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Health Insurance Exchange? Lessons from California

Building a National Insurance Exchange: Lessons from California

California HealthCare Foundation
Issue Brief
July 2009
Among the deliberations now taking place in the nation’s capitol regarding federal approaches to expanding health coverage, virtually all incorporate the idea of an insurance exchange – an entity to which people can go to select a health plan from a broad range of offerings. Over the past 15 years, California gained extensive experience in designing and operating just such an exchange, an effort that ultimately proved unsustainable.
The California Exchange
The Expectation
1. Provide an easy to navigate single point of entry where people could go to choose among several health plans.
2. Reduce the cost of coverage, using three primary mechanisms:
* Reduce administrative costs by achieving economies of scale
* Command lower prices
* Foster market competition
3. Enhance portability of coverage
The Reality
The actual experience of the California exchange taught some hard lessons. It showed that none of theses objectives is easily achieved.
The Participation Problem
… as long as the exchange is not the exclusive source of coverage for some populations, health plans may be reluctant to participate…
Insurers do not particularly like the head-to-head competition that is a feature of the exchange concept… Insurers always prefer to insure whole groups directly rather than compete in the exchange.
The Elusiveness of Savings
* Few administrative efficiencies
* A lack of pricing power
* Exposure to adverse selection
People involved in the operations of the California exchange agreed that when there is competition for the same customers within and outside the exchange, the exchange is in “extreme peril” of becoming a victim of adverse selection… Eventually the exchange will fail.
Choosing the Right Model
But once individual choice is part of the exchange design, insurers will prefer to generate business outside of the exchange, as occurred in the California experience… The insurers will still have an incentive to direct higher-risk people to the exchange rather than insuring them directly, in hopes that they might pass off some of the “bad” risks to other insurers.
http://www.chcf.org/documents/insurance/BuildingANationalInsuranceExchange.pdf
For a description of the Health Insurance Exchange proposed in the House Tri-Committee bill, insert H.R.3200 in the Thomas search box and read Title II:
http://thomas.loc.gov/

Most progressive policy wonks observing the reform process taking place in Washington have been quite smug. As the battles take place over a public option, over taxing employer-sponsored plans, or over the eligibility thresholds for government subsidies, these wonks are complacent knowing that the really important reform taking place is the establishment of the Health Insurance Exchange. Or so they believe.
Within the Exchange the regulated private insurance industry will have to provide standard benefit packages, at affordable premiums made possible by competition, and without the intrusive perversities that currently permeate the industry and its products. What could be wrong with this?
President Obama and the Democrats in Congress are currently facing a barrage of criticism for supporting the government takeover of health care. To fend off this criticism, what are the very first words out of President Obama’s mouth? “You can keep the insurance you have!” So much for an insurance exchange market of comprehensive, affordable private health plans.
Why would a phenomenally successful private insurer ever want to compete with itself by offering a heavily regulated Health Insurance Exchange product that has unaffordable premiums because of adverse selection? Because of the requirement of risk adjustment within the Exchange, and because individuals and employers with high health care costs will seek relief in the Exchange, all products offered by the Exchange will be too expensive.
The Health Insurance Plan of California (later PacAdvantage) was designed not unlike the current federal proposals – an insurance exchange especially geared for small businesses. Because of adverse selection, it became a victim of the death spiral, and closed in 2006.
The only way a Health Insurance Exchange could work would be if we moved all existing private plans into the Exchange, and established a system that would effectively pool risk. Even then it would be very expensive, partly because of the profound administrative inefficiencies, and it would still fall short on universality and equity. And at that we would still have to address the problem of the very large sector of our population who would not qualify for subsidies but who still could not afford the high premiums and out-of-pocket expenses of private insurance.
The least expensive, most efficient, and most effective method of ensuring that everyone has affordable access to the health care that they need is a single payer, Medicare-for-all, national health program. There will be a lot of noise on health care reform during the August recess. Just make sure that our noise is the loudest!

