Last Chance to Fix the Exchanges

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.

Let’s Not Lose Sight of the Goals

I love Daniel Schorr.  I’ve never met him in person, but I love his voice and his insights about politics on NPR’s Weekend Edition.  But this morning I was disappointed.  After listening to his comments on the Olympics and Iran, I looked forward with anticipation to his thoughts about the Senate Finance Committee’s accomplishments earlier this week on health reform legislation.  When asked whether a “real health care bill” is likely to pass later this year, he said, “Well, it begins to look more [likely] . . . that there will be a bill.  The question is not whether there will be a bill . . . but what will be left in the bill, because so many things have been taken out.”  I could almost hear him sigh.  He went on to talk about the fact that the public option is not a part of the Senate Finance bill, although it might be restored in full or part (through a trigger mechanism or health cooperatives) as the bill moves through Congress.

Let’s step back for a minute.  (This is what I usually rely on Schorr to do for us.)  Where were we a year ago?  Although advocates of health reform were encouraged that the health care crisis was getting a lot of attention in the Presidential election campaign, the outlook was not rosy.  Obama and McCain were neck and neck, and McCain’s reform proposal was so weak as to be laughable.  The pundits and pollsters were predicting that the Democrats would get about 56 seats in the Senate – not enough to overcome a filibuster.  And there was serious concern that even if Obama were elected, health reform would be crowded out by other major crises – the threat of a serious economic depression, the banking collapse, Iraq/Afghanistan/Iran, energy and global climate change, and who knows what else.  In October 2008 the likelihood of serious comprehensive health reform was probably about 25%.

What has happened during the last 12 months?  Well, Obama was elected with a clear mandate to do something about health reform, and his proposal was pretty solid.  The Democrats surprisingly won 60 seats in the Senate, although it took months for the Minnesota recount to be completed.  The President and the Democratic leaders in Congress have made health reform a top priority and haven’t let other critical issues get in the way.  Obama selected a top-flight team of policy experts and – more importantly – politically savvy professionals to push health reform.  (Sen. Baucus and others on the Hill had started doing this a year earlier.)  Using the lessons from the defeat of the Clinton plan in the 1990s, Obama set the overall goals and framework for reform but let Congress take the lead in creating the specific legislation.  The administration worked closely with health care industry groups to get their support for reform, or at least reduce the likelihood they would torpedo it.  A strong consensus emerged about the basic shape of the reform package, and five Congressional Committees have passed very similar bills.  We’re on the verge of actually getting something done.

What’s in the bills? Is it real reform or something watered down?  As the President reminded us in his September 9, we need to stay focused on the goals and not get tangled up in arguments about the ways we achieve those goals.  Reform advocates have been working for decades to improve access to health care for all Americans, improve the quality of health care, and reform the system in a financially responsible and sustainable way.  The bills in Congress would make major progress on all three of these goals, and we shouldn’t lose sight of that.  The bills can be improved, of course, but we must not let the perfect be the enemy of the good.  The inclusion of a public plan option should not be the litmus test of a good bill, despite what Howard Dean says; it’s only a means to an end, and there are other ways to get there.  We should focus instead on whether the final reform plan would make real progress on the three critical goals of access, quality and affordability.  In the end, it seems increasingly likely that we will pass the most important and far-reaching domestic legislation in many years – one that will help millions of people who cannot afford decent health care – and we should not lose sight of that.

But I still love you, Daniel Schorr.  We all need a healthy perspective on the major issues of our day, and I’ll listen in again next weekend.

Winners and Losers: Strategy in a Post-Reform World

Most health policy experts are focusing on the daily ups and downs in the political battles over health reform.  Within the health care industry, however, there is a buzz about who will be the winners and losers after health reform passes.  A.M. Best’s U.S. Health and HMO Insurance Index has been volatile since last November, reflecting high uncertainty about the effect of health reform.  Earlier this summer, there was some speculative analysis about the potential impact of reform on health care stocks.  Will health insurers come out as winners?  What about hospitals, doctors, drug manufacturers, and insurance agents?

It’s good to look ahead, but I think most people are asking the wrong question.  Each of these health industry sectors – in aggregate — will probably do just fine in the post-reform world, as Bob Laszewski points out in his recent blog.  The more important question is: who will be the winners and losers within each sector?

Change is coming.  After all of the political maneuvering this fall, some kind of health reform bill is likely to pass.  The basic shape of the post-reform world is coming into focus, and it is likely to include:

• Insurance reform: guaranteed issue (no medical screening), along with rating rules and standardized benefits in the individual and small group markets.
• Broader coverage: expansion of Medicaid, subsidies for low-income people and an individual mandate.
• New market structures: an insurance exchange for individuals and employees of small groups.
• Cost containment: increased attention to costs, transparency and accountability for insurers and providers.
• Payment reform: a gradual shift from fee-for-service to bundled payments, as well as incentives for quality outcomes.
• Emphasis on prevention, primary care, chronic disease management, and the use of comparative effectiveness research.

