With the GOP repeal drive on hold, members of Congress from both parties have declared that they want to shore up the health exchanges. One of the top priorities is increasing competition among insurers. Boosting the number of plans within the exchanges not only would increase options for consumers; it would also reduce the risk an exchange could end up with no plans at all. Perhaps most important, it would likely lead to lower premiums as plans competed to attract enrollees.
Yet in many counties, there’s little chance additional private plans will enter the exchanges. In what is a highly consolidated industry, some of the dominant insurers have scaled back their involvement or left the market entirely. According to the Kaiser Family Foundation, 70 percent of the 2,194 counties in the United States have fewer than three health insurers participating in the individual health insurance exchanges. The New York Times projects that in 2018, 45 counties will have no insurers participating in the exchanges, and 1,388 counties (44 percent) will have only one. Most of these 1,433 counties are in rural America.
Obviously, exchanges don’t work when there are no participating insurers. But even when exchanges have a few insurers, they offer limited choice, are likely to have higher prices, and face the risk of defections leaving them with a single (or no) insurer. Ideally, exchanges should have four or more insurers. Yet, at last count, just 354 counties (11 percent) met this standard. This hardly suggests a robust market.
The severe shortage of insurers in many of the exchanges poses risks to the goals of Republicans as well as Democrats. For Democrats, the stakes are clear: The exchanges are the centerpiece of the ACA, and their continued problems stand in the way of achieving its promise, as well as building broader support for the law among middle-income Americans who are not eligible for Medicaid.
Yet Republicans should also want to boost plan participation and competition. Not only are the exchanges weakest in rural “red” areas of the country, the fragility of the exchanges increases reliance on Medicaid, which many conservatives view as less attractive than subsidized private insurance.
So increasing competition within the exchanges should be a bipartisan project. Yet the main proposal on the table—substantially greater financial incentives to induce insurers to enter exchanges—would require big new federal outlays. Meanwhile, more insurers are leaving the market, especially in rural America.
A Better Way Forward: Adding Medicare FFS And Medicare Advantage To The Exchanges
We think there is a better approach: allow Medicare to enter the market in counties where fewer than three health insurers participate on the exchange. Introducing Medicare wouldn’t require significant new spending. It would provide competition in counties with only one or two insurers. And it would ensure that all counties would always have at least one insurance option available. What’s more, Medicare could be used to provide new private plan options by allowing Medicare Advantage private plans to offer coverage to nonelderly Americans through the exchanges.
The main worry about the Medicare option is that it would displace private plans. Under our proposal, however, Medicare would enter the exchanges only in counties that already have a small number of plans, limiting potential “crowd out.” Any crowd out that did occur, moreover, would be a result of consumer choices, not federal fiat. So long as Medicare competes on a level playing field—with the same subsidies and rules and a premium set to reflect local costs—it would gain enrollees only by offering coverage more attractive than that offered by private insurers.
Indeed, the competition posed by Medicare could encourage insurers to improve their offerings and gain market share as well. The exchanges are not a fixed pie: If they offer more diverse and affordable options, more Americans are likely to buy coverage through them, allowing both the public option and private plans to grow.
To be sure, private insurers will complain that Medicare has lower administrative costs and pays providers at lower rates than do private insurers. But here again, adding Medicare to the mix wouldn’t prevent insurers from improving their products. After all, private plans compete effectively against Medicare within Medicare Advantage. Currently, they enroll approximately one third of all Medicare beneficiaries. If insurers are able to lower their administrative costs and negotiate lower rates with local providers, they could do so within the exchanges as well.
This brings us to the second element of our proposal: Since Medicare already features private plans, it should be used not only to add a Medicare option, but also to expand the range of private options. Private insurers that offer Medicare Advantage plans in a region should be required to offer such plans within the exchanges as well. Because many more private insurers participate in the Medicare Advantage program than offer coverage in the exchanges, this would substantially increase the number of private insurers in the small group and individual markets.
How Much Would Our Proposal Help?
How much would a Medicare option with Medicare Advantage plans increase competition? To form a rough estimate, we examined the extent of competition in Zanesville, Ohio, the main city in one of the counties in rural America without any insurers on the exchange. Using Medicare.gov’s Plan Finder tool, we found 21 Medicare Advantage plans operating there: three offered by Medigold, five by Anthem Blue Cross Blue Shield, four by Humana, six by Aetna, and three by The Health Plan. Thus, if Medicare and Medicare Advantage plans were exchange options in Zanesville, a subscriber would have access to 21 different Medicare Advantage plans as well as traditional Medicare coverage.
The picture is roughly the same in most other rural counties in Ohio — our proposal would result in a major increase in private insurance options alongside a new Medicare fee-for-service option.
