Posts Tagged ‘exchanges’

Five Big Ideas that Shaped Health Reform

September 18, 2010

During the Great Health Reform Debate of 2009-10, much of the public discussion and media analysis focused on the political battles, the legislative process and specific elements of the health reform bill.  We talked a lot about daily public opinion polls, the futile search for bipartisanship, the political implications of the Massachusetts special election and the impact on the upcoming mid-term elections.  We also learned more than we probably wanted to about filibuster rules, reconciliation bills and CBO scores.  And we were inundated by detailed descriptions and analyses of the public option, abortion, payment reductions to Medicare Advantage plans, excise taxes on “Cadillac” health plans, and many other specific policy issues.

Future historians, however, will want to look more deeply for the policy frameworks and political forces that shaped the health reform bill.  From a high level vantage point, there are Five Big Ideas that established the fundamental framework for the bill.  With some exceptions, these ideas were not the subject of much public discussion or formal debate in Congress, but each of them shaped the reform bill in fundamental ways. As Ezra Klein[i] and others have observed, much of the form of the health reform bill was established long ago.

1. Managed competition

Why didn’t we go down the path of a single-payer health system?

For many years, a single-payer system was the holy grail of the liberals, and it was the driving force behind the campaigns of many of the current reform advocates.  To the disappointment and frustration of those advocates, however, the battle had already been fought and lost long before the 2009-10 debate.  In 1978, Alain Enthoven published a two-part article in the New England Journal of Medicine entitled “Consumer Choice Health Plan: A National Health Insurance Proposal Based on Regulated Competition in the Private Sector.”[ii] The title said it all.  It was a proposal for national health insurance (i.e., providing coverage to everyone) through a structured marketplace of private insurers and providers.  As Enthoven described it in a 1993 Health Affairs article, “The History and Principles of Managed Competition,” his concept built on earlier work by Paul Ellwood, Walter McClure and Scott Fleming, as well as the experience of the Federal Employees Health Benefits Plan (FEHBP).[iii] In the 1992 Presidential campaign, both of the candidates endorsed this approach to health reform, and it was one of the foundation elements of Bill Clinton’s reform proposal in 1993.  In the work of many policy experts since then, it became the de facto consensus approach.

Managed competition appealed to many liberal policy analysts who had training in economics.  It offered the best of both worlds: expanded coverage, but with cost controls achieved by the use of market forces, i.e., cost-sensitive consumer choice and healthy competition among insurers and providers.  It also was appealing politically, because the most serious opposition to health reform – especially to the single-payer version of reform – came from the established economic interests who do quite well in the current system.  The pharmaceutical manufacturers, health insurers, physicians and hospitals were fearful of government price setting under single-payer reform.  They saw managed competition as a potential way to maintain their ability to set prices, albeit within a more competitive framework.

By the time of the 2007-08 Democratic primary campaigns, all of the leading candidates (first John Edwards, then Hilary Clinton and Barack Obama) used the managed competition framework as the basis for their reform proposals.  The language had changed, of course, because it was associated the defeat of Bill Clinton’s plan in 1993-94.  (In addition, the phrase “managed competition” was often confused in the public’s mind with “managed care,” which was successful in slowing the rate of increase in health care expenses but created a political backlash in the late 1990s.) During the 2009 health reform debate, the single-payer concept survived in two slimmed-down versions (the public option and Medicare buy-in for those age 55+), but it died in the negotiations leading to the passage of the Senate bill in late 2009.

The final bill falls far short of Enthoven’s ideal, since it retains the existing Medicare and Medicaid programs, which are essentially single-payer systems for the elderly and poor.  In addition, the reform bill’s version of health insurance exchanges – the core mechanism for managed competition – is weak, even though exchanges are mentioned prominently as a key element of cost containment in testimonials to the legislation.  But the President and Congressional leaders never seriously considered applying a single-payer approach to employed, middle-class, working-age people.  In essence, the fight between the managed competition and single-payer approaches to reform was over many years ago.

