Opinion Column

Can Exchanges Help Consumers Get Insurance That’s A Good Value? Depends On Where You Live. (Guest Opinion)

There’s been a lot of talk among state policymakers, industry stakeholders and the media about whether exchanges should be “active” or “passive” purchasers of health insurance.

Some argue that exchanges should act like large employers, who often actively negotiate contracts with health plans in an effort to get the best possible price and quality. Others argue that exchanges should be passive conduits of information between health plans and consumers — a virtual “Yellow Pages.” In fact, while some states like California and Massachusetts have embraced active purchasing by allowing their exchange to selectively contract with health plans, the recently passed Colorado health benefits exchange bill expressly prohibits such activities, as do other state measures that include similar language.

It’s not too much of a stretch to guess who’s pushing what vision of an exchange. Consumer groups and, often, small business owners, would prefer an exchange that more actively manages competition and uses its ability to aggregate individuals and small groups to demand better prices and higher quality. On the other side sit the insurance industry and free market conservatives, who would rather see an exchange let any willing insurance company participate and offer an unlimited number of products, allowing a wider range of choices for exchange enrollees.

So, which approach should a state take? My colleagues at the Georgetown University Health Policy Institute and I recently partnered with the National Academy of Social Insurance to investigate this question.

To some extent the federal law decides the issue for states. While it gives them considerable flexibility in operating exchanges, it requires exchanges to do a lot more than just post on a website every health plan that comes knocking.

Only “qualified” health plans can participate — meaning they have to be state licensed, provide a minimum level of coverage, and meet standards for quality and transparency. And the health overhaul is clear that an exchange must be allowed to make a subjective judgment about whether a plan’s participation is “in the interests” of consumers and small business owners. An exchange also must have the ability to certify, re-certify and de-certify plans if they don’t meet minimum quality and affordability standards. This means that Colorado’s bill could be out of compliance with the federal law, if it’s implemented in a way that ties the exchange’s hands.

But, for states that want their exchanges to be active purchasers, a number of environmental factors will prove challenging.

First and foremost, there simply may not be a sufficient number of health plans that are able and willing to participate. An exchange can’t be a selective contractor if it only has one or two plans willing to contract with it. Unfortunately, though, today, nearly all health insurance markets in the U.S. are highly concentrated, and in 48 percent of markets, just one insurer holds at least half of the market.

Second, exchanges need to enroll a critical mass of individuals and small businesses for which health plans will want to compete. And even though the exchange will be the exclusive source of coverage for most low- and moderate-income consumers, in many states these folks will represent a relatively small share of the total commercial market. As a result, the exchange may have little real leverage to be a tough negotiator. And, regardless of size, the risk profile of exchange enrollees will be critical — past experience with exchanges has shown that if they attract higher risk enrollees compared to the outside market, health plans will flee. This will be a particular problem in states that allow the rules and regulations for the market outside exchanges to be less strict than the rules inside.

Third, effective active purchasing can be resource intensive. To do it well requires sitting down with health plans, one-on-one, early and often to discuss goals, priorities and requirements for participation. It requires an experienced staff, funds to conduct market research and ongoing outreach to stakeholders. It also requires a leadership that has expertise but is free from conflicts of interest. Yet many states are debating exchange bills that would allow multiple insurers to serve on the board of directors. And many state legislatures may not be willing to authorize an operating budget that would support a staff with the necessary skills and market experience.

One critical question — whether the exchange could negotiate a better bargain than consumers could get in the outside market — will likely prove challenging in many states. The exchange will not be the exclusive distribution channel for insurance products, meaning that most health insurance companies can continue to market their products in the outside market. And because the health law requires that prices for the same products be the same inside and outside the exchange, it means that any price discount negotiated by the exchange would have to be implemented in the outside market as well. For most carriers, the exchange won’t be a big enough book of business to justify such across-the-board rate reductions. More importantly, however, negotiating price discounts year-to-year with carriers does little to tackle the long-term problem for consumers and small businesses: the runaway growth in the costs of health care.

So … how can an exchange help deliver more affordable, higher quality health insurance coverage to enrollees? The good news is that the health law gives states considerable flexibility to pursue a wide range of strategies — strategies that can be tailored to local conditions. For example, even in concentrated insurance markets, exchanges may want to limit the number of products each company can offer, and standardize cost-sharing so that consumers can make apples-to-apples comparisons more easily. There’s significant research showing that too many product options can confuse consumers and lead them to choose plans that don’t best meet their needs.

Exchanges could also partner with other large purchasers in the state — such as the state Medicaid agency, the state employee benefits purchasing agency, or large employer coalitions to push plans on delivery and payment system reforms that promote the delivery of higher quality, more efficient health care services.

Exchanges might want to pursue a strategy of recruiting new insurance carriers to enter the market. The exchange in Massachusetts has successfully recruited two new commercial carriers — the first new market entrants in the state for decades.

Last but most definitely not least, exchanges will have important new tools to help change the way consumers shop for and buy insurance. New transparency requirements and web portals that allow for a comparative display of information can encourage consumers to select high value, efficient health plans. For example, exchanges can give special designations (i.e., “Top Value” or “Exchange Select”) to plans that submit the lowest priced bids, offer consistently reasonable rates, or score high on quality and consumer satisfaction metrics.

These activities, while they might not fall under some traditional definitions of “active purchasing,” may hold the greatest potential to help provide consumers and small businesses with higher-value coverage. On the other hand, where a state decides its exchange will be “passive,” or a simple conduit of information — the virtual Yellow Pages — it’s hard to see how it adds value.

Sabrina Corlette is a research professor at The Georgetown University Health Policy Institute.