In the debate about health reform, many issues are getting an inordinate amount of attention, but one is not getting the detailed consideration it deserves. How it is finally resolved is likely to be one of the key factors of the ultimate plan’s success or failure. That issue is the design of the health insurance exchange.
An exchange is a managed marketplace in which individuals can choose among a variety of health plans. Why do we need an exchange? An exchange would help to remedy serious deficiencies in the current health care system:
• Lack of consumer choice. Most employees are offered only one insurance option. Health insurers usually don’t allow small employers to offer competing plans, due to high administrative costs and concerns about adverse selection; as a result, the employer is forced to accept a “one-size-fits-all” plan for her/his employees. This is usually an expensive “fee-for-service” plan that rewards doctors for volume of services but not quality of care. The lack of choice for employees also means that there is no effective competition among insurers at the consumer level. This market blocks the growth of efficient integrated financing and delivery systems, which are not good candidates for the role of an employer’s sole plan.
• High costs. Small employer groups and individuals pay higher premiums than larger groups for similar health benefit plans. This is due primarily to higher selling and administrative costs for insurers in the small-group and individual segments.
• Unstable premiums. Many employers are too small to spread the risks of high cost care. One employee comes down with a costly condition and premiums soar. Sometimes insurers try to get rid of the costly patient.
• Administrative hassle. Small employers don’t have the time or expertise to search out the best insurance options, negotiate premium rates, administer health benefits, and handle consumer complaints.
A well-designed health insurance exchange would:
• Improve the range of choices for employees of small employers. An exchange would enable consumers to choose among multiple insurers, providers, and delivery systems offering standardized contracts.
• Lower premium costs for small businesses and individuals. An exchange would create a large pool and enable insurers to capture economies of scale and lower their administrative costs.
• Spread risks widely over thousands of people to make premium rates more stable and predictable.
• Reduce the burden on small employers of administering health benefits.
Most importantly, a well-designed exchange would be a catalyst for innovation and improvement in affordability, quality, and customer service resulting from healthy competition among both insurers and providers.
In order for a health insurance exchange to produce these beneficial results, it must have the following attributes:
• Critical mass. The exchange would need to act on behalf of a critical mass of people — at least 20 percent of the insured population that does not already receive Medicaid or Medicare. A large pool is needed to capture economies of scale, reduce insurers’ administrative costs, and lower premiums. In addition, a pool of this size is needed to attract serious bids from insurers. To amass such a large purchasing pool, Congress might need to require all employers with fewer than 100 employees to join the pool. Alternatively, Congress could design incentives to join, such as providing premium subsidies only for those who participate in the exchange. An even stronger incentive would be to limit access to the tax exclusion to employees of employers who choose to have their employees participate in the exchange.
• Protection against adverse selection into the exchange. Most exchanges that have been tried in the past have failed. These failures were usually due to an adverse selection spiral — that is, higher-risk people enrolled in the exchange, which drove up premiums, which caused lower-risk people to drop out. This is a serious threat, especially when people can voluntarily join or not join the exchange. One way to deal with this is to make the exchange the exclusive market for individuals and small groups. If use of the exchange is purely voluntary, however, there must be very strong mechanisms to minimize the likelihood of adverse selection.
• Protection of insurers who enroll high-risk people in the exchange. In any insurance market, there is a danger that high-cost people will tend to be concentrated in a particular insurer’s plan. To protect these insurers, the exchange must have a “risk equalization” mechanism to compensate those plans for the higher costs of their enrollees. In addition, the use of a limited number of standardized, easy-to-compare benefit plans will lessen the danger of adverse selection into one of the insurers.
• An active role. Providing information to consumers about health plan choices is a basic function of an exchange, but it needs to take a more active role. The exchange should also have responsibility for:
- Designing decision-support tools for consumers.
- Providing a mechanism to collect and aggregate premium contributions from multiple sources (individual, employer[s], government subsidies).
- Establishing performance benchmarks for participating insurers, including provider network adequacy, benefit design, price, and quality outcomes.
• Incentives to encourage healthy competition. Ideally, health reform legislation would ensure that no subsidies for health insurance, whether provided by employers or the government, exceed the price submitted by the lowest-bidding qualified insurer and benefit package in the exchange. This feature would ensure that consumers would have a strong incentive to enroll in the plans that offer the best value for the money.
We know this will work. Exchanges already exist in our current health system, although we don’t give them that label. The Federal Employees Health Benefit (FEHB) plan and the health benefit plans offered by some private employers have many of the features of an effective exchange, and it has successfully offered high-value health plan options for many years.
As comprehensive health reform legislation is crafted in Congress, it must have an effective health insurance exchange as a critical element. A large, robust exchange is essential for effective competition. A watered-down version of an exchange — too small, too weak, and vulnerable to adverse selection — will not offer significant benefits to individuals and small employers, and it will ultimately fail. An effective exchange will improve choices, lower costs, reduce administrative burdens, and help drive improvements in our health care system.