In the design of health insurance exchanges, one key issue is whether exchanges will offer improved value to people buying insurance in the individual and small group markets.  A lot depends on whether the exchanges act as prudent purchasers – making design decisions that keep quality high and costs low.  It appears that many states, however, are pursuing a different approach – one that allows virtually any licensed insurance carrier to participate and does not use effective purchasing strategies that are widely used by large employers.  If this approach is used, we will have missed an opportunity to reduce costs and improve quality for exchange participants.

The limited embrace of prudent purchasing in the exchanges is somewhat surprising, especially since other state-level entities are active purchasers for health benefits.  Many state employee benefit plans have been trailblazers in setting high standards for participating health plans and rewarding those that deliver high quality care at a low cost.  In addition, most state Medicaid programs have been very active in trying to find ways to save money, e.g., by contracting with managed care plans and setting low provider payment rates.

Why are most state exchanges not pursuing a prudent purchaser strategy? One reason, of course, is that some health insurers and provider organizations have expressed opposition.  These groups often have significant political influence, and they have been successful in some states in getting legislation that prohibits the exchanges from being active purchasers.  There is, however, a deeper explanation for the fact that most state exchanges are not pursuing prudent purchaser strategies.  In the exchanges, the premiums are paid by participating individuals and small employers, and the subsidies for low-income individuals are paid by the federal government.

In contrast, the premiums for state employees are paid fully by the state; any savings in the program come back directly to the state. Likewise, the costs of a state Medicaid program are shared by the federal and state government; when the state acts as a prudent purchaser, it saves money.

From one perspective, it makes sense for states to operate the exchanges while the federal government pays the subsidies.  The first element gives each state the flexibility to design its exchange to fit the unique characteristics of its individual and small group health insurance markets, and the second element shields the states from costs that they simply cannot afford in the current fiscal climate.  Unfortunately, these two provisions in combination create a situation in which the state does not have a strong motivation for saving money.  Using prudent purchasing strategies in the exchanges is likely to happen only in the states that consider it “the right thing to do” unless we can find ways to build stronger financial incentives for states to do this.

Shouldn’t something be done to encourage states to use prudent purchasing strategies?  Surely it would be better for the exchange’s beneficiaries – individuals and small employers – if the exchange were able to offer lower costs and better quality. In addition, an exchange’s efforts to improve affordability and quality could be a catalyst for broader improvement throughout the health care system.  From the federal government’s perspective, an exchange acting as a prudent purchaser would help to keep the cost of government subsidies lower.

Ideally, we could find a way to align the accountabilities, i.e., the authority to design the exchanges would be more strongly linked to financial incentives to do it better, but creating a theoretically ideal design probably isn’t practical at this point.  This isn’t an easy task, but there may be some measures that would provide support and strengthen the incentives to states to pursue prudent purchasing strategies. For example:

  • Federal requirements.  The federal government could, of course, simply set high standards for state exchanges and require them to pursue strong purchasing strategies, using the authority under PPACA to certify state exchanges.
  • Financial incentives. Short of shifting the costs of subsidies to the states – which is not practical in the current climate — there are a variety of ways that they could be given stronger financial incentives to be effective purchasers.  For example, the federal government could offer innovation grants and technical assistance to states that want to pursue prudent purchasing strategies.  An even stronger incentive would be provided if the federal government were to offer rebates to states in which premiums in the exchanges were lower than a defined benchmark, e.g., expected premiums based on historical trends or averages of other states.  The rebates would be financed by the reduced cost of federal subsidies in those states in which premiums were lower than expected.  This “shared savings” approach would provide a tangible reward to states that used effective purchasing tools in their exchanges.
  • Alignment with other purchasers.  For other state purchasers, i.e., Medicaid and state employee plans, it would be valuable for the exchange to use similar purchasing practices.  If all state-level purchasers, including the exchanges, were to use common performance measures, consistent standards for participating health plans, and common purchasing strategies, it would send a clear and consistent message to the state’s health plans and their affiliated providers.  If the other state purchasers were to speak up about the value of alignment, it might influence the design of the exchanges.
  • Report cards.  If states were evaluated on their use of effective purchasing practices and the results were published, it might encourage more states to use stronger purchasing practices.  The positive recognition for those with good outcomes (lower costs, higher quality) and the potentially uncomfortable visibility for those with poor outcomes might move the latter group to make changes.  The use of report cards might also be a stimulus for the sharing of best purchasing practices among the states.
  • Consumer and purchaser voices.  Individuals and small employers could speak up and insist on good value in the exchanges.  In some states, they have potential influence through participation in the exchange’s governing board.  If consumers and purchasers were to make a strong and unified case for a prudent purchaser strategy, they might be able to influence legislators and governing boards as they make design decisions about the exchanges.

In the end, we will need to address this issue.  If exchanges do not pursue effective purchasing strategies, we will have missed an opportunity to reduce costs and improve quality for individuals and small employers and to be a catalyst for improved performance of the health care system as a whole.  States would benefit from stronger financial incentives to pursue effective purchasing strategies in the exchanges.  In recognition of this fact, we should pursue some or all of the above approaches to recognize and reward states that design and implement the exchanges in ways that create improved value.

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