Health benefit exchanges: A market intervention mechanism aimed at preserving individual, small group health coverage
State health benefit exchanges mandated by the federal Patient Protection and Affordable Care Act of 2010 have been commonly described as online marketplaces where buying a health insurance policy or managed care plan can be done as easily as booking a flight or vacation. Ease of purchase, however, is not the driving policy rationale behind the exchanges. They came about in response to market failure in the individual and small group market segments, particularly in the former. In insurance terms, market failure means the dreaded death spiral of adverse selection.
Insurance fundamentally is about spreading costs across a group of insureds, known as the insurance principle. The principle is based on the law of large numbers. If too few people purchase an insurance or health plan, the law of large numbers is violated and the insurance principle breaks down. For those insureds left in the group, their share of the group’s costs – paid as premiums or membership dues – must be sharply increased. The pool shrinks and only those most likely to use medical services remain since they need coverage, putting further upward pressure on premiums.
There is a limit what any insured can afford to pay. Eventually market failure results and the insurance or managed care plan becomes economically unviable. As plans close, the fewer remaining health plans pass along relentlessly rising medical care costs and the unvirtious cycle proliferates until the entire marketplace is at risk. That was — and still is — the situation the individual and small group health insurance markets leading up to the enactment of the ACA in 2010. Ultimately, health benefit exchanges are an attempt to preserve these markets by concentrating plan issuers and purchasers into a government-sponsored marketplace with incentives and disincentives for individuals to participate in the form of tax credit subsidies and tax penalties, respectively.
Whether the exchanges are able do so won’t be known for several years after the exchanges begin pre-enrolling individuals and small businesses for 2014 coverage starting in October 2013. What is certain is the exchanges as insurance marketplaces – like the failed market they seek to remedy — are also subject to the insurance principle. They must attract sufficiently large numbers of individuals and small businesses if they are to successfully achieve the market aggregation solution that led to their inclusion in the ACA.
Speaking at a Univision forum Wednesday night, the Republican presidential nominee said that now and then Obama calls him the grandfather of Obamacare.
Romney said, “I don’t think he meant that as a compliment, but I’ll take it.” He went on to defend the Massachusetts law but says it is wrong for the federal government to take that approach.
Governor Romney was also the Godfather of former California Republican Governor Arnold Schwarzenegger’s omnibus health care reform plan in 2007-08 that was largely based on Romney’s Massachusetts reforms featuring a state health benefit exchange and an “individual mandate” that everyone have public or private health coverage. I know because I covered “ArnoldCare” nee RomneyCare from its beginnings to inglorious collapse in the state Senate as Sacramento health care correspondent for the Bureau of National Affairs.
Can Active States Endure A Ground Shift? Implications Of The Supreme Court’s Health Reform Decision – Health Affairs Blog
If the Supreme Court invalidates components of the Affordable Care Act, active states will try to adapt to the shifting ground by designing new policies to mitigate adverse selection and cover the uninsured. However, their success in doing so will depend in part on how much the ground shifts.
This is a thorough discussion of how state Medicaid and health benefit exchanges could fare after the U.S. Supreme Court issues its ruling on the Patient Protection and Affordable Care Act this month. The focus of the article is the 14 states that are moving forward with putting their exchanges in place.
Underlying the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010 was a fundamental policy choice that rejected the idea of cutting out private “middle man” health plans and insurers in order to make coverage more accessible and affordable by adopting a Canadian-style single payer model in which the government pays all medical bills. Or have a government-run insurance plan compete with private payers — the so called “public option.” The Obama administration rejected these deprivatization schemes as too radical and instead chose to build upon the existing system largely based on working age people and their families having private health coverage paid for by employers.
Two recent surveys by benefit consulting firms Towers Watson and Mercer suggest however the foundations of that system could ironically erode under the PPACA if employers drop their group insurance and managed care plans and opt to have their employees purchase coverage in the individual market. One of the major motivators, this AP article suggests, is the creation of health benefit exchanges designed to make it easier for individuals and families to buy their own coverage.
Given steep medical cost inflation that has rapidly accelerated the cost of covering workers over the past decade, at least some employers see “opting out” of providing health coverage as their cost control “nuclear option” despite the adverse tax implications and penalties they would incur by not covering their employees.
The implications of the Towers Watson and Mercer surveys are controversial and are drawing caveats from administration officials, particularly insofar that the benefit exchanges won’t open for business until January 2014. With more than two years until then, it’s hard to draw any firm conclusions regarding what employers will actually do when the exchanges become operational. But benefits consultants warn that it won’t take many employers to start a trend of opting out as the AP story notes:
Benefits consultants say most companies, especially large employers, will continue to offer coverage because they need to attract and keep workers. But that could change if a competitor drops coverage first.
Michael Turpin, a national practice leader at broker and consultant USI Insurance Services, said one of his clients plans to drop coverage as soon as any competitor does. The client, a major entertainment industry company he declined to identify, will be at a financial disadvantage if it doesn’t.
“In those industries … if somebody makes the first move, the others are going to follow like dominoes,” Turpin said.
