jettison their calls for creating a public health care plan to compete with private insurers or fashion a compromise that makes such a government-run plan acceptable. This won’t be easy.

Last week, 17 Senators  signed a letter to Senate Finance Committee Chair Max Baucus and Health, Education, Labor and Pensions Committee Chair Edward Kennedy insisting that a public health plan needed to be a part of any health care reform package.  The 16 Democrats and one independent argued that “There is no reason to believe that private insurers alone will meet the public purpose of ensuring coverage for all Americans at affordable prices for taxpayers.” According to The Hill, the originator of the letter, Senator Sherrod Brown, told reporters that “A public plan option ‘would provide competition to the sometimes dysfunctional private insurance market.'”

Seventeen Senators is a significant block of votes, especially when they’re expressing the position of the Obama Administration as well. Yet Republicans are, thus far, united in their opposition to a government-run plan.  And not all Democrats are sold on the idea, either. The New York Times counts Democratic Senators Ben Nelson and Arlen Specter as among those expressing “reservations about a public plan.” If these and other moderate Senators object to the public plan, their liberal colleagues will be faced with the need to either give in on the issue or give up on comprehensive health care reform.

Thus the search for common ground.

The New York Times reports Senator Charles Schumer is attempting to do just that. The article  is indispensible reading as Senator Schumer’s was asked to search for a compromise by Finance Chair Baucus. Senator Schumer identified four principles that might make a public health insurance plan acceptable to moderates:

  • “The public plan must be self-sustaining. It should pay claims with money raised from premiums and co-payments. It should not receive tax revenue or appropriations from the government.
  • “The public plan should pay doctors and hospitals more than what Medicare pays. Medicare rates, set by law and regulation, are often lower than what private insurers pay.
  • “The government should not compel doctors and hospitals to participate in a public plan just because they participate in Medicare.
  • “To prevent the government from serving as both “player and umpire,” the officials who manage a public plan should be different from those who regulate the insurance market.”

This approach was echoed, with less specificity, during testimony before the House Ways and Means Committee by the new Secretary of Health and Human Services, Kathleen Sabelius. According to The Wall Street Journal, she told a Congressional  Committee, “What I can assure is that it can be done as a level playing field.” The key, she went on to say, is how the program is set up. “It is about the rules that are established at the beginning.”

But there’s the rub. The rules in the beginning are not necessarily those that apply long term. California had a government managed health plan competing with private carriers in the small group market not all that long ago. The Health Insurance Plan of California (HIPC) was created by AB 1672 as part of a comprehensive small group health care reform package. The HIPC operated under many of the prinicples put forward by Senator Schumer. Ultimately the HIPC, which was spun off from the government and became the PacAdvantage, failed.

Yet almost immediately after it’s creation, legislators from both sides of the aisle put forward proposals to buttress the plan by giving it special status. Government, regardless of the party in charge, when seeking to build new programs, tends to look to existing programs as a foundation. Which means the level playing field promised by Secretary Sabelius may not last long. The principles enunciated by Senator Schumer may not last. As with any public program, once a government run health plan is in place, the rules that apply can be changed at any time. And someone is likely to try.

This doesn’t mean the search for a compromise shouldn’t continue, but  it highlights the difficulty involved. Unless the restrictions on the public plan aimed at preventing it from gaining an unfair advantage in the market are strong and long lasting, any compromise will simply be a milestone on an inevitable journey.