2. “If you like your plan, you can keep it.”

Why are we stuck with the employer-based system for providing health benefits?

Many policy experts have pointed out the shortcomings of the employer-based system and have developed reform proposals to move away from it.[iv] [v] Sen. Ron Wyden’s Healthy Americans Act, introduced in 2006, would have created a new system in which employer-based health benefits would be replaced by tax credits for individuals who could purchase coverage through a national insurance exchange.  But the policy ideal ran up against political realities.

When Sen. Hilary Clinton began her run for the Democratic nomination for President, there was great anticipation about her health-reform proposal.  She had been badly burned politically by the defeat of Bill Clinton’s plan in the 1990s, and she did not want to repeat the mistakes that led to that debacle.  The plan she put forward in September 2007[vi] contained much of what was in the old Clinton proposal, but with one big exception.  The plan did not disrupt employer-based health benefits, which is the way that the majority of Americans receive health insurance.  The infamous “Harry and Louise” advertisements had helped to kill Bill Clinton’s bill by preying on the fears of those with employer-based coverage.  Although many people felt dissatisfied and anxious about their existing employer-based coverage, most of them simply were not willing to make the switch to some unknown and untested plan.  Hilary Clinton – a savvy politician as well as a policy expert – saw the writing on the wall.  In order to be politically viable, her new proposal had to leave the current employer-based system largely intact.  It became an article of faith among political experts that this was a key element of any reform plan.  Barack Obama’s plan endorsed this approach during his campaign, and the reform bill was built on this foundation.

3. Health reform is needed to reduce the federal deficit

Why didn’t attacks on “tax and spend liberals” doom health reform?

In the past, most health reform advocates focused on the need to provide access to care for the uninsured.  This was framed as a moral issue – “How can the richest nation on earth let millions of people go without access to decent health care?”  To provide universal access, however, would require a lot more government spending.  This created a political barrier, because every reform proposal had a big price tag. Few politicians during the past 30 years of conservative ascendency were willing to support a program that dramatically increased government spending.   Many advocates believed that expanding coverage was worth it, but they faced very difficult obstacles due to concerns about the rising government deficit.

Peter Orszag changed all of that.  As Director of the Congressional Budget Office in 2008, he pointed out that Medicare and Medicaid expenses were the primary causes of increased federal government spending in the future; in contrast, spending for Social Security was projected to grow much less, and other existing programs were expected to remain stable as a percentage of GDP.[vii] As a December 2008 CBO report stated: “The rising costs of health care and health insurance pose a serious threat to the future fiscal condition of the United States.”[viii] In other words, not reforming the health care system would cause federal deficits to expand.  This meant that health reform – if done right – would not make the deficit problem worse; in fact, we needed health reform in order to tame the long-term deficit.  This transformed the debate about health reform.  No longer could it credibly be attacked as just another “tax and spend” proposal.  Health reform was seen as not just a desirable social policy; it was a necessary tool for fiscal discipline.

The Obama administration quickly picked up on the opportunity to re-frame the debate on health reform and fiscal responsibility.  First, the President chose Orszag to lead the Office of Management and Budget, assuring that Orszag’s views would continue to have significant weight.  Second, the President’s early statements on health reform established a goal of deficit neutrality or reduction over 10 years (a much longer period than previous reform efforts had attempted).[ix] Taking a long-range view of the federal deficit made sense, both policy-wise and politically.  Policy-wise, it would not be feasible to implement reform in one or two years; it would take at least 10 years to see anything like the full fiscal effects.  Politically, it gave the President and Congressional leaders a defense against attacks about fiscal irresponsibility.

4. Shared responsibility

How did the Administration and Congress spread the burden of financing health reform?

