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?

Hospital Cost Disparity Study: Implications for ABX1-1

The press is abuzz with the news that there’s a wide disparity in what different California hospitals charge for providing the same services. The study found that hospitals sometimes charge more than they need to in order to maximize their profits (or, for the non-profits, retained earnings). It seems hospitals charge what they can get away with. Amazing! (For examples of the coverage the report is receiving, take a look at what the Los Angeles Times, the San Jose Mercury News, San Francisco Chronicle, and the Kaiser Family Foundation’s KaiserNetwork.org web site have to say about it.) Not to fan the flames further, but there are also studies out there that show there’s no correlation between the cost of services and the quality of the outcomes.

The new hospital cost study was sponsored by the California Public Employees Retirement System (Cal-PERS) and the Pacific Business Group on Health (PBGH). Pardon my lack of surprise at the findings, but the findings are kind of old news. Health plans have been making this point since at least the late-90’s. Their claims were generally dismissed as mere justifications for rate hikes, but the facts have been out there for a long time.

There’s a host of reasons for these disparities. For example, there’s the impact of consolidation among hospitals. Community-based hospitals got tired of having their pricing requests ground down by carriers representing substantial numbers of potential patients. They realized the need for some heft of their own and consolidation was a way to get it fast. When the M&A activity settled, some hospitals were the only game in town — literally. This not only helped those hospitals negotiate higher reimbursements, it helped their chain as well. If a carrier wants a contract with the only hospital in City A, it might have to offer a sweeter deal to that hospital’s sister facility in City B. The result: higher hospital costs and, consequently, higher premiums.

Cal-PERS and the PBGH have done a public service by recognizing this market dynamic and having the credibility to draw attention to it. And anything that reminds policy makers that the key driver of health insurance premiums is the underlying cost of care is a very good thing.

What the study does not do, in my mind, is validate the need for a state-run purchasing pool as is called for by Assembly Bill X1-1, the compromise health care reform bill promoted by Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez. Yet some see the study as confirming the need for the state to gin up its own activities as a health insurance buyer to negotiate with carriers. This is the public policy equivalent of 1950s Japanese monster movie. When Mantra invades, the government calls in Godzilla to fend him off. Of course, the city gets trampled in the process (or at least a cardboard facsimile of the city gets trampled), but in the end, these citizens who survive are assumed to be winners.

I have a great deal of respect for the folks at Health Access. I appreciate the thought they put into their positions even when I disagree with their conclusions. Yet I was surprised to see them play the Godzilla card concerning the purchasing pool. A recent post on the Health Access blog claims the hospital cost study underscores “why AB x1 1 has a purchasing pool–bigger than CALPERS–to negotiate the best possible deal with insurers and drug companies.” But the ABX1-1 purchasing pool won’t be negotiating directly with hospitals. They can hang tough with carriers all they want, but it won’t begin to touch the problems cited in the study.

In fact, several California carriers already have roughly as much, if not more, purchasing power than the state-run pool is likely to have and have long used it to try to negotiate lower prices for their members. (As noted in an earlier post, another study estimates the government-run pool ABX1-1 seeks to create would provide coverage to about 2.5 million Californians.) Ironically, when carriers leverage their purchasing power in this way, they’re sometimes condemned for it. The reality is, however, that in a seller’s market — where there are monopolies or near monopolies, for example — purchasing power isn’t very, well, powerful.

Nor is it clear how successful a purchasing pool will be in negotiating down insurance premiums. The California HealthCare Foundation has studied the performance of several such arrangements around the country. They conclude that “a voluntary purchasing pool will not automatically reduce premiums.”   

The last time the state created a government-managed pool was as part of the small group health care reform package passed in 1992 known as AB 1672. That legislation created the Health Insurance Plan of California (HIPC). The HIPC was later transferred to  … wait for it … the Pacific Business Group on Health which renamed it PacAdvantage. It failed to reduce costs or to remain competitive in the marketplace and is out-of-business.

The hospital cost study is an important contribution to the health care reform debate. It underscores the need to rationalize spending with outcomes. To claim it justifies the creation of a state-run purchasing pool is too far a stretch.