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One by one, various cars are falling off the chugging legislative locomotive of Obama-style health “reform” as it tries to climb hills that are too steep. The public plan option has checked in for rehab as a co-op and even some end-of-life counseling. Bending-the-cost-curve measures were turned upside down by the Congressional Budget Office in July. Plans to raise taxes didn’t square with a deep recession that reduced the supply of deep pockets to pick and increased the supply of voters more worried about restoring economic growth and reducing debt. Mandatory universal coverage dreams have been downscaled in size, scope, and speed.
But remaining relatively unscathed and drawing little critical attention is the seemingly benign design offered by President Obama and congressional Democrats for a national health insurance exchange. Sketchy descriptions and political sales puffery for insurance exchanges can mean different things to different observers, but the full-strength version in the House Tri-Committee bill (and to a lesser extent the Senate HELP committee bill) would provide the essential regulatory connective tissue to keep the embryonic Obama plan alive and growing.
Many features of Obama Care 1.0 are somewhat negotiable, if not disposable. The national exchange, which ultimately aims to route all significant health care choices through a centralized political toll booth, is not. It will eventually become a more contested battleground in this fall’s health care debate.
The original soft sale for establishing health insurance exchanges pointed to clear problems of affordability, access, and choice in our current private insurance markets for individuals and small businesses. Individual insurance markets couldn’t possibly perform as badly as commonly believed by the health policy elites who recoil from them like vampires avert garlic. However, individual insurers remain burdened by high loading costs for marketing and administration. The limited role of individual insurance as a residual market product for customers lacking better options elsewhere strains its ability to pool and manage risk consistently. The small-group insurance market is whipsawed by counterproductive state-government regulation, a shrinking base of overburdened small-employer customers, and a shortage of competitive insurance choices.
Health insurance exchanges of various types have been proposed in the past and present as intermediaries to manage the relationship between insurers and their customers and perhaps better organize their insurance markets. However, finding consensus in identifying problems is not the same as agreement on the actual terms of sustainable solutions. Whatever those mechanisms are called (exchanges, connectors, purchasing cooperatives, etc.), what one person thinks he sees may not be what another one gets–at least through the political process.
The Many Varieties of Health Insurance Exchanges
Exchanges can be dialed up or down the regulatory spectrum. At one end, they might simply provide some standardized comparative information on the benefits, premiums, and service quality offered by insurers in a particular market. A little further up the dial, they might distribute private payments and public subsidies, simplify insurance purchasing and enrollment, and reduce transaction costs. At the other end, they could become the exclusive engineers charged with redesigning and overseeing most, if not all, insurance sales and purchases.
The policy parameters involving the role and power of an insurance exchange include whether it is voluntary or mandatory. Does it have an exclusive franchise or must it compete for customers? At what geographic level and for which market segments does it operate? Does it exercise substantial market power as a purchaser or even more political power as a regulator? Does it try to pool similar risks or cross subsidize very different ones? Does it limit or expand choices of carriers, plans, and benefits? As AEI adjunct scholar David Hyman explains, the more you want to try to do, the more regulatory complexity you have. You risk overloading each decision with another more sweeping one down the road, until the exchange starts looking like a public utility commission.
A look at some past state-level experience suggests no guarantee of future success. Past voluntary purchasing pools for small businesses at the state level generally failed due to the combination of adverse selection (retaining only higher-risk customers), insufficient scale, and lack of binding subsidies. These problems were aggravated by community-rated premiums for all participants at the point of entry (rather than just protection against changes in their health-risk status after joining the pool).
The initial mixed “success” of the Massachusetts Connector model of an exchange launched several years ago mostly proves that if one offers exclusive and generous subsidies to a targeted segment of the population and mandates their coverage, enrollment will increase (if you pay them enough, they will come when summoned). However, even Massachusetts officials refrained from making their Commonwealth Choice connector for non-subsidized residents an exclusive source of insurance coverage. That portion of the connector operates on a more level playing field and accounts for a very small share of recent increases in coverage. However, facing unsustainable state budget costs and the limits to bureaucratic growth, policymakers there appear to be moving to another strategy–reduce the range of insurance choices and impose HMO-like capitation payments on medical providers.