In the years leading up to the federal reform effort, many policy experts and advocates embraced the principle of “shared responsibility”.  Briefly, the underlying belief is that the problems of our health care system are not due to the actions of a few villains; the problems are systemic.  In various ways, all of the key stakeholders – individuals, employers, providers, health plans and government – are part of this systemic problem, so all of them should accept their responsibilities for improving the system.  Rather than financing health reform from one source, it should be done with contributions from all of the stakeholders.

The idea of shared responsibility was a foundation of the Massachusetts reform bill in 2006.[x] Earlier versions of reform in Massachusetts had been blocked or limited by reliance on narrower sources of financing; shared responsibility was credited with the political success of the new bill.[xi] Similarly, the California reform effort led by Gov. Arnold Schwarzenegger in 2007 used the principle of shared responsibility, although the political outcome was not as successful as it had been in Massachusetts.[xii] Shared responsibility also played a role in framing Barack Obama’s campaign proposal for health reform, although he seldom used that phrase explicitly.[xiii] Immediately after the 2008 election, Sen. Max Baucus published his Call to Action[xiv], which formed the basis for the bill that emerged from the Senate Finance Committee in 2009.  This report explicitly identified shared responsibility as one of the critical principles in health reform.

The use of the concept of shared responsibility had several significant impacts.  First, it shaped the policy framework of health reform, reflected in a series of specific requirements for each of the stakeholder groups.  These included a requirement for all individuals to obtain health insurance, an expectation for large employers to offer health benefits, the elimination of medical screening and related insurance practices, reductions in Medicare Advantage payments, increased Medicare taxes on high income people, a reduction in the growth rate of Medicare payments to hospitals, the extension of drug discounts, an excise tax on high-cost employer-sponsored health benefits, fees on drug and medical device manufacturers, fees on health insurers and similar provisions.  Without these spending reductions and revenue increases, the bill would not have achieved the goal of net deficit reduction.  Second, the fact that these elements were spread broadly among many stakeholders helped to neutralize political opposition to the bill.  In creating the bill, the Administration and Congressional leaders had discussions with every one of these groups about how they could contribute something to cover the costs of expanding coverage.  None of them could claim that they would be shouldering the entire burden; all of them would be sharing in the financing elements of the bill.  And in the end, most of the key stakeholders felt, in varying degrees, that they would be receiving a net benefit from the bill.

5. Coverage first, then cost

Given all of the above, why didn’t the health-reform proposal include stronger cost-containment features?  And why didn’t we start with cost containment, and then move on to expanding coverage financed by part of the savings?

First, we should clarify that making the reform bill deficit-neutral does not mean that it significantly slows the rate of cost increases.   In the health reform bill, the costs of expanding coverage to 32 million uninsured people are offset by the wide range of government revenue increases and expense reductions described above.  While the bill does contain a number of initiatives that may eventually help to reduce costs, the underlying trend in health spending – both public and private – is not expected to change dramatically in the foreseeable future.[xv]

The reason that the health reform bill does not include strong cost containment provisions is fundamentally political.  As a number of people have said in various ways, while it is impossible to have real health reform without cost containment, it is also impossible to pass a health reform bill with cost containment.  In the past, health insurers, physicians, hospitals and drug companies have defeated reform proposals because of their concerns about the impact of cost controls.  Early in his administration, President Obama and his staff met with health industry leaders to discuss ways to head off this problem.  In exchange for support or neutrality on a health reform plan with limited cost controls, the health industry offered to accept some reductions and to pay limited fees.  Although critics from across the political spectrum attacked this process, the agreements effectively muted the industry opposition that had defeated earlier reform efforts.

