As the name suggests, the primary policy goal of Subtitle D, Part 2 of the Patient Protection and Affordable Care Act (PPACA), Consumer Choices and Insurance Competition Through Health Benefit Exchanges, is to restore America’s health insurance market to functionality. Functioning markets by definition offer buyers meaningful choice among competing sellers. The health benefit exchange mechanism would create a functional market by “leveling the playing field” to ensure health plan issuers offer the same benefits and otherwise comply with rules governing coverage contained in the PPACA. Second, the exchanges offer strong market participation incentive for plan issuers by making available millions of consumers who cannot afford relentlessly rising premiums by taking tax dollars these individuals would otherwise pay to the U.S. Treasury and giving them to plans to subsidize their premiums.
In addition to these market interventions, the PPACA — like the Clinton administration’s unenacted health care reform plan of the 1990s before it — takes the insurance out of health insurance. How? By outlawing medical underwriting of individuals and instead instituting modified community rating where rates vary only based on age, family size and residence and not medical history. Underwriting is the heart of insurance: selecting who is offered insurance and at what price. Without underwriting, health coverage can no longer be accurately described as an insurance product. Perhaps that’s why the PPACA refers to the new, government mandated state insurance markets as health benefit exchanges and not health insurance exchanges.
Since all health plans would be offering the same coverage as mandated by the PPACA come 2014 and can no longer underwrite to obtain the lowest risk (and lowest cost) individuals to cover, they are left to compete solely on service and price. How will this play out over the long term since the underlying costs of medical care continue to rise and show no signs of abating? Let’s explore some scenarios. Plans may compete by absorbing the increased cost of care in order to keep premiums down. Plans that can do that successfully will survive. Those that cannot will be forced to pass along increased costs to consumers through higher premiums. As consumers choose cheaper plans offered by competing plan issuers, less price competitive plans face the death spiral of adverse selection and/or insolvency, leaving only the biggest players to compete in the exchanges. Fewer players mean less choice, which is contrary to a key goal of the exchanges. Less choice and less competition in turn gives surviving plan issuers greater incentive to pass along rising costs to consumers.
But unlike in the current market, in the exchange market starting in 2014 and going forward, those increased premiums won’t be necessarily be completely absorbed by consumers or lead to their dropping coverage because it’s no longer affordable. The federal treasury will also share the burden because the advance tax credit subsidies for exchange-purchased coverage will absorb whatever the plans charge above a consumer’s income level (subject to federal review of the reasonability of rate increases), ranging from no more than two percent of income at the federal poverty level (FPL) to 9.5 percent at 400 percent of FPL. Since tax dollars will be subsidizing insurance rates, how much those rates go up in this soon to emerge market automatically become not only a market regulation issue, but also a matter of national fiscal policy.
The Congressional Budget Office (CBO) concludes the high court’s ruling leaving the health benefit exchange component and related mandates of the Patient Protection and Affordable Care Act intact but striking down the mandatory state expansion of Medicaid will lower the law’s implementation cost from 2012 to 2022. The reason, CBO concluded, is it will cost the Treasury less in income tax subsidies to help people purchase coverage through the exchanges than it would to add them to the Medicaid rolls:
With about 6 million fewer people being covered by Medicaid but only about 3 million more people receiving subsidies through the exchanges and about 3 million more people being uninsured, and because the average savings for each person who becomes uninsured are greater than the average additional costs for each person who receives exchange subsidies, the projected decrease in total federal spending on Medicaid is larger than the anticipated increase in total exchange subsidies.
Click here for the CBO’s summary and link to the updated budget projections.
I recently came across this interesting article published at the website of the American Medical Association discussing how large insurers are forming their own insurance exchanges to compete with state run exchanges. State/regional health benefit exchanges are a critical component of the Patient Protection and Affordable Care Act (PPACA). They are intended to aggregate purchasing power for individuals and small employers by providing them a single marketplace to purchase coverage from a variety of insurers and managed care plans. The policy goal as stated in the PPACA is to increase consumer choice and competition among payers.
But perhaps an unforeseen consequence is that competition would entail payers competing not just against each other in government-operated exchanges but also directly against the exchanges themselves. According to the amednews.com article, motivating payers is the desire to retain a degree of control and independence from state-run exchanges:
Large insurers have invested in private exchange start-ups with the idea that they can offer a better insurance marketplace for employers and workers than a public exchange, keeping private plans dominant in the commercial market.
Moreover, the article continues, payers believe they can do a better job at attracting individuals and small businesses with their own exchanges. Rob Panepinto, managing director for the Client Practice and Exchange Solutions at Connextions, tells amednews.com that “government is not a good marketer.” In California, however, the California Health Benefit Exchange is gearing up in the apparent hope to prove that assessment wrong. The Sacramento Bee this week reported the Golden State’s HBEX tapped Ogilvy Public Relations to begin creating a marketing and public outreach and education strategy.
Looking back to the Clinton administration’s unsuccessful reform proposal of 1993-94, the emerging market dynamic of competing public and private exchanges wouldn’t likely have occurred. The Clinton reform plan would have created government run regional purchasing alliances that would have controlled the entire universe of payer and provider markets with both payers and providers competing within the alliances under the reform plan’s “managed competition” principle.