If that happens, the PPACA will have the unintended consequence of radically altering the employer-based system of health care coverage in the United States, moving it instead toward one based in individuals purchasing their own coverage.
Silicon Valley is internationally noted as a technology innovator. Now it’s home to another form of innovation, this time in medical care with something known as direct primary care. Direct primary care involves patients pre-paying for routine medical services. In the case of Silicon Valley startup primary care company MedLion, patients pay $49 per month and $10 per visit. “MedLion is able to provide high quality medicine at a price point nearly any family can afford,” notes David Chase on the TechCrunch blog.
I’ve opined that with burgeoning health care costs and their hyperinflationary effect on premiums for insurance and managed care plans, we could see a bifurcation of the market where these traditional forms of medical coverage are used only for major, unexpected expenses and not routine care such as provided by direct primary care providers. In that respect, it’s back the future when “major medical” coverage of decades past was designed to cover only what its name denotes to protect people from financial catastrophe. After all, that’s the key benefit of any form of insurance.
The direct primary care model could be embraced by both employers that have been shifting more risk to employees in the form of higher deductibles and co-pays as well as individuals seeing monthly premiums starting to rival the size of mortgage payments. If this happens, it would represent a major realignment of the private health care finance system. It could also lead small employers and individuals to opt for “bronze” level qualified health plans that state health benefit exchanges must offer beginning in 2014 under the Patient Protection and Affordable Care Act. Such plans must be cover 60 percent of an individual’s actuarially projected medical costs and would offer lower premiums than qualified plans covering 70, 80 and 90 percent of expected losses. With the current level of growth in premium rates, by 2014 bronze level plans may be the only ones that are affordable for many, as I’ve speculated in a previous post.
The Interim High Risk Pool created by the enactment of the Patient Protection and Affordable Care Act’s (PPACA) one year ago has not changed the underlying dynamics of the individual health insurance market and consequently appears to be having a negligible impact on reducing the ranks of the medically insured.
The pool, formalized as the Pre-Existing Conditions Insurance Program (PCIP), was created to provide temporary coverage for those with pre-existing conditions who don’t meet minimum medical underwriting standards of insurers and managed care plans. It goes away on January 1, 2014, when the PPACA outlaws medical underwriting and requires payers to accept all applicants regardless of medical history.
So far, few have signed up for the plan. As prior to the PCIP, younger people who would be eligible for PCIP enrollment pay lower rates for coverage but tend to go without. Older folks in their 50s and early 60s who want coverage are finding PCIP rates out of reach. An added deterrent, other observers note, is the requirement that applicants for coverage be continually uninsured for at least six months.
“The PCIP is a great health plan and the out-of-pocket maximum is low,” Barry Cogdill, president of Business Choice Insurance Services in San Diego, told SignOn San Diego. Nevertheless, he added, PCIP premiums are too expensive for many. “That’s why health care reform happened,” Cogdill explained. “The individual market has been the Achilles’ heel of the health insurance market. You end up with a lot of uninsured people.”
It appears many in this circumstance who aren’t covered by group or government plans will remain so. Whether they will be able to find affordable coverage when state health benefit exchanges designed to aggregate purchasing power of individuals and small employers open for business in January 2014 remains to be seen.
Robert Pear writes in today’s New York Times about state health benefit exchanges, a central component of the federal Patient Protection and Affordable Care Act (PPACA). Featured in Pear’s article are two state insurance exchanges, the Massachusetts Connector and the Utah Health Exchange. These two states’ exchanges are up and running well ahead of the Jan. 1, 2013 deadline that states must report to the federal Health and Human Services Agency on their progress establishing the exchanges. The exchanges are to be operational nationwide by Jan. 1, 2014 under the PPACA.
Pear notes “Congress assumed that insurance would also be sold outside the exchange. But federal subsidies, to help pay for insurance, will be available only to people who enroll in health plans through an exchange.”
Going forward, it will be interesting to watch the market dynamics play out between exchange markets and non-exchange markets. In setting up the exchanges, the PPACA effectively creates a subset of the larger insurance market in the hope that the government-instituted and subsidized subset will gain sufficient purchasing power to obtain coverage on terms and conditions favorable to insureds. If the exchanges do so with great success, they would control so much of the market that extra-exchange plans would effectively be crowded out of the marketplace. Particularly if employers opt to pay the $2,000 per employee fine for not providing health coverage to their workers, letting them get individual coverage through the exchanges as Tennessee Gov. Philip Bredensen discusses in a Wall Street Journal op-ed piece last week.
On the other hand, payors might chafe at conditions attached to offering coverage through the exchanges and ramp up their non-exchange plans aimed primarily at healthier people in order to hold down their medical loss ratios. If that trend accelerates, it could doom the exchanges to adverse selection by leaving them less healthy people the insurers and health plans want to avoid, creating even stronger incentive for payors to shun the exchanges and continue business as usual. Finally, if medical treatment costs continue to rise at their current clip, premium rates for all plans will grow increasingly out of reach — even for those subsidized through the exchange.