Implicitly, the President adopted the strategy of “coverage first, then cost.”  For better or worse, this approach pragmatically accepted the current political limits on including strong cost containment features in a health reform bill.  The hope is that after the initial bill is passed to expand coverage, the political calculus is likely to change.  Once we have established the principle of covering nearly everyone, public and private sector decision-makers will have a stronger stake in managing system-wide costs.  Medicare and Medicaid cannot simply cut provider payment rates, because physicians will refuse to see these patients.  Employers cannot simply drop employee health benefits, because they will be penalized if the employees are eligible for public benefits or subsidies.  State governments cannot simply cut back eligibility for Medicaid programs, since the federal legislation establishes a floor.  Ultimately, it is hoped that purchasers recognize that cost containment can be achieved only by addressing the underlying costs of medical care.  Once it is accepted that nearly everyone will have coverage, it becomes imperative to tackle the cost issue in order to keep the system financially sustainable.  Massachusetts explicitly used this sequenced approach in its health-reform initiative.[xvi]

Impact of the Five Big Ideas

Although the health reform debate focused primarily on the specific policies in the proposed bills, the boundaries of the debate were established long before any legislation was introduced.  The five big ideas that had been developed in the years leading up to the reform debate in 2009-2010 formed the framework of the specific proposals.  Although these ideas did not receive a lot of attention in the general media, they had a significant impact on the resulting reform bill.

Did these big ideas make the health reform bill better or worse?  On one hand, they provided a reasonably coherent policy framework for the bill, without which it could easily have become a chaotic patchwork of inconsistent and contradictory policies.  The big ideas also enabled the political success of the bill by avoiding or overcoming the obstacles that defeated earlier health reform attempts.  On the other hand, the big ideas severely limited the options that were considered.  One obvious casualty was the single payer option, which many liberal advocates believed was the best solution.  In addition, Sen. Wyden’s Healthy Americans Act, which many policy experts believed was the best approach, never received much serious consideration in Congress.

Finally, the constraints imposed by the five big ideas left at least two important questions unanswered.  First, will the reform bill allow our health insurance and delivery system to evolve toward a more comprehensive approach, or does it freeze in place the existing system?  The structure of coverage categories in the bill — Medicare for seniors, Medicaid for the poor, employer-sponsored coverage for employees of medium and large businesses, and the exchanges for individuals and employees of small businesses — represents an advance over the past by filling in the gaps and reducing the number of uninsured, but it remains a fragmented and uncoordinated system.  Second, will the reform bill address the need for cost containment?  The long-term financial sustainability of Medicare, Medicaid and the employer-based system depends on our ability to bend the cost trend downward.  Although the bill includes many innovative approaches and pilots that may have an effect on costs, the real impact of these specific initiatives remains to be seen.  Depending on the cost trends we see over the next 5-10 years, we may want to reconsider some of the big ideas that shaped the current reform bill and open up our thinking to different approaches.

[i] Ezra Klein, “What Obama Did, and Didn’t Do, on Health Care Reform,” Washington Post, December 21, 2009.

[ii] Alain C. Enthoven, “Consumer Choice Health Plan: A National Health Insurance Proposal Based on Regulated Competition in the Private Sector,” New England Journal of Medicine, 298 (March 23 and 30, 1978): 650-658 and 709-720.

[iii] Alain C. Enthoven, “The History and Principles of Managed Competition,” Health Affairs 12, supplement 1 (1993): pp. 24-48.

[iv] Committee for Economic Development, Research and Policy Committee.  Quality, Affordable Health Care for All: Moving Beyond the Employer-Based Health-Insurance System. Washington, DC, 2007.

[v] Ezekiel J. Emanuel.  Healthcare, Guaranteed: A Simple, Secure Solution for America. New York: Public Affairs, 2008.

[vi] Hilary Clinton For President. “The American Health Choices Plan: Ensuring Quality, Affordable Health Care for All Americans.” September2007. Quoted in Kelly Montgomery, “Senator Hillary Clinton’s Healthcare Reform Proposal”, June 5, 2008. [accessed April 11, 2010].

[vii] Peter Orszag, “Health Care and Behavioral Economics:  A Presentation to the National Academy of Social Insurance”, May 29, 2008.

[viii] Congressional Budget Office. Key Issues in Analyzing Major Health Insurance Proposals. December 2008.

