Friday, April 24, 2009


Senate Finance Committee chair Max Baucus offered some intriguing clues in his breakfast meeting today (see previous post) about the direction that reform legislation might take.

Baucus’ comments, mostly relating to the roles of insurers, seemed carefully calibrated to gain support from—or at least neutralize opposition from—business and the insurance industry. In general, he avoided discussion of provider payment and system costs, financing, and individual or employer mandates. However, he did point to his November 2008 White Paper as a foundation for his proposals.

Baucus made three key points: coverage should be available to individuals through an insurance exchange but a public plan option might not be essential (but he reserved the right to revisit the issue); the present structure for self-insured employers should be preserved; and the insurance market should be reformed to eliminate pre-existing condition limitations and to guarantee the right to coverage. Each of these points has important implications.

Proposals for a public plan option have aroused fierce resistance from insurers and have been a focus of Republican attacks on Democrats’ reform efforts. Insurers perceive a public plan, particularly one based on Medicare (as suggested in Baucus’ 2008 White Paper) as a double threat. First, it would create government-sponsored competition in a government-regulated market. Second, it would further increase cost-shifting as individuals moved from private insurance to government coverage. Together, these factors could have a huge and destructive impact on the insurance industry. (In its February 2009 report on possible costs and savings due to reform, the Commonwealth Fund estimated that a Medicare-based government program would drive provider payments down by thirty percent and attract up to two-thirds of the individual and group markets.)

Not having a public plan has its own implications. While the insurance exchange concept favored by Baucus would presumably put price pressure on competing insurers, the pressure would likely be less without a public plan than with one—at least in any region in which there were not efficient HMOs or PPOs, the two private structures that under Medicare Advantage have costs closest to the Medicare FFS program. (With less than one percent of Massachusetts residents covered by its Connector, there is probably insufficient current evidence to determine the price effects of insurance exchange competition.) On the other hand, avoiding undermining the traditional insurance industry, for all its faults, would reduce the risk involved in transition to a reform structure.

Preserving the present structure for self-insuring employers would also minimize the transition risks of reform. As presented at the breakfast meeting, the intent seems to be to insulate large employers—those most likely to self-insure—from the potential impacts of reform. Self-insurance is regulated by the terms of the Employee Income Retirement Security Act (ERISA), which presumably would remain unchanged. One feature of ERISA is that it reserves to the Federal government the regulation of self-insured plans, something that has been a concern of health reformers at the state level, who feared that employers not wishing to comply with state reform requirements could decide to self-insure, in effect hiding behind ERISA. In Massachusetts, the only state to have fully implemented reform, this has not so far been a problem, perhaps because the Commonwealth’s business community has generally been supportive of reform. However, if Federal reform allows any employer to self-insure and so avoid other reform requirements, this could become an issue.

The final key point, insurance market reform, also involves risk, but here it is an actuarial concern. Guaranteeing issuance and eliminating pre-existing condition exclusions obviously increase insurance risk. Assuming that market reform will include provisions for minimizing “cherry-picking,” large insurers will have a considerable advantage over their smaller rivals, unless the insurance exchange system provides for either very extensive risk-adjustment or very generous reinsurance. All these options imply increased costs and/or endless argument with government regulators.

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