The health insurance exchange, the organizational innovation of the Affordable Care Act (ACA), is here to stay. The principle of consumer choice among private health plans, with financial subsidies for low-income households, is now firmly entrenched. The Supreme Court has ruled that low-income subsidies are constitutional and hence that the exchanges can operate effectively in all 50 states.
As Republicans become convinced that full repeal is infeasible, many will discover that the exchange structure fits their values and policy preferences. Many Democrats will come to recognize that this model has worked well in employment-based insurance systems, in Medicare Part D, and Medicare Advantage, and in many state Medicaid programs. The health insurance exchange has the aura of a policy consensus underneath the political fray.
But What Is A Health Insurance Exchange?
Two models have dominated the policy literature on health insurance exchanges, with many hybrids borrowing elements of each. At one end of the policy spectrum, the insurance exchange can serve as a “marketplace” or “clearinghouse” where buyers and sellers transact with minimal regulation of the product features and prices.
In this marketplace model, the role of the exchange is to allow for the broadest variety of health plans and products, with the hope that potential enrollees would find the best fit for their needs. It facilitates consumer comparisons of premiums and cost sharing by having plans publish descriptions online, but does not standardize designs. The plans set benefits within the broad “essential health benefits” standards, and every product offered must fall into one of the “metal” actuarial value tiers. Premiums are set by the insurance plans, subject only to cursory regulatory review. This approach focuses on insurance offerings and avoids the more difficult issues related to the efficiency of health care services.
At the other end of the policy spectrum, the exchange serves as an “active purchaser” of health insurance on behalf of its clients, the individual consumers. In effect, the exchange seeks to move insurance from a let-the-buyer-beware retail market to a two-stage wholesale and retail market. The first (wholesale) stage uses supply chain management tools developed by corporate buyers of other services, while the second (retail) stage encourages consumers to select from a more narrow range of pre-contracted offerings.
California, Colorado, And Florida
The American states are said to be the laboratory for democracy. The California exchange, termed Covered California, has proclaimed its role as the nation’s most active purchaser. The federal exchange, which offers coverage to eligible individuals in Florida (among many other states), exemplifies the passive marketplace. In between lie the other state-based exchanges, with the Colorado exchange serving as an example that uses purchasing tools but in a softer manner than California and accords great discretion to insurers in terms of price and performance.
In our view, Covered California has proven that active purchasing can deliver lower premiums for better products than can passive marketplaces. It can thereby attract the broad enrollment sought by the authors of the underlying legislation. Covered California currently has over 1.3 million members in private health plans through its exchange and has helped enroll another nearly 3 million low-income residents in the state’s Medicaid program. Half of Californians uninsured prior to the Affordable Care Act now are covered by insurance, and the ethnic mix of enrollees in Covered California very closely matches the mix of the previously-uninsured target population. High enrollment has been accompanied by low premium increases. The average 2016 premium increase across the insurance plans in Covered California was only 4 percent, with 20 percent of enrollees seeing their premiums decrease.
What Does Covered California Do?
Covered California as an active purchaser does many things, but it does four big things: contracting with insurers, negotiating premiums, standardizing benefits, and requiring plans to engage in activities that promote improvement in the delivery system.
Covered California does not guarantee insurers the right to offer their wares on the exchange but, rather, extracts concessions on price and product design as a condition for having access to the largest pool of new enrollees in the state. It has excluded plans that have not demonstrated the administrative capability, prices, networks, or product designs that improve consumer value.
In the two-stage purchasing model, the consumer has the right and responsibility to select among different plans charging different prices. But the exchange first jawbones down premiums to the extent it can, leveraging its private information on risk mix, competitor rates, and the price elasticity of demand.
The Affordable Care Act requires exchanges and their health plans to offer products falling into four tiers of actuarial value, ranging from “platinum” products with comprehensive benefits but high premiums, through “gold” and “silver,” down to “bronze” products with thin benefits but low premiums. All products must offer a defined set of essential health benefits, and none may impose cost sharing that exceeds a defined annual maximum. Within those guidelines, however, the federal law allows plans to make their own choices as to deductibles, copayments, and coinsurance for each type of service (primary care and specialty physician visits, imaging and laboratory tests, inpatient and outpatient procedures, drugs and ancillary services).
Covered California opted to not leave the design of deductibles, copayments, and other cost sharing to health plans, which could use it to confuse consumers and discourage enrollment by those with serious medical conditions. Rather, the exchange specifies the benefit design for each of the four metal tiers.
Covered California is the only exchange that standardizes the benefits and excludes any health plans with deviations from the standard design. Standardization promotes apples-to-apples comparison among plans and ensures that consumers will not face undue barriers to care. Most importantly, perhaps, the 65 percent of Covered California consumers who select a “silver” product face no deductible for physician visits and other outpatient services. (A full description of Covered California’s standard designs planned for 2016 is available online.)
Engagement With The Health Care System
As a condition of participation in Covered California, health plans are required to engage in initiatives to improve the efficiency and quality of the care received by their enrollees. These initiatives span a wide range, from value-based payment methods to price transparency, quality improvement, shared patient-physician decision-making, and more. (See Covered California’s Attachment 7 of the contract with carriers). The exchange knows that its ability to obtain good prices and performance from its contracting insurers depends on the ability of those insurers to obtain good prices and performance from their contracting networks.
