Limited tax subsidy could diminish market power of active purchaser health benefit exchanges
An underlying economic principle of the health benefit exchange marketplace that kicks off this fall with open enrollment for 2014 is demand aggregation in the individual health insurance market. Individuals and families who would otherwise have no negotiating power with health plan issuers will be able to pool their purchasing power via the government-chartered purchasing mechanism of the state exchanges. That power will be strongest in those states – California, Oregon, Massachusetts, New York, Oregon, Rhode Island and Vermont according to an April 1 Kaiser Family Foundation compilation – that have opted to be “active purchaser” exchanges. Those exchanges will act as gatekeepers, using an actively managed competitive selection process to determine which plans will be offered on their exchanges — and which will not.
As voluntary markets, neither health plan issuers nor individuals are required to transact individual coverage through the state exchanges. Therefore to help concentrate the purchasing power of individuals in the exchange marketplace, the Patient Protection and Affordable Care Act provides for subsidies in the form of advance tax credits applied toward plan premiums to create incentive for individuals and families not covered by employer or government-sponsored plans to purchase coverage through the exchanges.
Those subsidies are not offered for individual coverage sold outside state exchanges. And as I recently blogged, the subsidies are unavailable to those earning more than 400 percent of the federal poverty level. Those individuals and families would have little incentive to purchase coverage in the exchanges, thus reducing the exchanges’ potential purchasing power relative to health plan issuers and by extension, their ability to bargain with plans for lower premium rates.
Going forward, it will be interesting to see how this policy manifests in states with active purchaser exchanges. Will it lead to a bifurcated individual market where plan issuers offer products exclusively outside the exchanges aimed at a higher income demographic such as high deductible, health savings account compatible plans? Or plans that bundle pre-paid direct primary care with insurance to cover high cost care? (Such plans would likely also have sold in the exchanges since the Affordable Care Act specifically recognizes them as qualified health plans eligible for sale through the exchanges.)