[ix] “Medicare Fact Sheet” [accessed March 22, 2010]

[x] Jon Kingsdale, “Implementing Health Care Reform in Massachusetts: Strategic Lessons Learned.” Health Affairs 28, no. 4 (2009): w588–w594.

[xi] Robert Seifert and Paul Swoboda. Shared responsibility: government, business, and individuals: who pays what for health reform? Boston (MA): Blue Cross Blue Shield of Massachusetts Foundation. March 2009. [accessed April 11, 2010].

[xii] Marian R. Mulkey and Mark D. Smith, “Reflecting on California’s ‘Year of Reform’,” Health Affairs 28, no. 3 (2009): w446–w456 (published online 24 March; 10.1377/hlthaff.28.3.w446); R.E. Curtis and E. Neuschler, “Affording Shared Responsibility for Universal Coverage: Insights from California,” Health Affairs 28, no. 3 (2009): w417–w430 (published online 24 March 2009; 10.1377/hlthaff.28.3.w417); and R.E. Curtis and E. Neuschler, “Designing Health Insurance Market Constructs for Shared Responsibility: Insights from California,” Health Affairs 28, no. 3 (2009): w431–w445 (published online 24 March 2009;10.1377/hlthaff.28.3.w431).

[xiii] Obama-Biden campaign materials, “Barack Obama and Joe Biden’s Plan to Lower Health Care Costs and Ensure Affordable, Accessible Health Coverage for All”, October 2008.

[xiv] M. Baucus. Call to Action: Health Reform 2009. November 12, 2008.

[xv] Richard S. Foster, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Passed by the Senate on December 24, 2009,” Centers for Medicare & Medicaid Services, January 8, 2010.

[xvi] Jon Kingsdale, “Implementing Health Care Reform in Massachusetts: Strategic Lessons Learned.” Health Affairs 28, no. 4 (2009): w588–w594.


What Good are Health Insurers?

March 6, 2010

As the health reform effort moves into the final stages, everyone seems to be taking a whack at health insurers.  Some of the insurers’ wounds are self-inflicted, such as WellPoint’s announcement of 39% premium increase for individual policies in California.  Some of the attacks are calculated to build public support for health reform, since every good crusade needs a good enemy.  Some of the criticism has even suggested that we don’t need private health insurers.  Michael Hiltzik asked the question in a recent column “What do we need health insurers for anyway?”  James Surowiecki – usually a careful and thoughtful observer of business and economic issues – said the following in a recent article in the New Yorker:

Congress [in its health reform bills] is effectively making private insurers unnecessary, yet continuing to insist that we can’t do without them. The truth is that we could do just fine without them: an insurance system with community rating and universal access has no need of private insurers.

Surowiecki goes on to comment on what the world would look like without private health insurers:

In fact, the U.S. already has such a system: it’s known as Medicare. In most areas, it’s true, private companies do a better job of managing costs and providing services than the government does. But not when it comes to health care: over the past decade, Medicare’s spending has risen more slowly than that of private insurers. A single-payer system also has the advantage of spreading risk across the biggest patient pool possible. So if you want to make health insurance available to everyone, regardless of risk, the most sensible solution would be to expand Medicare to everyone.

Not so fast.  I would feel more optimistic that this would work if we had a different political system.  One of the limitations of this approach is that Medicare’s spending is ultimately determined through the political process.  The U.S. political system – for better or worse — allows the health care industry (or any other well-funded interest group) to use its financial resources and lobbying power to increase the flow of government funds into the health sector.  The idea that Medicare has a “hammer” to force providers to accept lower payment rates is largely an illusion.  In the current system, Medicare can do this only because there is a safety valve, i.e., a large private insurance segment that pays much higher rates to providers.  If Medicare gets larger or replaces private insurance altogether, there will be less opportunity to use the safety valve, so providers will step up their efforts to use political pressure to increase payment rates in Medicare. I simply don’t see a strong countervailing political force that would exert sufficient political pressure to hold down costs.

