Health Insurance Exchanges...How Will/Can The Private Sector Compete?

Much of the large-scale implementation of Obamacare's insurance reform plan rests with organizations which, by and large, are the stuff of myth: state health insurance exchanges. This should give us pause.

Any health care nerd you know can tell you what a health insurance exchange is supposed to do: exchanges are statewide electronic marketplaces which will enable small businesses and individuals to shop for, purchase, and manage health plans in a secure on-line environment. The exchange will handle marketing, at least some sales, and presumably renewals, as well as administer whatever tax credits or subsidies each eligible exchange customer will receive. And it will perform other administrative duties as may be required.

Tall order. Good thing the exchange model is based on a solid foundation of experience and good results produced by "role model" organizations.

Except that's not true, either. While there are a few large Chamber or association health plans which have done a good job for their members, these plans (which have problems of their own) generally offer a variety of plans from a single health insurer, not a...tasteful buffet...of plans from multiple carriers.

The only real working example is the Massachusetts Connector, the exchange established by state government leaders in that state (proposed, you may recall, by Republican Governor Mitt Romney). So I thought I'd take a quick look at The Connector, to see how such mythical beasts might affect the small group market in the world post-2014.

The Massachusetts Connector was established in 2007, and its start-up subsidized at the level of over $40 million, according to independent sources. Its operation is financed by a "fee" charged to insurers that look for all the world like commissions.

A key to the establishment of the Connector was an individual mandate; individuals have to purchase insurance or pay a modest fine. Subsidies are available to underwrite premium costs for the working poor.

By the end of 2010, the Connector had enrolled just shy of 200,000 Massachusetts residents. An estimated 150,000 of them are individuals whose coverage is subsidized in some way. The remainder...the unsubsidized participants, are employees of small businesses, or are self-employed. The state estimates that the Connector currently covers less than five percent of the small group and individual market in Massachusetts.

From a systems standpoint, the Connector seems pretty transparent and easy to use. Individuals and/or small business owners are guided through a pretty easy process of shopping for and comparing among plans, which are organized simply as "bronze," "silver," and "gold" plans. Because Massachusetts is a community-rating state, premiums are higher for young people, and still pretty high for the 50+ age group. But with no significant health underwriting, application and enrollment look pretty easy

So far, so good.

But what the wonks generally don't talk about is that the cost of operating the Connector, and of maintaining the current level of subsidies, at a consistent level of coverage for everyone, is very expensive . There have already been attempts to reduce or eliminate Connector coverage for certain groups (like illegal immigrants). And because 4 out of 5 Connector participants are receiving come level of subsidy for their premiums, their coverage is highly dependent on the willingness of their fellow citizens to tax themselves to maintain those subsidies for a growing population of exchange participants.

So...flash forward to 2018...Health exchanges will be in operation in every state, and will have three years of track record. Four out of five participants in those exchanges are receiving subsidized care, but the federal subsidies, which are assured for the first three years, are set to expire, leaving a big unfunded mandate on state governments. We can have those discussions, right along with the ones about freedom and liberty.

But my point is to think about market penetration, and its implications. Because it is a relatively compact, relatively homogeneous state with a liberal political tradition, one can assume that the "take-up rate" there might be higher than average. But let's assume that they're right on target, and after three years of operation, exchanges cover about five percent of the small group and individual markets.

It's still a huge number. Collectively, it could represent $120 billion in premiums; the administrative cost portion, even if it's half the federally-mandated loss ratio (because there are supposed to be some efficiencies in operating exchanges on a large scale) could run $12 billion or more per year.

But it's still five percent of the market. And not a particularly attractive piece of it.

So who's going to be taking care of the other ninety-five percent?...

I've been giving some thought to what tools and capabilities will be necessary for brokers, insurers, small business owners, and self-employed individuals to compete with these mythical beasts. I'll share some in an upcoming post.

Meantime, we've had some...lively conversation...in the past on the politics of health insurance reform. How about a conversation about business strategy? Instead of being afraid of how insurance reform, and especially health exchanges, might threaten your business, let's think about what stakeholders are going to need to do for their piece of the other 90-95% of the market...