Like the Clinton administration’s comprehensive health care reform proposal of the 1990s, a key goal of the Obama administration’s Patient Protection and Affordable Care Act (PPACA) is having all Americans medically insured though public or private health plans. Since coverage gaps largely occur with private coverage, private market reform is central to the reforms of both administrations.
Since most working age Americans have employer-paid coverage, the Clinton administration’s reforms would have required all employers to cover their employees so that none had to obtain their own coverage in the individual market or be medically uninsured. Rather than the Clinton administration’s employer mandate, the Obama administration instead placed the mandate on individuals, requiring all Americans to have medical coverage by 2014. Key to the individual mandate in the PPACA is the law’s state health benefit exchanges to provide an insurance marketplace for small employers and individuals.
If the U.S. Supreme Court upholds the constitutionality of the individual mandate later this year, it could mesh well what some observers believe is a trend toward more temporary and self-employment. This trend has seen a significant boost in recent years as employers hire fewer people to do the same work or adopt processes that require fewer permanent staff. This in turn has led to growing numbers of temporary and self-employed people.
Since these workers aren’t covered by employer-provided plans and must obtain health coverage on their own, they will benefit from the exchanges where participating insurers will be required to offer coverage with minimum coverages and premiums determined using modified community-based rating versus medical underwriting. As 2014 draws closer, the exchanges could in turn encourage more to deliberately choose temporary and self-employment. Many who might otherwise work for themselves balk at the prospect of having to find health coverage in the existing individual market where they can be declined for pre-existing medical conditions and don’t benefit from group purchasing power the exchanges would provide. The exchanges and the PPACA’s mandates that all individuals have coverage and health plans and insurers accept all applicants regardless of medical history would significantly mitigate this disincentive for those considering self-employment.
California is once again mulling whether to effectively deprivatize its health insurance market and put in place a Canadian-style publicly funded insurance program. SB 810 would create the California Healthcare Agency that like Canada’s Medicare program would pay all medical bills out of tax levies. The idea is to create a market monopsony that would shift bargaining power from providers of medical coverage to purchasers — in this case making the state the 800-pound gorilla purchaser.
The legislation is a reintroduction of a bill of the same number and author that died in final days of the previous legislative session last year. Even had the bill had passed out of the Legislature, it faced near certain death at the hands of then-Governor Arnold Schwarzenegger, a Republican who vetoed previous single payer bills that reached his desk. Schwarzenegger instead preferred reform that aggregates purchasing power — particularly among individuals and small employers that currently have little to none — through purchasing exchanges. That approach was pioneered in Massachusetts and ultimately adopted as the national standard in the Patient Protection and Affordable Care Act (PPACA). The PPACA establishes the American Health Benefit Exchanges in the states; the exchanges must be ready to begin operations by January 1, 2014.
SB 810 would require California’s health and human services secretary to seek a waiver from the exchange requirement as well as the PPACA’s standards for the inclusion of “qualified health plans” in the exchanges under a PPACA provision allowing for waivers for innovative state health plans that offer coverage beginning January 1, 2017. So even if SB 810 becomes law, California would have three years of experience with the PPACA’s benefit exchange demand aggregation approach. While the exchanges in theory should exert enhanced market forces to hold health insurance and managed care plan premiums in check, it remains unclear as to whether they will meaningfully accomplish that goal. As payers continue to respond to rapidly rising medical treatment costs for their insureds and members, the state exchanges could end up being nothing more than large pass through mechanisms for those higher costs. That situation would bolster single payer advocates, who apparently hope to have their preferred alternative primed and ready to go in 2017. Or possibly at the same time the benefit exchanges begin operations. President Obama said on Monday, Feb. 28 he supports legislation that would amend the PPACA to allow states to start their own programs sooner then 2017 provided their plans provide the same extent and quality of coverage as under the PPACA and don’t add to the federal deficit.
Will SB 810 unlike its predecessors actually be signed into law? During Schwarzenegger’s administration, the chances were slim to none. Under recently installed veteran democratic Gov. Jerry Brown, it’s more likely but nevertheless still unclear. Democrats have a solid majority in the state Legislature and with the exception of 2010 have been willing to give their blessings to single payer. Whether Brown would be inclined to sign SB 810 into law will probably be largely influenced by the extent of voter outrage at having to pay more for less coverage as insurers raise premiums and shift more risk to their customers. With California’s economy still in bad shape, it won’t take much to spark that anger. Brown might also be convinced to sign the measure if it were presented to him as a backup plan in case the benefit exchange doesn’t hold down premium increases.
However, even if Brown were to support SB 810 in concept, there’s a political complication. In order to keep his campaign pledge to allow voters to ratify tax levies, an appropriation measure to fund it (drafted as a companion measure to previous single payer proposals) would have to go before the electorate. Minority Republicans in the Legislature wouldn’t likely provide the necessary supermajority vote to place a tax measure on the ballot. The same issue currently threatens to stymie Brown’s budget proposal calling for extending temporary tax increases to balance the state’s deficit-plagued budget.