Jon Kingsdale: A Q and A on Health Insurance Exchanges: October/November 2010
By Rachel Brand
Jon Kingsdale, who ran the Massachusetts Commonwealth Health Connector, is one of the nation’s foremost authorities on health benefit exchanges. State Legislatures caught up with him recently to hear why exchanges are important and what legislators need to know about them.
State Legislatures: Why are exchanges necessary for health care reform?
Jon Kingsdale: A big piece of health care reform is making it easier and more affordable for individual households to shop for and buy insurance. Under health care reform, the number of households buying insurance on their own is going to double, up from16 million people now to another 24 million buyers. If you are going to move into a world in which people are buying insurance on their own, you need a vehicle that makes it relatively easy to do so.
SL: Why not leave creating an online shopping mall to private industry?
Kingsdale: There are already some exchange-like entities on the private market, such as www.ehealthinsurance.com, www.BenefitMall.com and www.GetInsured.com, and they make shopping relatively easy. But in the absence of other health care reform-related changes, these entities don’t provide standardized options for consumers. They ask shoppers to fill out a medical history form and then get back to them with real quote later.
Health care reform requires the exchange instantaneously give shoppers a quote with a price that is guaranteed. A consumer will be able to go on the exchange, enter some data and see a range of plans with a standardized benefit package tiered from the highest premiums with the lowest cost-sharing to the lowest premiums with the highest cost-sharing. Consumers pick a plan, and it is guaranteed issue.
SL: How do exchanges control rising costs?
Kingsdale: One, by giving purchasers better, standardized information about their options. We have seen in Massachusetts that people are shopping for value, buying in disproportionate share the lowest-price plans.
For instance, shoppers get to see a range of plans with a range of premiums. Some lower-priced plans offer a limited, perhaps regional network of providers. In the market outside the exchange, these plans have very small market share. But in the exchange, these no-name, regional plans have 40 percent market share. So cost-conscious consumers, buying through the connector, are saving pretty significant amounts of money.
Two, the exchange can act like an employer and actually negotiate with insurance companies. It can pick which health insurance carriers it will offer and perhaps exclude the highest price plans that don’t offer significant value. There is a lot of hope on the part of policy makers, that in the brave new world of health reform, that exchanges will be aggressive in negotiating and pushing down premiums. It remains to be seen how successful they can be in doing that.
Three, the administrative costs of distributing insurance are very high. A lot of money goes to brokers, the sales effort, signing people up, explaining the program and billing. National figures suggest that non-claims-related, administrative costs for non-group and small group market can be as high as 40 percent of premiums. Exchanges have the potential, through economies of scale, to cut those costs way down.
SL: Exchanges will have many functions: online marketplace, rating system for health plans, market maker, funnel for tax credits and conduit to Medicaid. Which is most important?
Kingsdale: Their biggest impact will be for people who are newly eligible for coverage. It will be mission critical for states to create a smooth, easy-to-use and accurate way for some 30 million to 35 million people to find out if they are eligible for subsidies and Medicaid.
This is a golden opportunity, and it is not without opposition, to take what are highly fragmented and sometimes very inefficient, very cumbersome, eligibility determination systems and bring them into the 21st century. To automate them. You can do a lot with technology to reduce administrative costs. This will require a complex set of decisions and a technology build-out.
SL: Lawmakers have lots decisions to make about how to structure their exchanges. Which are the most important decisions, and why?
Kingsdale: First, what is the governance of the exchange? Will it be housed within an existing state agency? California and Massachusetts set up semi-independent authorities with their own boards of directors. They chose that model because the exchange has this funny set of functions of determining eligibility—traditionally a government job—and a non-government role of organizing a market. It must combine some public trust, fiduciary functions with some private, commercial retailing functions. An independent authority with appointed experts offers a vehicle to combine them.
Another key decision will be how to reform the whole insurance market. The Accountable Care Act delegates to states the job of implementing reform and structuring the relationship between the exchange and the rest of the market. That will involve writing rules to carefully guard against adverse selection.
Third, how selective should the exchange be? Does the exchange have to offer every licensed health plan or, can the exchange, like an employer, negotiate and pick and choose which ones it wants to offer?
There are three positions on this question:
- No, the exchange should be prohibited from being selective.
- Yes, it should be empowered to be selective.
- Yes, it should be required to be selective.
I believe it is unwise to either prohibit or force selectivity, but it is wise to give the exchange some flexibility to negotiate. The trouble with having no ability to select plans is that the exchange becomes an automated yellow pages.
Selectivity is the exchange’s only real tool to get carriers to serve its customers better. But it is not a power that any governmental body would want to use lightly.
Rachel Brand is a freelance writer in Denver and a frequent contributor to State Legislatures.