These changes in the regulatory and market environment will create changes in the dimensions of competition within the health care industry.  In the PRW (post-reform world), health insurers and providers will require different skills and strategies to be successful.

Health Insurers:  In the past, the key to financial success was risk management, i.e., making sure that the expected medical costs of enrollees were predictable and not too high.  Insurance CFOs focused on the “loss ratio” — medical claims payments as a percentage of premiums – as a key measure.  Insurers used medical underwriting, targeted pricing and benefit design to manage the risk profile of their enrollees.  Many insurers also tried to hold down medical costs and administrative expenses, but it’s much harder to do that.  (No one likes being yelled at by doctors.)  Most insurers have deep expertise and experience in risk management, so it’s not surprising that this would be the primary tool for achieving their financial goals.

In the PRW, however, the usefulness of risk management tools will be greatly diminished.  Medical screening won’t be allowed, and insurers will be limited in their ability to use pricing and benefit design to attract only low-cost enrollees.  Even if they do, risk equalization mechanisms within the new health insurance exchange will reduce the financial benefits of cherry picking.  Insurers will need to put more effort into managing expenses, for both administration and medical services.  In other words, insurers will need to move from risk management to cost management.

The second major change for insurers will be in the small employer market segment.  In the past, insurers focused on the employer as the customer, not the employee.  They worked through brokers to get access to employers, to whom they offered coverage on a sole source basis.  Insurers – rightly concerned about adverse risk selection in a multiple choice arrangement within a small pool – insisted on being the only health plan offered within a small group.  The employees could only join the plan offered by the employer, so there was little need for consumer-oriented marketing.

In the PRW, the employees of most small businesses will purchase their coverage through a health insurance exchange.  The employer will have a minimal role, and the employee will have a choice of multiple health plan options.  Insurers will need to focus their sales and marketing efforts to consumers rather than brokers and employers.  In other words, insurers will need to shift from employer-based to consumer-based marketing.

Health Care Providers:  Hospitals and physicians face similar changes.  The analogy to insurers’ risk-management strategies is providers’ payer mix strategies.  An important factor in providers’ financial performance has been the mix of commercially insured, Medicare, Medicaid, and uninsured patients.  Since the payments for commercially insured patients have been much higher than for the others, many providers have systematically minimized or avoided patients in the other three categories.  Even not-for-profit safety net clinics have been forced to increase the proportion of commercially insured patients to stay afloat financially.  Many providers have also tried to hold down medical expenses, but it’s much harder to do that.  (No one likes being yelled at by staff physicians and nurses unions.)

In the PRW, the effectiveness of payer-mix management strategies will be reduced.  Most people will have insurance coverage, which will provide new revenue to providers who had been serving the uninsured.  There probably will still be payment differences between commercially insured vs. Medicare and Medicaid patients, but the importance of payer-mix management will be reduced.  In response, providers will need to focus more on managing their costs of delivering care.  In other words, providers will need to move from payer-mix management to cost management.

The second major change for providers will be in provider payment formulas.  In the past, the fee-for-service payment system rewarded a higher volume of services, regardless of the patient’s health outcomes.  The CFOs of provider organizations used key indicators such as the number of hospital admissions, the number of medical procedures, and billable physician time.  There was increased pressure for improved physician “productivity”, and billing systems were upgraded to maximize fee-for-service revenue.

In the PRW there is likely to be a movement away from fee-for-service payments — although it will probably happen gradually — and the incentives for increased service volume will be dampened.  Instead, providers will be paid for a “bundle” of services, and there will be a greater emphasis on quality processes and outcomes.  Hospitals will not be paid for a patient’s readmission for the same medical condition or for correcting medical errors (“never events”).  Physicians will be paid to take care of patients with chronic conditions via a specialized capitation or case rate.  Providers will need to coordinate their services and improve the management of chronic disease patients.  There will be stronger incentives to invest in electronic health records, use evidence-based clinical guidelines, and develop integrated delivery systems.  Providers will need to move from increasing service volume to improving patient care.

These are only a few of the changes that will be driven by health reform; the effects of reform are likely to be far-reaching.  The new legislative and market landscape will be very different from the one that insurers and providers have been accustomed to.  Smart health care organizations are already thinking ahead and developing strategies to be successful. The ones that don’t adapt will be moving against the tide.  Some insurers will gain, and others will shrink.  Some providers will thrive, and others will struggle.  Within a few short years, we’ll be able to sort out the real winners from the losers.

