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Understanding Health Insurance "Exchanges"

April 20, 2011 J

Health Insurance Exchanges – April 2011 – James Valvo

What is a Health Insurance Exchange?

A health insurance exchange is a market mechanism for bringing all of the insurers in a given marketplace together to offer their policies in a forum where the consumer has access to information, can understand the policies and can compare prices. Exchanges can also serve as a tool to increase coverage and ease enrollment administration. Eventually, exchanges could be used to increase portability by allowing people to keep their coverage through the exchange when they move from job to job.

Exchanges are a neutral tool that can be used either to promote free market competition among rivals or as a mechanism to centralize control and push a single payer system.

How does Chairman Ryan’s Proposal use Exchanges?

Chairman Ryan’s FY2012 budget proposal creates state-based exchanges for Medicare. Enrollees would receive premium assistance based on their income level and health status. This assistance is paid directly from the government to the health care insurer, lowering the policy’s price for the consumer. In order for an insurer to cover Medicare enrollees, the insurer must be admitted to the state-based exchange. To avoid cherry picking, the insurer must agree to take all Medicare applicants in order to join the exchange.

“The annual payment would be adjusted by income, with high-income seniors receiving a reduced payment and low-income seniors receiving extra support. The payment would also be geographically rated and adjusted for health risk. In addition to a higher Medicare payment amount, low-income ‘dual-eligibles’ would also receive a fully funded account from which to pay out-of-pocket expenses.” (Rivlin-Ryan Plan. A Long-Term Plan for Medicare and Medicaid. http://budget.house.gov/News/DocumentSingle.aspx?DocumentID=225826 )

In Ryan’s plan there is no mandate to enroll in Medicare, the premium assistance or to take coverage at all. There is no penalty on individuals for failing to obtain coverage through the exchange. And there is no requirement that insurers join the exchange; however, if they want to cover Americans receiving the premium assistance the insurers must do so through the exchange.

Ryan’s plan is a “defined contribution” system where the government sets out ahead of time how much money they are going to contribute to individuals in the Medicare system. The enrollees then use that defined contribution to shop in the exchange for a plan that fits their health needs and how much they can afford. This defined contribution combined with the downward pressure the competitive exchange would create on prices is one of Ryan’s key cost control mechanisms.

How does ObamaCare use Exchanges?

The health care exchanges in ObamaCare have some similarities to the Ryan plan, broad elements shared by nearly all health care exchange proposals. These include “one-stop shopping” that seeks to lower costs by encouraging direct competition; the ability to provide consumers with transparent information, comparing prices and plan provisions; the use of information technology to create a consumer-friendly administrative mechanism for enrollment.

While the plans may look similar on the surface there are large differences in three key details: Who participates? What government requirements must insurers meet? How generous are the government subsidies towards premium payments?

First, ObamaCare anticipates funneling a much larger group of individuals into these exchanges. Under the law, states are required to set up exchanges and make them available for use by all citizens, not just Medicare beneficiaries. If a state refuses to set up an exchange, the federal government will step in to do so. Recall that under ObamaCare, all citizens are required to hold health insurance or face a penalty – individuals who cannot afford to purchase insurance or employees of small businesses that do not offer health benefits will likely find themselves participating (and likely being subsidized by) the ObamaCare health insurance exchanges.

Second, in order to sell insurance through the exchange, insurers must meet requirements set by either the state or the federal government. These requirements can either be light (for example, insurers must offer coverage of a set of basic services) or heavy (for example, government sets stringent standards for premium rates and mandates coverage for previously uninsurable individuals). While the details have not yet been released, ObamaCare exchanges will likely contain much more stringent qualifying requirements. Among other things, we could see the following ObamaCare goals be implemented via exchange participation requirements: insurers participating in the exchanges are required to cover preventative health care services without expensive co-pays or high deductibles; insurers’ ability to rescind insurance coverage from individuals is extremely constrained; new restrictions on premium rates, along with new rules on how insurers must spend the premiums they do take in; and insurers are prohibited from denying coverage based on pre-existing conditions (“guaranteed issue”) or charging different rates to different individuals based on differences in health status (“community rating”).

Third, the government’s commitment to subsidizing health insurance is substantially higher in ObamaCare exchanges. Whereas the Rivlin-Ryan plan calls for a defined contribution from the government to help low-income seniors pay for coverage from private insurers, ObamaCare will provide an open-ended subsidy on insurance for all Americans earning less than 400% of the federal poverty level (which in 2011 for a family of four is $89,400). CBO estimated this expansion of health care subsidies will cost more than $464 billion over 10 years. Ryan’s plan would save an estimated $110 billion over current law.

Specifically on Medicare, ObamaCare does not implement exchanges and instead keeps the current fee-for-service with price controls on doctor reimbursements, while at the same time reducing additional private plan coverage by limiting access to Medicare Advantage. In short, ObamaCare exchanges will cover more people at a higher cost, and they will rely on government mandates, instead of market innovation, in an attempt to control costs and improve service.

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