So Much Angst...Over The Market No One (Really) Wants...

An awful lot of bureaucratic process has created an AWFUL lot of drama among health insurance professionals over the last couple of weeks:

The 11th Circuit Court Of Appeals issued a fairly narrow ruling regarding PPACA, stating that the individual mandate provision of the law is an unconstitutional expansion of Congress' right to regulate interstate commerce. Opponents of PPACA were crowing, even though the Appeals Court concluded that the mandate could be invalidated without throwing out the whole law.

(I think the mandate issue is a GIANT red herring, for reasons I reviewed in a previous posting here: http://polkiananalysis.blogspot.com/2011/01/what-difference-does-mandate-make.html).

The Department of Health and Human Services published its first round of rulemaking on the formation of state health insurance exchanges, which over half the states are trying to ignore in hopes that their lawsuit seeking to repeal PPACA will prevail (though, it turns out, most states HAVE accepted $1 million planning grants to get the process started).

HHS also discussed the process of forming a federal exchange to provide services to people in states which choose not to operate their own health exchanges...even though reports suggest that, in enacting the law enabling the formation of a federal exchange, Our Friends In Government neglected to appropriate any money to set one up and operate it (though it looks as though the good folks at eHealth may be trying to jump in and help).

And McKinsey and Company released a controversial study which suggested that as many as 30% of U.S. employers might drop their employer-sponsored health plans to leap on health exchanges once they've started up.

Setting aside for a moment that expectations seem fairly high for organizations which haven't even been built yet, the news seems to be alarming many in the employee benefits who are decrying everything from the prospective End Times for group health coverage to the elimination of brokers from the market. And everybody seems focused on the loss of marketing opportunities which might result from the rise of easy-to-use health exchanges.

Really?...

I thought I'd take a minute to review the private health insurance market, to see where the opportunities might be lost. My conclusion is that the greatest potential for disruption is in the segment of the market which neither insurers nor brokers seem to care about very much: companies with fewer than 10 employees.

Let's look at some numbers, shall we?

It has been my experience for many years that the most competitive market segment, from both an insurer and a broker perspective, is companies with more than 100 employees.

That's understandable. Even though such companies comprise less than two percent of business entities in America (about 127,000 firms), they employ about 65% of all private-sector workers (78.7 million employees).

While these companies certainly face challenges in re-designing health plans due to some of the changes proposed in PPACA, they're not much affected at all by the formation of health exchanges.

The biggest potential for change in behavior is among the 5.3 million small employer groups in the country which employ fewer than 20 people.

Of that segment, the nearly 4.6 million small groups which employ fewer than 10 employees is the most problematic. These companies employ a total of 12.9 million people; half that workforce is in units of four employees or fewer.

A survey of small employers conducted by the National Federation of Independent Businesses (NFIB) Foundation using 2009 data showed that, for the first time, fewer than 50 percent of firms with fewer than ten employees provided employer-sponsored health coverage to their workers. That means over 6.8 million of the 12.8 million workers do not have access to employer-sponsored health plans today.

Why not?

A big chunk of that uninsured cohort consists of self-employed individuals running their own businesses, who don't qualify for group coverage. Very few states permit self-employed companies to qualify for group insurance coverage. For these businesses, the only availability is heavily-underwritten health plans in the non-group market. And we know from extensive studies of the non-group market that fewer than ten percent of those applying for non-group coverage actually buy it. The reason for the low "take-up rate" is that the majority of non-group applicants either have their applications denied for medical reasons, or the combination of age and health conditions of those applicants and their families make coverage, if it's available at all, too expensive to purchase and maintain.

In fact, nearly 70 percent of respondents to the NFIB survey who didn't provide coverage to their workers cited the cost and complexity of purchasing and maintaining coverage as a key reason they chose not to buy it.

Insurers don't like these very small groups; they are volatile and very driven by price. Most large insurers do not market actively to groups with fewer than ten employees.

Agents and brokers don't like these groups because they don't have professional HR or benefits people on-board, they require a lot of hand-holding, and they're not very profitable...especially given insurers' new zeal for ratcheting down sales compensation as a part of their mandate to bring down administrative costs.

So where do these groups go? Traditionally, they're covered mostly by local Blue Cross & Blue Shield plans...part of those plans' residual roles as "insurers of last resort" in their local communities.

These groups are also strongly represented among health plans sponsored by Chambers of Commerce or membership associations. For my COSE alma mater, half of the companies participating in COSE's health plan covered one or two workers; the average size of plan participant companies was six employees. For other large Chambers, the average group size is between three and four workers.

And as we know, when coverage IS available to these small groups, it's very costly. Companies with fewer than ten employees pay between 18 and 20 percent more for coverage than larger groups do for similar coverage. That's because administrative costs...the costs of marketing, selling, and underwriting small groups, have traditionally comprised 25-27 percent of premium.

But insurers are cutting back on commissions. Agents are cutting off smaller groups. Where are groups like this to go?

I suspect that the first significant group of businesses to take advantage of health exchanges will be those self-employed folks and very small groups who aren't currently covered. Where health and affordability are issues, the community-rated, guaranteed-issue coverage, together with co-ordination with Medicaid and the availability of direct subsidies and tax credits will have significant value.

But these are companies which insurers and agents already don't have; so nobody's losing anything.

As to the rest, the only real experience to draw any instruction from would be the Massachusetts Connector, the health exchange in that state which is touted as the national model.

After five years in business, three-quarters of the 150,000 individuals enrolled through the Connector were individuals receiving subsidies, and the Connector's penetration into the small group market was less than five percent. And this is in an expensive state where coverage is already mandatory.

While many bureaucrats are wasting a lot of breath either promoting exchanges as The Next Big Thing or opposing them as Armageddon, the truth is that exchanges, if they work, will be attractive primarily to segments of the market which currently have few practical alternatives to obtaining coverage at ANY cost.

I DO think that, in fairly short order, the technology platforms being developed to support public exchanges will migrate very quickly into the private market, so that (fewer, but smarter) insurers and brokers will figure out how to use them to consolidate the 90% of the market which will never buy through an exchange.

The best thing to come from exchanges would be to wake up the rest of the industry to the fact that administrative efficiencies and economies of scale could make coverage more available, and more affordable, in the private sector.

Which, it strikes me, is a better use of one's time than wishing PPACA would just go away...