Editor’s Note: A new 4th post analyzes what changed in the bill the House approved on Saturday night.

In my first post, I described the major features and basic approach of HR 3962, as well as the provisions of the bill that would go into effect more or less immediately.  This post will look more closely at some of the bill’s basic insurance reform elements.  In a final post, I will discuss the bill’s other features.

To begin, there is the public option.  It is one of the most popular features of the bill—many polls find that it is supported by a majority of Americans—but the media continues to insist that it is a loony left-fringe idea and it terrifies the insurance industry.  Some analysts believe the public option to be the most effective cost-control mechanism in the reform legislation, as a public plan paying something close to Medicare rates could introduce competition into markets which a single or small group of insurers currently dominate.  This includes the vast majority of local insurance markets in the United States.

Insurers have little to fear from this public plan, however, it is in all likelihood a paper tiger.

The House’s ‘Public Option’: Strengths And Weaknesses

In many respects the public option in HR 3962 is much stronger than the “Community Health Insurance Option” contained in the Senate HELP Committee bill. (The Senate Finance Committe bill lacks a public plan, rather including cooperatives, which, as far as I can tell, no one takes seriously as a competitor for private insurers.  The Congressional Budget Office dismissed cooperatives out of hand, opining that they would not even spend half the money appropriated for start-up funds.   Cooperatives are also permitted in the House bill.)  

The House public plan is also likely to be stronger than the national opt-out version being mooted by Senator Reid.   The House bill would be a single national public plan, eschewing the state-based approach of the HELP bill.  State-based plans would inevitably become hostages to the vagaries of state politics, and the federal government has a poor track record in making the states comply with federal requirements.  Consider the federal government’s performance in getting the state’s to comply with Medicaid requirements or in enforcing the HIPAA individual market insurance reforms.   A national plan could get underway much more rapidly and should have lower administrative costs. 

The other significant strength of the House approach is that it would begin with the Medicare network of providers.  One of the biggest barriers facing a new entrant into any health insurance market is assembling a provider network at competitive prices.  The public option would start with the Medicare network, which exists in every part of the country, except insofar as providers opted out.  The bill also encourages innovative approaches to provider payment and support for delivery system reforms and allows the plan to vary premiums by locality, permitting it to be more competitive in areas where private insurers offer lower rates. 

The House public option is weakened considerably, however, by the requirement that it negotiate rates with providers.  The CBO in its review of the bill asserted that the public plan would have premiums higher than those of most private plans in the exchange, and would only attract about one-fifth of the people buying insurance through the exchange, about 6 million members.  The CBO’s logic makes some sense.  If the public plan cannot achieve market share, it would have limited negotiating power and would likely be forced to pay some key providers rates that are at best comparable to those paid by private plans.  It should save on administrative costs, but would (like Medicare) probably be less aggressive in controlling utilization than private plans, and could become a dumping ground for high cost insureds.  On balance, it would probably face higher expenses than private plans.

How Would The Public Plan Negotiate With Providers?

How would negotiating rates work?  I asked Paul Ginsburg of the Center for Studying Health System Change how insurers in fact negotiate with providers.  He said that health plans pay hospitals using three different approaches, with per diem rates being most common, followed by percentage of Medicare based on DRGs, and discounts from charges.  Basic formulas are complicated by various adjustments — outlier payments for example.  Rates are negotiated on a hospital-by-hospital basis, and “must have” hospitals call the shots.  Physicians are more commonly paid on a percentage-of-Medicare formula based on the RB-RVS system, but key physician groups can and do demand special treatment. 

The public option may need to bargain with a lot of hospitals and many medical groups on an individual basis. With 5500 private hospitals and over 750,000 doctors in the United States, the prospect of case-by-case negotiations is daunting.  In each market, moreover, the public option will have a small market share compared to the big insurers, which will not, like the public option, be limited to the exchange and will be bargaining not only for their own groups, but also for the self-insured contracts they administer. Many providers will likely not give the public option a break, and will likely be under pressure from their big insurer customers not to. 

I also contacted Bob Berenson of the Urban Institute, who basically agreed that the public option is going to have to negotiate rates on a provider-by-provider basis if it has any hopes of achieving prices appropriate to the market. Simply taking a national rate and adjusting for input price differences, as Medicare does, would be manageable but would not produce prices that “work” in many communities. Providers will demand negotiations or simply reject the offer. 

Berenson thought that some hospitals might be shamed into participating, but that “must have” physician groups would likely not participate, leaving inadequate networks and/or driving up costs.  Although the bill does not allow the public plan to pay rates higher than the average rates paid by other insurers, it is unlikely that it will pay lower rates. (Figuring out average rates is also going to be very difficult, as there is no transparency as to these prices.  To help rationalize the system, the final legislation should require insurers to disclose these rates).

It is also hard to see how the public option will have the bargaining power to implement the payment and delivery reforms the bill calls for.  The CBO’s gloomy (for consumers, not providers or insurers) assessment seems on point.

Of course, some providers would also refuse to participate in a strong “Medicare+5” public option. Physicians have been very supportive of the public option, and many might participate at rates below what they get in the private market.  The Commissioner has the authority to keep private plans from dumping high cost enrollees into the public plan and the ability to collect the data necessary to exercise this power.  The exchange risk adjustment mechanism, described below, should also help protect the public plan against adverse selection. The House public plan also remains far superior to the versions being considered in the Senate.   But a public plan paying negotiated rates will not be nearly as strong as the public plan that appeared in the earlier House bill. 

