An Enduring Insurance Exchange

Christi Vivar

by Adam Lynch
October 14, 2009

News regarding health-care reform hovers incessantly around either defending or attacking of the so-called public insurance option, a section of H.R. 3200 that provides a government-funded insurance option for customers who choose not to buy insurance from the private sector. The public option is not a component of the Senate version of the health-reform bill supported by Senate Finance Committee Chairman Max Baucus, D-Mont., but one component that in both the bills (and one that could inevitably decide the long-term survival of health-care reform) is a provision creating an insurance exchange.

An insurance exchange is essentially a government-regulated marketplace, where small businesses or private individuals have access to a large number of insurance providers. In theory, exchanges provide more affordability by amassing a large bargaining group. The exchange that both the House and Senate bills envision also offers consumers the benefit of restricting insurance providers from withholding coverage from exchange participants on the basis of pre-existing health problems.

Proponents argue that the exchange provides to small businesses and individuals the same kind of coverage available to big companies and federal government employees, who annually get to choose from a variety of insurance plans that meet certain standards.

But exchanges have not always been successful. Texas and California have attempted to create insurance exchanges before—and both died lonely deaths because private insurers were in a position to influence the market. Florida and North Carolina also gave it a shot, and managers had to shut down the programs after the rates got too high for participants.

A July report issued by the California HealthCare Foundation drew on an example set by the California insurance exchange that closed its doors in 2006, claiming that exchanges become too expensive when the clients it serves became too costly.

"People involved in operations of the California exchange agreed that when there is competition for the same customers within and outside the exchange, the exchange is in 'extreme peril' of becoming a victim of adverse selection," the report states. "If an exchange attracts a disproportionate share of higher risk individuals and groups as the California exchange did at various times, it cannot succeed."

Cappy McGarr, the founding chairman of the Texas Insurance Exchange, wrote an Oct. 5 editorial in The New York Times, "A Texas-Sized Health-Care Failure," blaming private insurers.

"Private insurance companies, which could offer small-business policies both inside and outside the exchange, cherry-picked relentlessly, signing up all the small businesses with generally healthy employees and offloading the bad risks—companies with older or sicker employees—onto the exchange," McGarr said. "For the insurance companies, this made business sense. But as a result, our exchange was overwhelmed with people who had high health-care costs and too few healthy people to share the risk. The premiums we offered rose significantly. Insurance on the exchange was no longer a bargain, and employers began backing away. Insurance companies, too, began leaving the alliance."

He added that if Congress were to now creates new exchanges, the founding entities would be doomed if new laws do not force insurers to accept everyone, both healthy and sick, and charge all customers the same price, regardless of their health.

McGarr wrote that the sheer amount of government monitoring would be tough, and that "it would be smarter for Congress to revisit the idea of creating a public plan that could provide an attractive choice for consumers and real competition for private insurers.

Ed Haislmaier, senior research fellow in the center for health policy studies at the Heritage Foundation in Washington, D.C., said leveling the playing field could be a relatively simple move.

"The rules both inside and outside the exchange have to be the same if you're going to prevent selection," Haislmaier told the Jackson Free Press. "The issue is actually less what rules are in place and much more that the rules are the same for both options, not just with exchanges, but with other arrangements.

One good example could be the state of Utah. Utah law dictates that an insurer selling to a small group can only adjust the premium up or down by as much as 30 percent, based on the characteristic of that particular employer group. A high-hazard mining company would have to pay slightly more for the same plan as a software company, but the limit is still set at 30 percent.

Changing the rules, Haislmaier, says is as simple as applying a pre-existing federal law to the insurance industry: "All they need to do is apply the same rules that are currently in federal law for group coverage into the individual market. You'd solve most of the problems that people are complaining about."

But H.R. 3200 and the Baucus Bill are not equal in the rules they dictate to insurers, Haislmaier adds.

"The problem with what's coming out of the Senate and the House is that they really go too far in both their respective directions. There's a pendulum of extremes on some of these guaranteed-issue and preexisting-condition-exclusion provisions. Neither extreme, which is totally unrestricted on the one hand or totally abolished on the other, work. And they create problems in the market," he said.

H.R. 3200 and the Baucus Bill are also unequal in what kind of exchange program they create. H.R. 3200 creates an exchange with staff members dedicated to bargaining with insurers to keep premiums down. The Baucus bill, however, creates much weaker exchanges that don't pick and choose insurers, but instead lets in just about any insurer who meets relatively light federal requirements. The Baucus bill, in particular, reduces the exchange to a passive advertising billboard for insurance companies.

Insurance company stock jumped the day Baucus revealed his bill last month. Perhaps there is a reason.

Sen. John Kerry, D-Mass., attempted to add an amendment to the Baucus bill last month that would have given the exchange outlined in the Baucus bill a more active role in deciding who stays and who goes, though the amendment failed when conservatives attacked the idea of more government intervention in the insurance market.

Haislmaier was a cynic when it came to the likelihood of passing reform, particularly because of heavy opposition from the Republican side of the debate.

"Look at the political history of this. If you're winning this with a one-vote margin, then chances are that it will not be popular, and the reform will be repealed," Haislmaier said.

"Utah's own exchange passed the state Legislature with overwhelming majorities," Haislmaier added. "House Speaker David Clark said he wasn't interested in hearing 'No.' He said he only wanted to hear 'yes, if ...' The point is that both parties were willing to adjust to accommodate business and customer needs. The method took time, but produces lasting results. But we're not getting this on the federal level."

posted by dsram1535 on 10/15/09 at 08:11 AM

posted by itodd on 10/15/09 at 11:18 AM

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posted by blu_n_a_redstate on 10/16/09 at 02:54 PM