Health Insurance Exchange? Lessons from California

Building a National Insurance Exchange: Lessons from California

California HealthCare Foundation
Issue Brief
July 2009

Among the deliberations now taking place in the nation’s capitol regarding federal approaches to expanding health coverage, virtually all incorporate the idea of an insurance exchange – an entity to which people can go to select a health plan from a broad range of offerings. Over the past 15 years, California gained extensive experience in designing and operating just such an exchange, an effort that ultimately proved unsustainable.

The California Exchange

The Expectation

1. Provide an easy to navigate single point of entry where people could go to choose among several health plans.

2. Reduce the cost of coverage, using three primary mechanisms:

* Reduce administrative costs by achieving economies of scale
* Command lower prices
* Foster market competition

3. Enhance portability of coverage

The Reality

The actual experience of the California exchange taught some hard lessons. It showed that none of theses objectives is easily achieved.

The Participation Problem

… as long as the exchange is not the exclusive source of coverage for some populations, health plans may be reluctant to participate…

Insurers do not particularly like the head-to-head competition that is a feature of the exchange concept… Insurers always prefer to insure whole groups directly rather than compete in the exchange.

The Elusiveness of Savings

* Few administrative efficiencies
* A lack of pricing power
* Exposure to adverse selection

People involved in the operations of the California exchange agreed that when there is competition for the same customers within and outside the exchange, the exchange is in “extreme peril” of becoming a victim of adverse selection… Eventually the exchange will fail.

Choosing the Right Model

But once individual choice is part of the exchange design, insurers will prefer to generate business outside of the exchange, as occurred in the California experience… The insurers will still have an incentive to direct higher-risk people to the exchange rather than insuring them directly, in hopes that they might pass off some of the “bad” risks to other insurers.

http://www.chcf.org/documents/insurance/BuildingANationalInsuranceExchange.pdf

For a description of the Health Insurance Exchange proposed in the House Tri-Committee bill, insert H.R.3200 in the Thomas search box and read Title II:
http://thomas.loc.gov/

Comment:

By Don McCanne, MD

Most progressive policy wonks observing the reform process taking place in Washington have been quite smug. As the battles take place over a public option, over taxing employer-sponsored plans, or over the eligibility thresholds for government subsidies, these wonks are complacent knowing that the really important reform taking place is the establishment of the Health Insurance Exchange. Or so they believe.

Within the Exchange the regulated private insurance industry will have to provide standard benefit packages, at affordable premiums made possible by competition, and without the intrusive perversities that currently permeate the industry and its products. What could be wrong with this?

President Obama and the Democrats in Congress are currently facing a barrage of criticism for supporting the government takeover of health care. To fend off this criticism, what are the very first words out of President Obama’s mouth? “You can keep the insurance you have!” So much for an insurance exchange market of comprehensive, affordable private health plans.

Why would a phenomenally successful private insurer ever want to compete with itself by offering a heavily regulated Health Insurance Exchange product that has unaffordable premiums because of adverse selection? Because of the requirement of risk adjustment within the Exchange, and because individuals and employers with high health care costs will seek relief in the Exchange, all products offered by the Exchange will be too expensive.

The Health Insurance Plan of California (later PacAdvantage) was designed not unlike the current federal proposals – an insurance exchange especially geared for small businesses. Because of adverse selection, it became a victim of the death spiral, and closed in 2006.

The only way a Health Insurance Exchange could work would be if we moved all existing private plans into the Exchange, and established a system that would effectively pool risk. Even then it would be very expensive, partly because of the profound administrative inefficiencies, and it would still fall short on universality and equity. And at that we would still have to address the problem of the very large sector of our population who would not qualify for subsidies but who still could not afford the high premiums and out-of-pocket expenses of private insurance.

The least expensive, most efficient, and most effective method of ensuring that everyone has affordable access to the health care that they need is a single payer, Medicare-for-all, national health program. There will be a lot of noise on health care reform during the August recess. Just make sure that our noise is the loudest!