Health Insurance Crisis

I recently came across this interesting article published at the website of the American Medical Association discussing how large insurers are forming their own insurance exchanges to compete with state run exchanges.  State/regional health benefit exchanges are a critical component of the Patient Protection and Affordable Care Act (PPACA).  They are intended to aggregate purchasing power for individuals and small employers by providing them a single marketplace to purchase coverage from a variety of insurers and managed care plans.  The policy goal as stated in the PPACA is to increase consumer choice and competition among payers.

But perhaps an unforeseen consequence is that competition would entail payers competing not just against each other in government-operated exchanges but also directly against the exchanges themselves.  According to the amednews.com article, motivating payers is the desire to retain a degree of control and independence from state-run exchanges:

Large insurers have invested in private exchange start-ups with the idea that they can offer a better insurance marketplace for employers and workers than a public exchange, keeping private plans dominant in the commercial market.

Moreover, the article continues, payers believe they can do a better job at attracting individuals and small businesses with their own exchanges.  Rob Panepinto, managing director for the Client Practice and Exchange Solutions at Connextions, tells amednews.com that “government is not a good marketer.”  In California, however, the California Health Benefit Exchange is gearing up in the apparent hope to prove that assessment wrong.  The Sacramento Bee this week reported the Golden State’s HBEX tapped Ogilvy Public Relations to begin creating a marketing and public outreach and education strategy.

Looking back to the Clinton administration’s unsuccessful reform proposal of 1993-94, the emerging market dynamic of competing public and private exchanges wouldn’t likely have occurred.  The Clinton reform plan would have created government run regional purchasing alliances that would have controlled the entire universe of payer and provider markets with both payers and providers competing within the alliances under the reform plan’s “managed competition” principle.

Like the Clinton administration’s comprehensive health care reform proposal of the 1990s, a key goal of the Obama administration’s Patient Protection and Affordable Care Act (PPACA) is having all Americans medically insured though public or private health plans.  Since coverage gaps largely occur with private coverage, private market reform is central to the reforms of both administrations.

Since most working age Americans have employer-paid coverage, the Clinton administration’s reforms would have required all employers to cover their employees so that none had to obtain their own coverage in the individual market or be medically uninsured.  Rather than the Clinton administration’s employer mandate, the Obama administration instead placed the mandate on individuals, requiring all Americans to have medical coverage by 2014.  Key to the individual mandate in the PPACA is the law’s state health benefit exchanges to provide an insurance marketplace for small employers and individuals.

If the U.S. Supreme Court upholds the constitutionality of the individual mandate later this year, it could mesh well what some observers believe is a trend toward more temporary and self-employment.  This trend has seen a significant boost in recent years as employers hire fewer people to do the same work or adopt processes that require fewer permanent staff.  This in turn has led to growing numbers of temporary and self-employed people.

Since these workers aren’t covered by employer-provided plans and must obtain health coverage on their own, they will benefit from the exchanges where participating insurers will be required to offer coverage with minimum coverages and premiums determined using modified community-based rating versus medical underwriting.  As 2014 draws closer, the exchanges could in turn encourage more to deliberately choose temporary and self-employment.  Many who might otherwise work for themselves balk at the prospect of having to find health coverage in the existing individual market where they can be declined for pre-existing medical conditions and don’t benefit from group purchasing power the exchanges would provide.  The exchanges and the PPACA’s mandates that all individuals have coverage and health plans and insurers accept all applicants regardless of medical history would significantly mitigate this disincentive for those considering self-employment.

As to be expected from the Kaiser Family Foundation, the organization has prepared a thorough and excellent report on the status of state health benefit exchanges two years before the deadline established in the Patient Protection and Affordable Care Act (PPACA) for the exchanges to open for business.

Political uncertainty related to the pending U.S Supreme Court decision this year on the constitutionality of a keystone component of the PPACA — the requirement that all Americans be covered by or purchase some form of health insurance including from state benefit exchanges  — has some states sitting on the sidelines.  Other states are operating on the assumption the PPACA is good law until the Supreme Court rules otherwise and are attending to the complexities of getting their exchanges ready for business come January 2014.

Click here for the Kaiser Family Foundation report.

The Kaiser Family Foundation has published an excellent primer on the actuarial foundation upon which “qualified health plans” must be based under Section 1301 et seq of the Patient Protection and Affordable Care Act (PPACA).  The plans will be sold through state health benefit exchanges starting Jan. 1, 2014.  The exchanges will serve as marketplaces aggregating purchasing power among the small group and individual markets — the most distressed health insurance market segments where coverage is far less accessible and affordable than large group and government insurance plans.

These plans that cover from 60 percent (bronze) to 90 percent (gold) of an individual’s projected medical costs show the era of health coverage with minimal cost sharing and out of pocket costs has come to an end for individuals and those employed by small businesses.  That new reality that emerged in recent years is now institutionalized as public policy in the PPACA.  That policy is reinforced by tax policy allowing individuals to establish tax deductible Health Savings Accounts, which have been in existence only since 2004.

The bronze plan’s 60 percent coverage level could be equated to “major medical” plans of decades past that covered as the name implies only major expenses such as hospitalizations but not routine doctor visits.  As medical treatment and pharmaceutical costs continue to push up health coverage rates leading up to 2014, it remains to be seen if the higher level silver, gold and platinum (90 percent of projected actuarial costs) will be affordable for individuals and small businesses even with their new purchasing power via the benefit exchanges.  Many could find their budgets can handle only the low end bronze plan, shifting the bulk of these market segments to a major medical level of coverage.

The aphorism “everything happens at the margin” directly applies to the health insurance crisis.  In the health insurance market, that margin is the low end of the market: individuals who buy coverage on their own and the small group segment — those employing less than 50.  This is the most troubled region of the health insurance market where the risk spreading mechanism that is the core principle of insurance is the weakest.

That’s why the Patient Protection and Affordable Care Act (PPACA) includes a mandate that all individuals have some form of health coverage.  This controversial requirement is the focus of Congressional misgivings over the PPACA and some federal court rulings finding the mandate unconstitutionally compels people to engage in commerce.

Modeled after reforms enacted in Massachusetts several years ago, the mandate essentially creates a government enforced pool of insureds so there are more “lives” as they called in the insurance business across which to spread risk of claims.  Too few people and the pool tends to fall into a death spiral called adverse selection, leaving only the highest — the most adverse — risks remaining.  Too many dollars end up going out to pay claims and too few are replaced in the form of premiums.

The PPACA also addresses the troubled individual and under 50 employee group market by establishing state health benefit exchanges.  The exchanges will begin operating in 2014 and are designed to aggregate purchasing power among insurance buyers in these market segments.  Compared to the large employer group market, individuals and small businesses have little or no purchasing clout that can help them bargain with insurers and health plans for lower premiums.

But even midsize and large employers are seeing their premiums rise nearly ten percent in 2011.  Due to their weak purchasing power, the increases are far steeper in the small group and individual markets, rising so rapidly in the latter they now nearly equal the amount of a mortgage payment for people in their fifties and early sixties.

If premiums driven by rising medical costs keep increasing at their current rate, it calls into question the utility of the health benefit exchanges.  By the time the exchanges set up shop in 2014, premiums could be so high that few employers of less than 50 people will be able to affordably provide health coverage.  That would leave primarily individuals buying coverage through the exchanges.  That raises the question of whether premiums will be affordable for these individuals, even with income-based subsidies.  If not, that could lead many of them to conclude it’s a better deal to go bare and pay the penalty for not having coverage.