Reality Check: Defining Expectations for the State Health Insurance Exchanges

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In states across the country, policymakers and regulators are working out the details of establishing new insurance exchanges. The U.S. Department of Health and Human Services (HHS) is providing considerable assistance to states in this effort. By 2013, HHS will determine whether each state is on track to open its exchange for business by 2014. At a minimum, the insurance exchanges will help eligible individuals purchase health insurance, with income-adjusted federal subsidies for families earning up to $89,400 for a family of four. In addition, small businesses with up to 100 employees will be able to go to the new exchanges for small businesses, also known as Small Business Health Options Programs (SHOPs) to select health plans for their employees, many with the benefit of a tax credit.

The exchanges are expected to cover up to 30 million individuals and employees of small businesses by 2020. And, since the exchanges are also intended to determine whether families are eligible for Medicaid and the Children’s Health Insurance Program, an additional 16 million currently uninsured people may go to the exchanges to gain coverage.

Helping people and small businesses gain health insurance coverage alone are significant operational undertakings for states. But the exchanges are also viewed as potential tools to further reform the health system. Perhaps the only thing greater than the list of consultants available to help build state-based health insurance exchanges these days is the pile of expectations being heaped on them. Many hope, for example, that the exchanges will offer small employers and individuals more choices and lower prices by harnessing both the power of the market and the leverage of group purchasing.

Moreover, exchanges are also hoped to galvanize individual product offerings, stimulate insurer entry into local markets, set and enforce performance standards for health insurers, facilitate all kinds of price transparency, and be a tool for comprehensive delivery system reform. Those responsible for helping to plan the design of these exchanges should work to clarify and prioritize public desires for them, lest the exchanges become the object of every person’s faint hope for whatever they conceive of as “health care reform”—hopes that cannot be met right away and so might damage the political viability of the effort.

Central to this reality-calibration is forecasting the potential enrollment in a state-based exchange. Based on federal subsidy levels and local commercial markets, I am familiar with predictions of a combined individual and small-group enrollment in exchanges of between 5 percent and 10 percent of a state’s total population, or 10 percent to 20 percent of commercial enrollment. This is consistent with the experience of Massachusetts’s Connector.

Several realities emerge when the aspirational roles of an exchange are paired with this forecasted market share:

1. Delivery System Reformer: In this role, the exchange will catalyze the long list of reforms prescribed for the health care delivery system to improve its performance. It can lead efforts to disseminate the payment reforms suggested by the Affordable Care Act, reinvest in primary care, and promote improved care coordination and delivery system integrations.

The delivery system we have is in large part a creation of the payment system we have. Five percent to 10 percent of total enrollment is too small to reform either system. Advocates for such an exchange role need to coordinate exchange planning and governance with other state regulatory and purchasing levers, and ask hard questions about why the establishment of the exchange would increase chances for success if previous efforts have failed.

Combining exchange and Medicaid policymaking is a logical first step here, particularly for those states with mature Medicaid managed care programs and a desire to smooth family transitions between Medicaid, the Children’s Health Insurance Program (CHIP), and the exchanges. Such a tactic, however, doesn’t necessarily guarantee much delivery system leverage. Moreover, for many, the exchange offers the opportunity to break state health care policymaking from Medicaid—and its liabilities of provider price-squeezing, limited benefits flexibility, low-income “branding,” and sometimes segregated provider networks.

2. Volume Purchaser: Here, the exchange will deliver value for small businesses and individuals by being the Walmart of health insurance, buying it cheaper on behalf of cloutless small groups. This role has significant intuitive appeal for the general public.

While the exchange can be a valuable option for small employers wanting more choice of plans or products for their employees, 10 percent to 20 percent of the commercial market will not compel significant pricing discounts from insurers, who are essentially brokers of provider networks and have direct control over approximately only 15 percent of their premium. If the exchange has a vision of being an active purchaser that drives discounts, it will draw lessons from large self-insured purchasers and public employee health insurance purchasing. Meaningful discounts are only possible with meaningful limits on product choice, plan choice, and possibly provider choice for exchange users—all of which will limit the political attractiveness of the exchange in the short term and market attractiveness of the exchange in the longer term, particularly in an employer-purchasing driven model.

3. Insurance Market Maker: In this role, the exchange’s volume will bring new insurers to compete vigorously for the business. Prices will fall and providers will be happier as local insurer oligopolies are broken up, usually by national insurers. Regional exchanges will, by this rationale, increase the numbers and the competition.

Of all exchange thinking, this is probably the most magical. In large states, there are many local markets, with local dynamics. Ten percent to 20 percent of that market, split among carriers, is not enough to attract new entrants. More significantly, more insurers in any one market will mean less leverage over providers and higher unit prices. This will please providers, not purchasers.

Regional exchanges offer real back-office administrative savings opportunities for those states looking at small enrollments over which to spread administrative costs. However, these costs are a very small share of insurance premiums; creating a truly regional insurance market is a much tougher task, and calls for harmonizing statutes and regulations. Even if accomplished, regional insurance markets still have little answer for dominant local providers and may make public policy for delivery system reform harder, not easier.

4. Insurance Market Reformer: Finally, the exchange is offered as the hope for bringing rationality to an insurance market where employers buy but individuals use, intermediaries work for buyers but are paid by sellers, and the product demanded comprises perhaps incompatible desires for both financing of routine health care and catastrophic risk protection. The exchange would be responsible for helping develop and demand new products, and simplifying product offerings, pricings, and administration. Newly empowered consumers would then be able to drive value as they do in home and auto insurance or airline travel.

This is an attainable role for the exchange but of uncertain value. The bulk of exchange enrollment initially will be individuals and small businesses that will come to pick up their subsidies and tax credits. These will provide a significant running start for exchanges aiming to build enrollment volume. The resulting 10 percent to 20 percent of the commercial market is certainly enough to innovate and disrupt the market; depending on political will the exchange could promote new benefits designs, easier and faster eligibility determination and enrollment, lower distribution costs, and new employer subsidy models including defined contributions. However, the road to real economic value for nonsubsidized groups—translating the laudable innovations suggested here into cheaper premiums—is not clear. This is a real quandary for reform advocates struggling to marry their aspirations with the political necessity of disrupting the health insurance choices of as few constituents as possible.

While these visions for the role of an exchange are not necessarily mutually exclusive, they should be prioritized—asking the exchange to fulfill several of them will ensure it does none well. Achieving any of these roles—with the likely exception of the third—is possible, but only with significant planning and coordination with other state efforts, and expectations clarification with stakeholders. It is incumbent upon state leaders to acknowledge the opportunities and limitations of the exchange’s potential as they work with community stakeholders, and not shrink from the responsibility of describing these realities. Overselling the exchange is in no one’s interest. Using the exchange planning process to educate one another and develop public consensus on the desired structure of local and regional public and private insurance markets may be our greatest hope and opportunity. Such a project may not stir the hearts of the public, but if this were easy it would already have been done.

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