A Town Hall Meeting 3000 Miles from Washington, DC

Seaside, Oregon, is about as far away from Washington, DC, as you can get in the continental U.S. Not quite 3000 miles, but almost (2860 to be exact). And it seemed very far away from the sound and fury of the health care debate in the nation’s capital when I attended a Town Hall meeting last Friday. Sen. Ron Wyden was the speaker at the event, which was attended by over 400 people crowded into the Seaside High School cafeteria.

As we waited, the crowd was calm and polite, but there was a murmur of anticipation and an undercurrent of tension. We had all seen the stories about disruptions and threatened violence at similar Town Hall meetings across the country. Would it happen here? We could see people standing at the back with signs opposing health reform. Would they interrupt the proceedings and cause problems? We all respect freedom of speech, but somehow it wouldn’t seem like “freedom” if someone else was shouting us down and disrupting our attempts to learn about the health reform proposals.

To my pleasant surprise, everyone behaved well; the process was orderly, and the tone was respectful. People asked Sen. Wyden some tough questions: Why not simply expand Medicare for all? Will there be enough doctors to take care of everyone? What will happen to the federal deficit? How can we reduce the administrative hassle for doctors? Why do you take campaign contributions from insurance and drug companies? Sen. Wyden is very knowledgeable about health care and answered the questions thoroughly, but – more importantly – he didn’t speak down to anyone. He explained the issues clearly and tried to help people to understand the complexities of the challenges we face. I overheard him talking afterwards with a member of the U.S. Army color guard who said, “I learned a lot from what you said and what the people were asking today.” Isn’t that the basic idea of a Town Hall meeting?

The scene reminded me of the well-known Freedom of Speech painting (one of the Four Freedoms series) by Norman Rockwell. A man in a flannel shirt and leather jacket is standing up to speak at a Town Hall meeting, and the people around him are looking up with interest and curiosity. Many people think Rockwell was just a talented illustrator who painted sentimental themes. They may be right from an artistic perspective, but I think he tapped into something important about us – something we often forget. Big issues like health care are too important to leave to the special interest lobbyists, the experts and the cable television commentators. We need to have conversations in every one of our communities around the U.S. We need to listen, share our ideas, learn from each other, move toward consensus, and trust the wisdom of the people.

During the past few weeks we’ve heard about the disruptive and abusive tactics used by opponents of health reform at some Town Hall meetings. We haven’t heard, however, what happened at the hundreds of other Town Hall meetings across the country. I suspect that most of them are like the one I attended in Seaside, where people are struggling to find common ground to address one of the biggest problems we face – providing access to affordable, high quality health care for everyone. Seaside may be far from Washington, DC, but it’s close in spirit to Stockbridge, MA – the home of Norman Rockwell – and thousands of other communities in the U.S. My faith in the American people is being strengthened, one Town Meeting at a time.

Are “Cadillac” health plans the problem?

The debate over proposals to tax health insurance plans is confusing and frustrating.  The proposals are usually described as a tax on “gold plated” or “Cadillac” health coverage.  According to the media and many spokespeople on the Hill, these health plans with “overly generous benefits” supposedly encourage overuse of medical services and drive up the overall costs of health care.  People express outrage that Wall Street executives have expensive tax-subsidized health benefits that include coverage for cosmetic surgery.  Is this really a problem?  If we fix this, will it raise lots of revenue and bend the cost curve?  I don’t think so.

The problem is not “Cadillac” coverage, whatever that is.  I know that some economists believe that people ought to have more “skin in the game” by paying a significant share of the costs of medical services they receive.  I agree, but only up to a point.  Health care services are not like other goods and services.  If you give me more money, I might build a fancier house, buy a new car, go to more concerts, fly first class, etc., because I like all of these things.  Frankly, I don’t particularly like going to the doctor, and I wouldn’t spend my extra income on more blood tests, CT scans, colonoscopies, or surgeries (ouch!).   It’s fine to have modest copayments to discourage unnecessary doctor visits or to encourage use of generic instead of brand name drugs, but onerous cost sharing when someone is seeking medical care won’t solve our problem.  A tax on “Cadillac” plans won’t raise much revenue, and it won’t bend the cost curve in any significant way.

A recent article by Alec MacGillis in the Washington Post makes the same points.  Most of the experts he interviewed agreed that increasing copayments and deductibles is unlikely to slow the growth of health care costs.  But I think this misses the point, or – to be more precise – mixes together two different issues.

When people are making decisions about health care that affect their pocketbooks, there are two steps.  Before deciding whether to go to the doctor or to undergo surgery, people have to decide which health plan to choose. Most people who work for large employers usually have a choice among multiple health insurance plans, usually an HMO and several PPOs.  (For example, federal government employees in Portland, OR, can choose among plans offered by Blue Cross Blue Shield, Aetna, United, Kaiser Permanente, and several others.)  The real issue is that most people don’t have much financial incentive to choose the efficient, high value health plan that is offered to them.  Most large employers pay the full premium for employees (or a % of the full premium), regardless of the cost.  These employers are, in effect, subsidizing the inefficient health plans and providers.  And this is encouraged by the open-ended tax subsidy for employer-paid health benefits.  If the tax exclusion were capped at a reasonable level, people would have to pay more for higher cost health plans, and they would benefit if they chose a lower cost plan.  (For more background, there are some useful articles about this issue by Jonathan Cohn, Ezra Klein, and Paul N. Van de Water.)

