Taking Stock of Exchanges: Bigger is Better

The different health reform bills pending in Congress represent quite different understandings of what a health insurance exchange is, what it does, how it is organized and how it functions. These differences are likely to affect significantly the extent to which the exchanges accomplish their goals and avoid the problems that have afflicted earlier attempts at creating and operating exchanges. 

The exchanges should operate at the federal level, as the House health care reform bill, America's Affordable Health Choices Act of 2009, or HR 3200 [2], provides. 

• The health reform legislation is federal law addressing problems with access to health care and rapidly rising health care costs that are national in scope.
• Congress is creating exchanges under federal law that will be carrying out functions specified by federal law, administering federal premium subsidies, and initially receiving federal start-up funds. 
• As we have learned from our experience with Medicaid, HIPAA, and other programs, state implementation of a federal program under federal supervision is at best awkward. 
•  It is difficult for the federal government to regulate a co-sovereign, especially when large sums of money are flowing through the states, as would be true with the premium subsidies, creating a tempting pool for the states to use for their own purposes. 
• The federal government cannot under our constitutional system “commandeer” state government for its regulatory purposes. To secure state cooperation in implementing a federal program, it must either use the carrot of federal funds (as with Medicaid) or the stick of a threat of a federal fallback program in states that refuse to implement a mandated program themselves. 
• The three biggest “exchanges” in the country are run by the federal government–the Federal Employee Health Benefits Program, the Medicare Advantage program, and the Medicare Part D drug program. The federal government has also long been primarily responsible under ERISA for regulating employee benefit plans, the largest source of health insurance in the country.  
• The Finance bill establishes national private plans, which logically should be regulated by a national exchange. 

Congress should minimize adverse selection. Insurers should be allowed to sell their products only through the exchange, as HR 3200 provides for individual policies, and Congress should limit premium and affordability subsidies to the exchange as all the bills do.

• This avoids the problem of agents and brokers steering their customers away from the exchange when they can make higher commissions for sales outside of the exchange.
• It also creates a larger exchange risk pool.

To the extent insurers can sell their products outside the exchange, insurers in and outside the exchange should be required to play by the same rules, as they are under HR 3200 and the Senate Finance bill.

•  Do not allow less generous plans to exist outside the exchange, as the HELP bill does.
• Though it is hard to see how it can be enforced, require all individuals in and out of the exchange to be treated as being in a single risk pool and all small groups in and out of the exchange also to be treated as a single risk pool, as the Senate bills both do. 
• Require insurers to charge the same price for plans sold both in and out of the exchange, as the Senate Finance bill does.

Insurers that attract good risks should be required through risk adjustment to compensate insurers who end up with bad risks to reduce incentive to risk select.

• The Senate bills provide for risk reallocation both in and out of the exchange and thus could make a substantial contribution to addressing this problem. The Senate Finance bill probably does the best job of bringing uniformity in and out of the exchange, but its risk adjustment mechanism is hard to follow. The risk reallocation approach of the HELP bill is much more straightforward.
• HR 3200 only provides for risk adjustment within the exchange and so will do little to protect exchanges from adverse selection. 
• Risk reallocation requires a great deal of data to be done successfully.   The mechanism for it working outside the exchange is not clear since, for example, premiums outside the exchange are paid directly to the insurer.
• The best solution is for all individuals and small groups eligible for insurance through the exchange to have to purchase through the exchange, as HR 3200 requires with the individual market. If not, some combination of uniform benefits, single risk pools, uniform prices, and risk reallocation in and out of the exchange may work. 

Exchanges should make insurance plans more standard and more transparent, thus enabling consumers to make more informed choices and promoting head-to-head competition among plans. 

All of the bills do a reasonably good job with standardizing plans. 

• All require plans sold within the exchange to cover essential benefits, limit cost-sharing (albeit at very high levels), exclude (or limit) annual or lifetime limits, and provide an opportunity for appealing coverage decisions. 
• Each bill also standardizes and specifies tiers of coverage defined by actuarial value (in effect, levels of cost-sharing) into which plans must fit. This should also facilitate comparison of plans by purchasers. 
• HR 3200 and the Finance bill standardize plans both inside and outside of the exchange, permitting consumers to also consider the benefits of purchasing within the exchange or going outside of it.
• All bills also include provisions that should make plan coverage more transparent, requiring the disclosure of information about premiums, cost-sharing, network providers, benefits, and other issues of concern to consumers. 
• The Finance Committee provisions offer by far the most detailed and creative approach to transparency, including rating plans for cost and quality and price, describing each insurance plan using standard defined terms in a four-page summary, and providing model scenarios describing coverage and cost-sharing for particular medical conditions.  

Exchanges create large purchasing pools within the nongroup and small group markets, which should offer some efficiencies and should reduce administrative costs, making health insurance more affordable and accessible. 

• Exchanges also cost money and must create efficiencies in the purchase of insurance if they are to save money over all.
  • The Senate bills provide for surcharges on insurance premiums to fund exchanges. HR 3200 would fund the exchanges from the excise taxes received from individuals or employers who fail to comply with coverage mandates and would cost less because it would involve one federal agency and not 50 state agencies. 
  • As long as the exchange has only a small market share it is unlikely to achieve significant administrative cost savings because insurers are likely to continue to carry on their current functions, largely duplicating exchange functions. 
• One federal exchange should help reduce overall costs far more than 50 separate state exchanges.
• The rating reforms in the bills generally should reduce underwriting costs, both in and out of the exchange. 
• Enrollment in health plans through the exchange could reduce the cost to health plans of enrolling members.
• Information transmitted through the exchange could reduce marketing costs. 
• The exchange should reduce brokerage commissions, which consume from 2 to 8 percent of the premiums of group plans and a much higher percentage of premiums in the nongroup market. Eliminating their commissions could result in substantial cost reductions for the health care system overall. 
  • Brokers would seem to be completely redundant with the exchange in the nongroup market and for individual employees who enroll in insurance through the exchange. 
  • Both the Blue Dog amendments to HR 3200 and the Senate Finance bill retain brokerage commissions, although the Finance bill would regulate them. 
  • Brokers’ fees should at least be regulated, recognizing that brokers in fact no longer play a useful role once the exchange is established. The Finance Committee bill contains this possibility.