DESIGNING AN EFFECTIVE INSURANCE EXCHANGE. OR NOT.

If health care reform legislation is passed, it will almost certainly include provisions for insurance exchanges. Theoretically, these could be key to controlling costs and expanding access to coverage. In practice (and in addition to assumptions about guaranteed issuance, community rating, and the elimination of medical underwriting) these goals will be achieved only if exchange design adheres to five basic principles:

1. Exchanges must be the only source of private coverage for individuals and small businesses.

Without this rule, insurers will be free to “cherry pick” the best risks, abandoning the less attractive to the exchanges and driving up the costs of exchange coverage. Conversely, a very large “unselected” exchange pool will reduce insurers’ risks, enhance competition, and result in lower premiums. Ideally, if we are really serious about maximizing price competition, all but self-insured and other large employers should utilize the exchange.

2. Insurance choices should be made by individuals, not employers.

Employees (and other individuals) are likely to be wiser consumers of care they have chosen to fit their own needs. In contrast, employer choice will tend to result in a “one size fits all” approach, increasing costs for the young and fit and possibly creating dissatisfaction among the less healthy, and potentially requiring employees changing jobs also to change providers—thereby disrupting continuity of care—as they switch to new insurers’ networks.

3. Exchange offerings must separately price basic benefits and any supplemental coverage.

The key to price competition is to have comparable products explicitly priced. Allowing insurers to offer differing benefits will undermine consumers’ attempts to determine best value. However, to avoid instability of enrollment that could result from large numbers of enrollees switching to a new lowest bidder at annual enrollment time, basic benefits below the median price should be listed at the median.

4. Exchanges should be state-based.

While state-based exchanges imply some administrative duplication, they offer three potential advantages. They would facilitate oversight of participating insurers, they would make possible the use of a state “trigger” to implement some form of public plan if insufficient or ineffective insurer competition is available, and they would allow subsequent optional inclusion of Medicaid eligibles.

5. Exchanges should protect insurers against the effects of adverse selection.

Insurers will not willingly participate in an exchange system that guarantees issuance, without protection against high-risk or high-cost individuals. This means that the exchange design must include either exchange-sponsored reinsurance or some form of risk adjustment.

So, are we likely to see reform legislation that includes insurance exchange design that adheres to these five principles?

Unfortunately not, based on what appears to be the reform approach being taken by congressional committees—applying a massive series of band-aids to the present system. And unfortunately not, if exchange design mimics that of their prototype, the Massachusetts Connector, which takes the same approach. If the only draft bill that has emerged so far from committee (Senate Health, Education, Labor and Pensions) is any guide, reform will replicate many of the worst features of Massachusetts’ system, allowing insurers to continue to market whatever they want to whomever they choose, and leaving the insurance exchange as the coverage source of last resort for those few who fail to be marketing targets for insurance salesmen.

The result? A triumph for the insurance industry—but not for consumers.