Is there an alternative to this?  Unless we change the U.S. political system by reducing the effect of money on elections and legislation, the best potential solution lies in healthy competition in the private market.  In this approach, government has an important role in setting the “rules of the game” to ensure that the markets are competitive and will benefit consumers.  The current Senate and House bills implicitly embrace this approach.  For example, the insurance reforms prohibiting medical screening will eliminate “unhealthy” competition based on risk management.  This should help to encourage “healthy” competition based on cost, service and quality.  Another example is the creation of insurance exchanges, which should offer increased choice and information to consumers, thereby stimulating healthy competition.  If the exchanges are allowed to grow over time, this could be a significant factor in bending the cost curve downward.

In this model, there is a very important role for private health insurers.  As the successful insurers adapt their business strategies by moving from risk management to cost management, they will develop new approaches to paying providers to create incentives for efficiency and quality.  Insurers may also become more selective in contracting with providers, by including in their networks only those who demonstrate the ability to manage costs effectively.  And competitive price pressures may cause insurers to exert stronger negotiating tactics with providers.  All of this is separated from the political process and thus more likely to be effective than a government-run effort to control costs.

To put it another way, the control of health care costs depends on the existence of a strong buyer.  In the current system, buyers are in a relatively weak position vs. hospitals, physicians, and drug companies, especially in small or mid-sized markets where there are only one or two hospitals and consolidated medical groups.  (A recent article by Berenson, Ginsburg & Kemper highlighted the trend toward increasing concentration among hospitals and physician groups in California, leading to higher payment rates to providers.)  Similarly, consumers are in a very weak position, since they are dependent on physicians for telling them what kind of medical care they need, and there is a lack of useful information to help consumers compare the price and quality of physicians and hospitals.  Employers likewise have been relatively weak, since most of them seem unable or unwilling to become knowledgeable and effective purchasers.  The government’s ability to be a strong buyer is limited because of the political pressures described above.

So who will be the bad guy and become a purchaser that is strong enough to balance the power of hospitals, physicians and drug companies? Although most health insurers haven’t been willing or able to exert pressure on providers during the past 10-12 years, they are probably the best candidates.  They are already accustomed to being bad guys; it would be hard to damage their public image much further.  And they have the mechanisms to have an impact: traditional tools such as utilization management, prior authorization, and physician profiling, as well as more progressive ones such as new incentive payment models, data analytics and feedback to physicians.  If health reform passes, insurers in the exchanges will have to compete more on price, since the traditional tools of risk management will be taken away.  Healthy competition among insurers will drive them to find ways to work with providers to hold down costs.  From an overall policy and political perspective, it’s probably better to have the providers negotiating and sometimes fighting with private insurers rather than lobbying the government for higher payment rates.  And some of the insurers might actually be seen as good guys, if they can develop constructive partnerships with providers to offer affordable, high quality health care.

In the end, there is a potentially important role for private health insurers in a post-reform world.  Getting this right is hard and the results are uncertain, but it’s probably the best chance we have to design a financially sustainable health care system.

[edited 3/6/10 to add final sentence re: good guys in next to last paragraph]

State vs. National Exchanges – Why it Matters

January 12, 2010

Does it matter whether health insurance exchanges are state-level or national?  I used to think that it wasn’t a major issue, but my opinion has changed.

During the health reform debate early in 2009, I thought that other exchange design issues were more important than whether they are organized at the state or national level.  In my view, who is eligible to join (all small business employees or just those who receive subsidies?), whether the exchange is the exclusive market for individuals and small groups, and how the exchange will be protected from an adverse selection “death spiral” are critical design features and will determine whether the exchanges are successful.

