Regardless of whether or not the Supreme Court strikes down the individual mandate or the entire 2010 health reform law in June, state-based health insurance exchanges are a good idea and, if established, should benefit many working Americans who are too well-off to qualify for Medicaid but unable to otherwise afford health insurance coverage on their own. This is the second of three posts excerpted from an unpublished paper that I recently authored on this topic. You can find my first post here.
Adverse selection is a phenomenon in which higher-risk (and higher-cost) individuals become more likely to purchase insurance inside the exchanges, leading to premium increases within the exchanges, driving healthier (and lower-cost) individuals to purchase cheaper insurance outside the exchanges, leading to further exchange premium increases, and so on, until the exchange essentially becomes a high-risk pool. Thus, adverse selection is a serious threat to the viability of exchanges. One potential solution is to simply eliminate the market outside of the exchanges, but this option may not be feasible for most states. To reduce the risk of adverse selection, states should have identical rating rules for the markets inside and outside of the exchanges, and require all insurance plans of a certain size to participate in the exchanges. Massachusetts, for example, requires that all insurers with more than 5000 non-group enrollees submit bids to the Connector, and that prices for insurance products be the same inside and outside of it.
California will require insurers inside and outside of its exchange to offer all four tiers of benefit coverage, and in addition, will only permit insurers to offer catastrophic plans if they participate in the exchange. In Maryland, insurers who currently collect more than $10 million in premium revenue from the individual market or more than $20 million in premium revenue from the group market must participate in the exchange, and insurers offering catastrophic plans outside of the exchange must also offer them within the exchange. Maryland’s exchange governing board is empowered to re-examine the participation revenue threshold and adjust it as needed over time to ensure that large insurers remain in the exchange.
In addition to offering subsidized and/or competitive coverage, the exchanges should offer consumers tools to make informed choices between different insurance plans and coverage tiers. To facilitate comparisons, all participating insurers could be required to disclose standard types of benefit information through a common Internet portal, including patient satisfaction scores, if available. Exchanges must strike a balance between ensuring transparency and overwhelming consumers with information, as Jon Kingsdale observes: “Given the (understandable) lack of excitement in the general populace for mastering the details of insurance, the danger of information overload is almost as great as that of knowing too little. Exchanges must learn what information consumers want and need and how best to package and present it – a challenge not unlike that confronted by retailers."
The Massachusetts Connector web site (http://www.mahealthconnector.org) allows consumers to easily compare up to three plans side-by-side on the basis of monthly cost, annual deductible, out of pocket maximum, and other cost variables. Although neither California’s nor Maryland’s benefits exchange portals are yet operational at the time of this writing, California’s current exchange home page (http://www.healthexchange.ca.gov/Pages/Default.aspx) promises that it will “support consumer choice” through a web-based eligibility portal, website that provides standardized plan comparison information, a cost-comparison calculator, and a toll-free assistance hotline.