Addressing Challenges To Implementing Our Proposal
To be sure, not all regions have such robust competition within Medicare Advantage. Some rural counties have few Medicare Advantage insurers, and a few do not have any. But since traditional Medicare coverage is available in all counties, all Americans on the exchanges would have at least one new option.
Establishing New Premium Rates
The main technical challenge is that the Medicare program would need to establish new premium rates for individuals and families in order to participate on the exchanges. Medicare’s actuaries would have to determine the rate that would correspond to the expected cost of enrollment through the exchanges. Medicare would set rates nationally and then adjust the rates to reflect the expected cost in each county. These premiums should be set so they are budget neutral. The public option would be eligible for the same tax credits as private plans, and it would need to be subject to the same rules regarding risk adjustment, reinsurance, and risk corridors—the “Three R’s”—to reduce the potential effects of adverse selection.
Providing The Essential Benefits
In addition, Medicare and Medicare Advantage plans would have to provide the essential benefits of the ACA and meet other requirements of the law, so the benefit packages—perhaps at the gold and silver levels—would need to be different from the ones Medicare offers to seniors and the disabled. This would require, for example, that the Medicare public option offer prescription drug coverage. Since Medicare currently does not insure prescription drug spending directly, it would either need to develop the capacity to do so or partner with local Part D plans.
One potential problem worth noting is that elderly and disabled beneficiaries of Medicare might resent that Medicare covered broader benefits for younger Americans. This would be less of a risk if support for these changes were bipartisan, since neither party would have the incentive to falsely portray these changes as hurting Medicare.
Enlisting New Providers And Determining Provider Payment Rates
Medicare would also have to require that Medicare Advantage plans include certain additional providers such as pediatricians in their list of providers. And these plans would have to upgrade their benefits as well. As a rule, Medicare Advantage plans are more comprehensive than Medicare so they would have less trouble than public Medicare meeting the new standards.
The biggest challenge is not technical, but political: the resistance of providers to Medicare’s lower payment rates. In most counties, however, the number of people buying coverage through the exchanges remains relatively small, so any effect on providers’ bottom line would at least initially be modest. From providers’ standpoint, it would be better to have patients covered by Medicare than not to have them covered at all.
If there was substantial provider resistance, the Medicare option could increase payment rates to approach what private insurers pay in that county. Medicare would then have two fee-for-service payment rates—one for traditional Medicare and a higher one for Medicare on the exchanges. While this would make Medicare less competitive on the exchanges, it would still be an attractive option and a valuable fallback if no private plans were offered.
Medicare Advantage plans, too, might need to pay higher rates than they typically do. Currently most such plans “shadow price” Medicare, paying close to the same rates, because Medicare is the only game in town: If providers want to offer services to older and disabled Americans covered by Medicare, they have to accept Medicare’s rates, and the private plans thus have little incentive to offer substantially higher payments. Indeed, providers are required by law to accept Medicare’s rates for private fee-for-service plans in which they’re not network providers — unless they object up front.
The exchanges, however, only cover a fraction of the non-elderly population within an area, so Medicare Advantage plans would have less bargaining power with providers. As enrollment in the exchanges grew, however, plans’ leverage to obtain lower rates would grow as well.
Dealing With Adverse Selection
A final concern is adverse selection: the likelihood that Medicare would attract a higher percentage of people in poor health than do private insurers. But this problem can be addressed as well. For starters, Medicare would benefit from the same Three R’s (risk adjustment, reinsurance, and risk corridors) that are now used to protect private plans. Given that many such plans already suffer from adverse selection, we would argue that these measures should be strengthened and made permanent, especially the reinsurance provisions. If these provisions weren’t sufficient, the Medicare program would have to charge a higher premium to reflect adverse selection. But this adjustment, if modest, probably wouldn’t have a big effect on enrollment given the paucity of good options today.
When Medicare Should Be Added To The Mix In Each County
A last important point: Medicare should not be moved on and off the exchanges based on private plan penetration. Once the Medicare program becomes an option within an exchange, it should remain so in perpetuity. The alternative—having Medicare come and go from an area depending on whether the number of plans was just above or below the level that triggered its entry—would be chaotic, disrupt continuity of care, and create openings for insurers to game the system.
Why not make the Medicare option available in all counties — even those with a sufficient number of plans? Politically, this may be too big a lift. Moreover, a staggered rollout of the public option would give Medicare time to refine its approach. If that approach proves successful, Medicare could be made available in more counties over time by increasing the minimum number of plans required to trigger its entry.
For now, the main goal should be to increase competition where limited numbers of insurers operate and ensure that at least one good plan is available to all Americans. Allowing Medicare—and Medicare Advantage—to enter the exchanges where there are fewer than three insurers would provide more choice for exchange enrollees, increase competition, and lower premiums for consumers.
At a time of great uncertainty in U.S. health policy, Medicare is about as sure a bet as we can find: a proven program that can give Americans in all parts of the country good coverage at affordable prices.