The House’s Health Insurance Exchange Proposal  

The exchange proposal in HR 3962, on the other hand, seems very strong.  The House bill and Senate committee bills have all along included an exchange or exchanges (called gateways in the Senate HELP bill), and an exchange will almost certainly be part of the final legislation.  The exchange, however, is an ill-defined concept.  An exchange could be nothing more than a website where potential enrollees can compare available health plans. On the other hand, it could be an active regulator—regulating health plan coverage and rates, administering public subsidies, assuring greater transparency and accountability.  Click here for a fuller discussion of the role of exchanges, difficulties they have encountered in the past, how the pending bills would treat them, and likely policy outcomes.

We have had a great deal of experience with health insurance exchanges, and while a few like the Federal Employees Health Benefits Plan or the Massachusetts Connector have enjoyed some success, many state and private exchanges have failed.  Most commonly they have failed because they have failed to attain a great enough market share to gain bargaining power and drive down administrative costs and because they  have become victims of adverse selection, driving up premiums and making them unattractive to consumers. 

HR 3692 creates a single national exchange (from which states can opt out if they meet stringent requirements) as compared to the state-based exchanges the Senate bills create.  A national exchange should have greater bargaining power and lower administrative costs.  Federal oversight and enforcement should be more effective than the approach of the Senate bills, which leave oversight and enforcement to the states.  If history and experience tell us anything about insurance regulation, it is that big insurers will often out gun state regulators—assuming the states even have the will and resources to oversee the insurers.  But most importantly it eliminates the inter-sovereign squabbles that are certain to attend the administration of state exchanges administering exchanges under federal law subject to federal oversight. 

HR 3692 would require all individuals who did not have employment-related coverage; coverage under Medicare, Medicaid, or other public coverage; or grandfathered plans to purchase through the exchange.  It would also allow employers with up to 25 employees (50 employees by 2014 and 100 or possibly more employees by 2015) to purchase insurance for their employees through the exchange. The CBO estimates that by 2019, 21 million Americans would be purchasing insurance through exchange.  Both Senate bills would allow an individual market to continue outside of the exchange, which would give it a smaller market share and make it more vulnerable to adverse selection.  

The legislation also provides for the exchange to risk adjust premiums of insurers within the exchange to control adverse selection, but the risk pooling only takes place within the exchange and thus cannot protect the exchange itself against adverse selection, which is likely to happen in the group insurance market.  Both of the Senate bills require risk reallocation both within and outside of the exchange.

The exchange would administer the premium and cost-sharing subsidies.  All insurers selling through the exchange would have to offer plans fitting into one of four tiers based on cost-sharing obligations and benefits covered to ease comparison shopping and facilitate the administration of the premium subsidies.   Plans selling through the exchange would need to cover essential benefits and comply with other consumer protection requirements.  States could require plans to cover benefits beyond the essential benefits package defined by federal guidelines, but would have to cover any increase in premium subsidies needed to pay for the extra benefits.  This should roll back some current state insurance mandates and put a damper on efforts to create new ones.

The House’s Exchange: An Active Negotiator, Not A Passive Price-Taker Like The Senate’s Exchanges

The most important feature of the House exchange, however, is that it would have the power to negotiate and contract with insurers.  Insurers wishing to sell insurance through the exchange would have to justify their proposed premiums, which the Commissioner would review for their affordability with the power to deny excessive premiums or premium increases.  By contrast, the exchanges in the Senate bills are passive price takers with no authority over premiums (indeed, the Senate Finance Committee rejected an amendment offered by Senator Kerry to give the exchanges negotiating authority).  Negotiations could be an important lever for controlling health insurance premiums, although it must be remembered that a group health insurance market will continue to exist outside of the exchange, and there is nothing to keep insurers from refusing to negotiate if they are willing to give up the nongroup market.

Other Health Care Financing Provisions

The other health care financing provisions of the House bill contain few surprises.  The regulatory provisions require guaranteed issue and renewal, ban pre-existing condition exclusions altogether and limit rescissions.  All plans (including non-grandfathered employee-benefit plans) would be required to cover essential benefits, could not charge cost-sharing for preventive services, and would have to limit out of pocket spending to $5000 individual/ $10,000 family.  This would probably require revision of the current law governing health savings accounts, which permit high deductible health plans with higher limits.  Abortion coverage could not be required as an essential benefit. Plans inside the exchange, and outside the exchange as determined by the Commissioner, would need to meet marketing, grievance and appeal procedure, and transparency and disclosure requirements.  Finally, in a provision that three times in the space of three pages prohibits the encouragement of suicide, assisted suicide, or mercy killings, the statute requires plans to provide information about advanced directives.  Bloggers are no doubt already claiming the intent of the provision is to encourage assisted suicide. 

As noted in my last post, the employer mandate would be limited to larger employer, most of which already provide health benefits.  Employers subject to the mandate would have to pay a minimum of 72.5% of the cost of premiums for single coverage and 65% for family coverage for full time employees.  Employers currently pay on average 83% of single coverage, 73% of family, so this should not be a burden for most.

Although the individual responsibility provisions of the reform legislation are actively supported by insurers and have provoked little opposition from other interest groups, they have proved very controversial with rank and file conservatives, who believe them to be an unconstitutional threat to individual liberties.  I recently received a death threat in response to my defense of the mandate’s constitutionality, although I am not certain how serious it was.  The basic question is whether the provision falls within the power of Congress under the Commerce Clause   I believe it clearly does.

Although the House bill would exempt from the mandate Americans who do not earn enough to file taxes, as well as those who object for religious reasons or who meet yet to be defined hardship requirements, it is still likely to meet vigorous opposition.  The fact that the failure to purchase insurance results in an income tax rather than a fine strengthens the argument for its constitutionality because of the arcane constitutional provisions dealing with taxes.

Finally, the bill provides affordability credits, available only though the exchange to U.S. citizens or lawful residents without affordable employer coverage.  Ezra Klein offers a comparison of the credits offered by the House bill and the Senate bills.