It seemed to me that the arguments put forward by advocates of a national exchange were not compelling.  The most common argument was that a national exchange was needed in order to gain sufficient size, which would supposedly give the exchange more bargaining power with health insurers.  But I always thought that size was more important at the local level.  Health insurers negotiate provider contracts locally, not nationally, and they gain leverage based on their size locally regardless of how big they are nationwide.  In addition, the “bargaining power” argument is relevant only if the exchange is negotiating rates with insurers.  In an “all comers” model, the exchange isn’t negotiating rates; it relies on healthy competition among insurers to drive down premiums.

There is another argument, however, for a national-level exchange. A problem with state-level exchanges is the likelihood that they would be different from each other in variety of ways: participation rules, quality standards, enrollment processing, payment coordination, management effectiveness, etc.  In other words, they would be non-standardized, and this would create a serious barrier for participation by large, multi-state employers.  This isn’t an immediate problem, since the current health reform bills permit only individuals and employees of small employers to use the exchange in the near term.  But the lack of standardization would effectively limit the exchanges to these groups for the long term.  Most large, multi-state employers would look at the patchwork of state-level exchanges and decide that it wouldn’t be worth the hassle.  (One of the reasons that these employers fiercely defend ERISA’s federal preemption of state insurance regulations is the administrative complexity caused by the differences in state laws.)  If the exchanges were administered nationally, however, some large employers might seriously consider participating.

One of the major goals of the current reform bills is to put in place the framework for an effective health insurance system.  If the framework is robust and flexible, we can make improvements and allow the system to evolve.  If we get it wrong, however, a flawed framework can block the evolution.  We don’t have to decide right now if we want the exchanges to completely replace the employer-based system in the long run, but shouldn’t we at least give large employers the option to use the exchange if it makes sense to them?  We can do that with a nationally administered exchange; it won’t work with a 50 state approach.

(Note: I should be clear about definitions.  This is not a single nationwide exchange including only insurers who have provider contracts throughout the U.S.  It is a nationally administered exchange, with insurers choosing to participate in selected locations.  There could be local administrative organizations to which the national exchange administrator could delegate certain tasks, e.g., health plan certification, coordination with state Medicaid programs, etc.  There would be some national insurers in the exchange, of course, but it would also include insurers who have only a local or regional presence.  People would have a choice among several national insurers as well as the local insurers that participate in their area.  This is the model used successfully by FEHBP and nearly all large, multi-state employers.)

Last Chance to Fix the Exchanges

October 17, 2009

Last Chance to Fix the Exchanges

We all know that well-designed health insurance exchanges are a critical element for good health reform, right?  And we also hear that exchanges are part of all five reform bills in Congress, so we should be satisfied, right?  Wrong.  There are some good design elements in the various bills, but the best components from each need to be pulled together as the bills are merged, amended, and worked over in conference.

Health insurance exchanges are arguably the key to successful reform, but most of the recent health reform debate has focused on other issues – subsidies for low-income people, the penalty for noncompliance with the individual mandate, taxes on high cost insurance plans, cost containment measures, protections against high out-of-pocket expenses, etc.  Many of the other elements can be tweaked if we don’t get them quite right in the first version of reform, but it’s critical to establish the right design framework for exchanges at the beginning.

The exchanges are needed to address three critical problems that most small employers and individuals face in the current health insurance market:

COSTS — Individuals and small employers pay much higher premiums than large employers for similar health benefit plans, due primarily to high insurance administrative and selling costs for this segment and a lack of bargaining power.

CHOICE — Very few employees of small employers are offered a choice of health plans; most insurers will offer coverage to small employers only on a “sole source” basis.  This also makes coverage less “portable when people change jobs.

CONVENIENCE – It’s a tremendous administrative burden for small employers to manage health benefits for their employees.

There are three design elements that are crucial to achieving these goals:

How big? Who’s in? Size is important; as Sen. Olympia Snowe put it, “The more the merrier.”  Sufficient size will attract more insurers and offer wider choice to consumers in the exchange.  It will also enable the insurers to achieve economies of scale and reduce administrative costs and premiums.  And allowing more categories of groups into the exchange will allow more people to get the benefits of expanded choice, reduced hassle for administering health benefits, and improved portability of health coverage.

