Healthcare Reform Part 10: Insurance Exchanges
By Roger A. Forsyth, MDJanuary 05, 2010
A key component in the Senate-passed healthcare reform bill is the insurance exchange. An exchange will be a government entity that provides individuals in a limited geographic locale with access to government-chosen insurers who will offer them group rates rather than expensive individual rates. These individuals will usually be self-employed or employed at small companies that do not offer health insurance. Some will have lost their insurance due to the existence of an expensive illness.
The administrative costs are high when individuals are insured one at a time instead of in groups. The cost of benefits is high when those with existing illnesses take out individual policies. By pooling a large number of individual policies on low-risk individuals with a “modest” number of policies on individuals with existing illnesses, insurers in an exchange expect to be able to offer policies that do not prohibit the presence of a preexisting illness, cannot be canceled if a severe illness develops, and are similar in cost to the policies offered to large groups.
Currently, about 20 million low-risk people do not try to purchase individual insurance, even though they could afford it, because they have concluded that the cost of the available policies vastly exceeds the likely benefit. However insurers cannot lower premiums for those at high risk unless they have a balancing number of policyholders who are at low risk. In order to give low-risk individuals an incentive to take out insurance, the new legislation mandates that non-participants will have to pay a tax of up to $750. It is important for the public to understand that exchanges are not necessary to achieve a prohibition against excluding those with a preexisting condition. This could be mandated in the absence of an insurance exchange.
Exchanges are being promoted as a method of lowering the cost of healthcare by 1) using regulation to force insurers to limit the cost of administration, 2) possibly limiting the compensation paid to executives, 3) creating competition that will force insurers to minimize profits, 4) providing guidelines and payment schedules that will cause physicians and hospitals to choose the most cost-effective care rather than the most profitable care.
Unfortunately, the facts do not support these hopes. The legislation states that an exchange could represent either one state or a group of states. A government commission would oversee each exchange, would compile a list of minimum requirements that insurers would have to cover (such as pregnancy, preventive services, etc.), would choose the insurers that were qualified, and would set up rules that they would have to follow. For example, if an insurer's administrative costs exceeded 20%, they would be subject to a fine.
However, even without this rule, large insurers currently payout 85% of premiums in benefits. It is only small insurers who write individual policies that have a payout rate of less than 80%. The 20% provision will not lower costs because it will be the large insurers who will compete to be a part of an exchange.
What if an exchange or the competition engendered by an exchange resulted in a limitation on executive compensation, profits, or administrative costs? If an insurer, had 25 billion in sales, covered 10 million people, paid the CEO 10 million, had profits of 3% (750 million), and cut 3% (750 million) from the 10-12% currently being spent on administration, what would be the savings for each insured individual?
Canceling the CEO’s salary would save each individual $1 and eliminating profits or cutting administrative staff would each save $75—a very small savings. Meanwhile, the lack of profits would make it impossible for insurers to raise the capital necessary to keep their equipment current. MRI’s and CT scans would be delayed, and the reduction in services common to government run systems elsewhere would begin to occur. The processing of paperwork would slow to a crawl as insurers understaffed administrative services in an effort to meet the demands of their regulators.
Significant savings can only be found in the 85% of insurance payments that go into benefits—not the 15% that goes to the insurers. The true goal of exchanges is to introduce greater government regulation of actual patient care. The regulators who run the exchanges will gradually increase their efforts to reduce costs by increasing their micromanagement of the practice of medicine.
For example, the current legislation contains fines for physicians who deviate from the norms that the regulators will set up. Physicians who make a larger than average number of referrals will be subject to financial penalties. If a physician has an older, sicker panel of patients, he will be penalized. This will affect patient care and worsen the loss of physicians from primary care. Regulators will then create subsidies to reverse the loss. Any savings that might be attributed to the guidelines will be swallowed by the costs generated by the guidelines.
All of this occurs because the current reform proposal is a top-down, command and control approach instead of a bottom up effort to reduce the utilization of healthcare services by instituting appropriate incentives and disincentives at the patient-physician level rather than the regulatory level.
Unfortunately, we know how the movie ends. Collectivizing farms in China and Russia led to famines. Cities with strict rent controls end up with acres of slums as landlords can no longer afford to keep up their properties. Price controls on oil in the 1970’s led to long lines as gas shortages developed. By forcing insurers, physicians, and hospitals to accept less than the actual cost, Medicare has transferred costs to private care, caused physicians to refuse to see the elderly, and has driven physicians from primary care into expensive specialization.
There is more. Currently, negotiations between insurers and patient advocates such as union representatives will determine the allocation of employer funds between the coverage provided to a group and the employer contribution that goes into salaries. With exchanges, lobbyists and politicians will pressure regulators to include their pet program under insurer-paid coverage and individuals will have less input in choosing between mandatory benefits and salary. The cost of policies will rise as coverage for mental health, drug addiction, wellness, etc. are added to the long-term care coverage that was inserted into the current legislation without any regard to the long-term cost. Low-risk individuals will then opt to pay the $750 fine rather than participate. This will lead insurers to increase premiums and regulators to counteract this by increasing the fines. The spiral will lead to new cries for a single payer system.
Exchanges are not simply a benign marketplace where deserving citizens can get the reasonably priced coverage that was denied to them by evil insurers. The full implications of exchanges need to be understood.
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