The Utah version of a clearinghouse-style, Internet-based exchange, which is powered by eHealth inside and launched last month, takes a better approach. It is based on enhancing information on additional insurance choices for consumers operating from a defined-contribution platform, rather than through paternalistic regulation that rules some choices in and others out.
Learning the Wrong Lessons
The main sponsors of still-incomplete health bills in the House and Senate seemed to have learned all the wrong lessons, or none at all, from previous attempts at constructing health insurance exchanges. In just about every case, the decision was made to go for more rather than less, under the temptation that a national exchange won’t be able to adequately “reform” the insurance marketplace if it leaves too many stray sheep outside its fences. The prevailing concept of a “level playing field” and “common rules” regarding pricing and benefit design is to make the rest of the private insurance market conform to the exchange’s politically designated operating rules, rather than the other way around. Competing against what’s most commonly done in the rest of the marketplace and leaving it up to consumers to choose what they prefer apparently would be just too hard and fail to deliver the desired political outcome. Of course, whether resulting selection is “adverse” depends on the perspective of who determines the selections.
The House Tri-Committee bill in particular is full of limits and specifications for the range of the required “essential” and other permitted “tiers” of qualified benefits, along with tight restrictions on cost sharing. The Senate HELP Committee bill’s sponsors were somewhat more restrained, mostly to reduce the direct near-term budgetary costs of moving individuals from private employer plans to subsidized insurance within the exchange. In either case, the exchange’s rules for guaranteed issue (people who wait until they are sick to get insurance must be offered insurance on the same terms as those continuously insured) and not-so-adjusted community rating (everyday higher premiums for younger and healthier people to lower those of older, sicker, and generally wealthier people) would be applied nationwide–even to private plans operating outside the national exchange. Modest legislative lip service to the limited option of state-level exchanges appears more illusory than real.
The national exchange initially was marketed as a means to provide new choices to those largely shut out of the traditional employer-sponsored group health insurance market. But the House bill gives away its ultimate objective by authorizing the Orwellian “Health Choices” commissioner to open the national exchange to ALL workers, even in large self-insured employer plans, by 2015, in a grab for dominant market share and more complete regulatory control. It empowers that commissioner and her forthcoming bureaucracy to fill in most of open-ended opportunities for regulatory commands and controls, over time. When combined with narrow grandfathering and grace periods for many existing insurance benefits plans that are biased toward an early expiration date, the real goal of this legislative exercise appears to be to construct a national exchange as a roach motel of centralized regulation, into which private plans and their enrollees might check in but never be able to check out.
It turns out that in order to control one thing, and then another thing, and then more and more unanticipated things, many congressional legislators and their designated bureaucrats believe they will just have to control almost everything.
One does not have to go all “Harry and Louise” (1994 version, sponsored by different interest groups than the latest 2009 incarnation) on the larger public to think that there has to be a better way. And there is. The short version is to start exchanges only at the state level, where the feedback loop is shorter. If the temptation for regulatory overreach can’t be kept in check, limit their ambitions to supplementing, rather than preempting, current insurance options for the uninsured, those not already offered employer-based coverage, and perhaps the smallest (fewer than 20 employees) businesses seeking another coverage option. Rely much more on consumer-empowering information than on choice-limiting regulation. Let consumers re-design their insurance markets by voting with some of their own dollars. As a necessary trade-off for allowing greater latitude in initial risk rating of new entrants to any exchange, target much more generous subsidies through substantially expanded high-risk pools to cap out-of-pocket costs and risk-based premiums for the most vulnerable, and still relatively small, slices of the population. Use incentives rather than compulsion to encourage enrollment in more sustainable coverage options. Then try to leave everyone else alone while the insurance market adjusts, rather than scare them more with political power grabs that are simply too much, too fast, too untested, and too suspiciously unlimited.
Thomas P. Miller is a resident fellow at AEI.
The national health insurance exchange will eventually become a more contested battleground in this fall’s health care debate.
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