How to avoid the “death spiral”. Many exchanges in the past have collapsed when high cost people joined and stayed in the exchange while low cost people purchased coverage outside the exchange.  Ideally, the exchange would be the sole market for individuals and small groups.  Since this is probably unrealistic politically, it is necessary to put in place mechanisms to minimize the danger of the death spiral.  For example

  • The same insurance regulations (e.g., guaranteed issue, rating, benefit design, etc.) should apply inside and outside the exchange.
  • Insurers should be required to set their premiums based on the entire pool of the combined markets (inside and outside the exchange).
  • Insurers should be prohibited from advantaging their comparable non-exchange products in any way (e.g., through the use of different marketing, application processes, etc.)
  • If an insurer participates in the individual and small group markets outside of the exchange, it must also participate inside the exchange.

What role for the exchange? An exchange can play a variety roles ranging from passive provider of consumer information to active purchaser of health benefits on behalf of consumers.  A narrower role would leave the consumers to deal directly with the insurers.  (If this is the case, there won’t be any savings in administrative or marketing expenses.)  But the exchange could play a broader role by managing the enrollment process, determining eligibility for subsidies, collecting premium contributions from multiple sources, administering a risk equalization mechanism to protect insurers from adverse selection, contracting selectively with insurers, and even negotiating rates.

I’ve put together a simple chart comparing the key design elements from the three bills.

Senate Finance Senate HELP House TriCommittee
How Big?Who’s In? Reasonably inclusive.Individuals + small employers (<100) in 2015; state option to add large employers (>100) in 2017 Somewhat inclusive.Individuals + small employers (<50); state option to add large employers (>50) Somewhat restrictive.Individuals + very small employers (<20) phased in by 2014; option to add large employers (>20) in 2015.
Avoiding the “Death Spiral” Some features to reduce danger of death spiral Reasonably strong features to reduce danger of death spiral Unclear or weak features to reduce danger of death spiral
Role Limited role.  All insurers must be made available in the exchange Substantive role, but does not include negotiating rates with insurers Active role, including accepting bids and negotiating with insurers

Here is my recipe for the best policy blend to address these problems.  (It’s basically one from column A, one from column B, and one from column C.)

How big/Who’s in — Use the Senate Finance Committee bill as a starting point, but consider expanding further.  (Sen. Wyden’s proposed amendment would accomplish this by allowing employees of larger groups to join the exchange, but there would need to be stronger protections against a “death spiral” for the exchange.)

Avoiding the death spiral – Use the Senate HELP bill as a starting point, but add language to (a) prohibit insurers from advantaging their comparable non-exchange products in any way, and (b) require insurers that participate in the individual and small group markets outside of the exchange to also participate inside the exchange.

Role Use the language in the House bills, which allow a more active role for the exchanges, including selective contracting.  (The proposed Kerry amendment would achieve this in the Senate bills as they are merged.)

Other commentators have made the point about the importance of designing insurance exchanges right.  Jon Cohn included it in his recent list of “The Top Ten Things Worth Fighting For”.  (Just to show how important it is, it’s on his list twice: #5 – Strengthen the Exchanges, and #10 – Open up the Exchanges.)  Elliot Wickes posted a new blog at Health Affairs on the essential characteristics of exchanges in health reform.  Earlier this summer, Alain Enthoven, Peter Lee/John Grgurina, Joe Minarik, David Riemer and Ezra Klein posted excellent commentaries on exchange design.

The design of health insurance exchanges is too important to be brushed aside or used as simple political bargaining chip.  If we don’t get it right in the bill this year, it will be very difficult to fix it in future years.  If we get it right, however, exchanges will address the problems of cost, choice and convenience faced by small employers and individuals, and it will help to bring healthy competition and drive down overall costs in the health insurance market.

Note: Revised slightly 10/28/09 after helpful conversation with Alain Enthoven.