Other active purchasing marketplaces embrace only some of the four activities described above. Hence, even amongst active purchasing marketplaces, there is significant variability.
How Do Three Major States Compare?
What do the prices and products look like in California, Colorado, and Florida? We compared the 2015 number, price, and characteristics of insurance products offered through the health insurance exchanges in the largest cities in these three states (Exhibit 1). To facilitate side-by-side comparison, we limited our analysis to the offerings for an individual earning $30,000 per year (hence eligible for premium subsidy but not any benefit enhancement) who selects a silver tier product. Sixty-five percent choose silver in California, 47 percent in Colorado, and 76 percent in Florida. We looked at the range of products facing our representative enrollee and, for deeper insights into benefit designs, also looked at a commonly chosen product in each city. Any reader is free to choose his or her own comparison; all this material is on the respective exchange websites.
How Many Choices Of Plans And Products?
If more choice is better choice, active purchasing loses the race. In Los Angeles, our consumer of modest means can select among seven silver plans offered by six different insurers. But in Denver the same individual could choose among 35 silver plans offered by eight insurers, and in Miami among 33 silver plans offered by six insurers.
What About Premiums, Cost Sharing, And Financial Protection?
In Los Angeles, monthly premiums for the seven silver plans before tax credits are applied range from $205 to $264, with an average of $237. The deductible for all silver plans is $2,250, and the annual cost sharing maximum is $6,250. (Remember, all seven insurers must offer the same benefits, but can compete on the premium.)
In Denver, the 35 plans range in premium from $183 up to $366, with an average of $280. Deductibles run the full gamut from $0 to $5,000, and annual maximums range from $3,650 to $6,600.
The premiums across the 33 silver plans in Miami begin at $243 (near the top of the California range) and extend up to $466 (twice the California average), with an average of $318. Their deductibles range from $0 to $5,750 and annual maximums from $4,000 to $6,600.
We also compared premiums—after tax credits are applied—for the lowest-cost silver offerings in each of the three cities. These have similar premiums: $181 in Los Angeles, $183 in Denver, and $207 in Miami. What differs is how much a consumer must pay on top of that premium, in terms of cost sharing at the time of receiving care.
In Los Angeles, the enrollee gets first dollar coverage (no need to pay the $2,250 deductible) for all outpatient physician and facility services, x-rays, lab tests, and generic drugs. The deductible does apply to advanced imaging (e.g., MRI), non-generic drugs, and inpatient hospital care. The out-of-pocket cost sharing required for a hospital visit is standardized. This is true for any of the silver plans the consumer might choose.
In Denver, the $3,900 deductible must first be met before the enrollee gets any services, with the sole exceptions being generic drugs and the annual wellness service. The other 34 plans available in Denver vary in terms of when the deductible applies, plus the amount of copay and coinsurance, since benefits are not standardized by the exchange.
In Miami, the deductible is a hefty $5,000. Generic and preferred brand drugs are not subject to the deductible, but non-preferred and specialty drugs are. The other 32 plans in Miami vary dramatically, with some requiring consumers to meet their full deductible before any outpatient services are covered.
How Do These Findings Compare To Other Research?
A previous Health Affairs article found that state-based passive marketplaces generally offered health plans with lower premiums compared to the federal marketplace and the states that used an active purchaser approach. This result is surprising both for advocates of passive markets and for advocates of active purchaser markets. The authors did not seek to explain this anomaly but concluded that passive purchasers perform better than active ones.
The premium rates we cite here are for 2015, in contrast to the 2014 rates used in that study. More importantly, our analysis focused on three specific states and thereby avoids the inevitable mixing of apples and oranges that occurs when different states with quite different marketplace structures and strategies are lumped together into clusters by market type. Anomalous clustering creates anomalous results. Our state-specific data reveal premiums declining from a state-based active purchaser (Los Angeles) to a state-based passive market (Denver) to a federally-facilitated clearinghouse market (Miami). The within-market variability in premiums also increases along this continuum (Exhibit 1).
Other researchers have cited year-over-year premium changes as a metric of comparison among exchanges. They found that premiums for the second-lowest-cost silver plan, before tax credits, changed from 2014 to 2015 by 0.8 percent, 15.6 percent, and 1.8 percent for Los Angeles, Denver, and Miami, respectively. However, after applying tax credits, all three cities had the same change in premiums: -0.8 percent.
The Benefits Of Active Purchasing
Consumer choice is the bedrock of the American economy and, increasingly, of the American health economy. This is a good thing. But consumers are busy, often distracted, and sometimes scared of health care and health insurance. How can consumers assess the value of a given health plan if there is no basis by which to compare products against one another?
The health insurance exchange offers meaningful support to consumers in the complex process of choosing insurance. Even the most passive insurance marketplace puts products, benefits, and prices online and woos consumers to compare the offerings. But an insurance exchange structured as an active purchaser can do more. An active purchaser uses its scale and sophistication to offer better premiums, better product designs, and better care. In areas with exchanges that are passive purchasers, health plans continue to use confusing and inconsistent benefit designs. They continue to design benefits to select low-risk enrollees and to inhibit side-by-side product comparisons.
The employer-based insurance market functions as a two-step process, with the firm’s human relations department first selecting what it considers to be the best mix of options and then individual employees selecting from within that menu. The health insurance exchange can do the same, only bigger and better.