When I say “higher cost health plan”, I’m not talking about richer benefits; this is about higher costs for the same benefits.  How can some insurers’ premiums be lower, even for the same benefits?  Some have made investments in IT and streamlined their claims processing systems, so their administrative costs are lower.  Some work closely with groups of physicians and hospitals that are committed to using evidence-based clinical practices and reducing unnecessary medical services.  But why would an employee join one of these more efficient plans if they don’t get to keep the savings?  And why would a health plan go to all the trouble of becoming more efficient if their customers are not price sensitive?

The bottom line: the proposal to tax “Cadillac” plans has populist appeal, but it is attacking the wrong problem.  Instead of making people pay more when they need health care, we should provide incentives for people to enroll in more efficient health plans.  A cap on the tax exclusion of employer-paid health benefits – ideally, adjusted for income – would allow people to benefit from choosing a more efficient, high-value health plan.  It would also encourage healthy competition and help to bend the trend of health care costs overall.

Beyond the Beltway – How Most of America Sees Health Reform

What are people saying about health reform beyond the beltway and outside the health wonk debates?  I’ve been meeting with Rotary Clubs and local Chambers of Commerce during the last several months, and they’re talking about different issues than the ones being debated in Washington, DC.  When I talk with these groups about the prospects for national health reform, what are the top three questions they ask?
•    Is this going to lead to a single-payer system with rationing, just like they have in Canada?
•    Why isn’t the malpractice problem being addressed?
•    Will this include illegal immigrants?

These are not the top issues being debated on Capitol Hill.  If you just read Politico.com, the Washington Post, and the pundits’ blogs, you would think that the big issues are the public plan option, the employer mandate, and the cap on the tax exclusion of employer-paid benefits.  There are important, but they aren’t the issues that most small employers and consumers are worried about.

Let’s take each of these in turn.
•    The concern about rationing under a Canadian-style single-payer system shows that the messages from right-wing opponents of health reform are finding a receptive ear, at least among some people.  I heard this issue expressed at every meeting I attended – often using the exact language the Frank Luntz has recommended.  In response, I try to explain that the most likely reform legislation would preserve the multi-payer private employer-based system for most people, and it would rely on healthy competition rather than government price-setting and rationing to slow the growth in health care costs.  My response usually falls on deaf ears; many people are convinced that Obama and Kennedy are secretly pushing for a government-run plan.  It will take a lot of work to overcome the fear factor that is being stirred up by opponents of health reform.
•    Many people – especially those with family members who are doctors – are convinced that the malpractice problem is the single biggest driver of high costs.  In the words of one person at a meeting I attended recently, “The malpractice lawyers are raping the doctors”.   I respond by acknowledging that malpractice insurance and the use of defensive medicine do drive up costs, but these are relatively minor factors; the way physicians are paid has a much larger impact on driving unnecessary use of tests and medical care.  But there is a real issue here: why hasn’t malpractice reform been seen as an essential building block of reform?  The likely answer is political:  the trial lawyers have traditionally provided financial support to Democrats, while doctors have usually supported Republicans.  Since most of the current bills are being written by Democrats, it’s not surprising that they don’t focus on liability reform. Pres. Obama’s recent comments to the AMA provided a glimmer of hope that the issue will be addressed.  If there is any interest in building bi-partisan support for comprehensive health reform, this ought to be on the table.
•    The fear of illegal immigrants is a hot button issue for many people.  In the current economy – with many people losing their jobs, and many more worried sick about the danger of unemployment – it’s sad but not surprising that some people would see immigrants as a threat.  So far, the President and Congressional leaders have been successful in keeping this issue from getting out of hand, but Senators and Representatives will get an earful when they spend time in their districts during the July 4 and August recesses.  Unless we find a way to manage this issue, it could become a flash point in the final phases of debate on a comprehensive reform bill.

Welcome to “Now’s the Time”

It’s time for health reform. Many of us have been laboring for years on health policy issues and working to improve the current health system. We all know the problems — unsustainable costs, inconsistent quality, and too many people unable to get the care they need. I’m personally committed to doing whatever I can to fix the system and improve the health of all Americans, and I know all of you share that commitment. I have some ideas about solutions, but I also know that there are many paths to the mountain-top. I hope you find the ideas you read here to be helpful and provocative, and I welcome your comments. We have an historic opportunity to make our health care system work better, and I hope that you’ll join the effort — now’s the time!