California exchange models managed competition in individual, small group health insurance markets

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.

Source: Whither Health Insurance Exchanges Under The Affordable Care Act? Active Purchasing Versus Passive Marketplaces

This article co authored by UC Berkeley School of Public Health economist James C. Robinson, the executive director of California’s health benefit exchange, Peter Lee, and exchange policy staffer Zachary Goldman effectively argues California exchange’s active purchaser role vis health plan issuers embodies the concept of managed competition in health insurance described in this January 1993 Health Affairs article by Alain C. Enthoven:

A sponsor (either an employer, a governmental entity, or a purchasing cooperative), acting on behalf of a large group of subscribers, structures and adjusts the market to overcome attempts by insurers to avoid price competition. The sponsor establishes rules of equity, selects participating plans, manages the enrollment process, creates price-elastic demand, and manages risk selection.

As the authors note, the Patient Protection and Affordable Care Act creates basic standards for health plans in terms of defining required covered services, actuarial value and annual out of pocket maximums. But to realize the full benefit of managed competition, they appear to assert that health benefit exchanges must function as demanding and exacting wholesale purchasers of health plans in order to achieve maximum comparable selection and value for their retail customers. By aggregating purchasing power for insurance buyers, the exchanges help balance out market power between buyers and health plan issuers in a market that due to high entry and operating costs tends to be oligopolistic.


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email or call 530-295-1473. 

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Frederick Pilot

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