PPACA prescribes states’ “flexibility” in structuring exchanges. Libertarian and conservative policy analysts have criticized Massachusetts’ bloated and intrusive Commonwealth Connector, the country’s first pre-Obamacare exchange. Some, however, have pointed to the Utah Health Exchange, re-launching next year, as a more consumer-friendly alternative. According to this line, even states opposed to Obamacare should go forth and establish Utah-type exchanges, which will blunt the worst effects of Obamacare.
These grounds for collaboration, unfortunately, do not survive careful scrutiny. In the pre-Obamacare world, exchanges were suggested as a way to get around the major government failure in American health care: Congress’s grant of monopoly control of our pre-tax health dollars to our employers.
The Utah Health Exchange allows spouses to aggregate defined contributions from different employers. For example, suppose a husband’s employer contributes $300 per month to the exchange for health insurance. His wife works for another employer which does the same. The household has $600 to spend on a family policy that they, not their employers, choose. The husband and wife can then decide to which of their employers they wish to affiliate, satisfying federal regulations for group coverage. That sounds pretty good. However, this “premium aggregator” has not yet been tested. It goes into effect this month, for members who applied via open enrollment at the end of last year.
Enthusiasm for the Utah Health Exchange must be tempered. Although its supporters described the original version, launched in August 2009, as a “pilot,” reports from only a few months ago describe it as a disappointment. Although 20 businesses enrolled on the first day of operations, and 136 businesses in total signed up, only 13 remained enrolled by last December, according to the Deseret News. (The small number of firms participating explains why the “premium aggregator” was never tested: There were no reported couples where each worked at a different firm within the exchange, according to Don Garlitz of the exchange’s advisory board.)
The Utah Health Exchange offers modified guaranteed-issue policies. This means that the exchange must accept all applicants, regardless of health status, while charging premiums that range within a “band” narrower than actuarially accurate premiums would be. Risk-rating rules dictate which premium within the band can be charged to each applicant. (In pure guaranteed issue, health plans must accept anyone who applies and charge each exactly the same premium.) The original exchange had different risk-rating rules than the traditional small-group market; so when businesses applied for coverage under the exchange, health plans figured that their employees were sicker than average. As a result, premiums within the exchange were 30 percent higher than standard, according to the Salt Lake Tribune.
The new version of the Utah Health Exchange has the same risk-rating rules as the small-group market does. However, the new version also shows a significant cost of such a system: Insurers and other interested parties invest an inordinate amount of time developing risk-rating and risk-sharing rules. The exchange needs a way to compensate insurers which attract a disproportionate number of sick people. This occurs by transferring a share of premiums from the insurers who attracted a disproportionate number of healthy people.
Utah’s new statewide risk-adjuster is managed by a board of mostly insurance executives. If all the insurers participate in the board, it is likely that they will design a system that does a good job of adjusting for risk, because no one insurer will tolerate being taken advantage of by others. However, as in Medicare Advantage, and in the Swiss system of social insurance, insurers as a group are clever enough to design a risk-adjustment system that leaves taxpayers bearing more of the costs than expected (as I’ve discussed in a study of Medicare Advantage.) And this is precisely what is about to happen.
The Congressional Budget Office and the Chief Actuary of the Centers for Medicare & Medicaid Services intependently estimate that about half a trillion federal dollars will flow into Obamacare exchanges between 2014 and 2019, and these likely underestimate the true costs of the subsidies. The Congressional Budget Office estimates that 24 million people will enter the exchanges in 2019, of which only 3 million will come from the 162 million who would have enjoyed employer-based benefits under the status quo ante. The actual number will be far greater. John Goodman of the National Center for Policy Analysis has concluded that anyone who earns less than $80,000 annually will be dumped into an exchange.
Those states establishing exchanges will soon find that they are very expensive to operate. The Utah Health Exchange only costs about half a million dollars annually, but it has just been a pilot with a dozen businesses participating. Massachusetts’ Commonwealth Connector spent more than $26.6 million on vendors and contractors in FY 2009, and $3.4 million on employee compensation. The total comprises fully 3.5 percent of the money that businesses and enrollees paid into the exchange.
This explains why consultants and vendors of information technology (IT) are swarming the states, urging them to invest in IT to enable Obamacare exchanges. But state taxpayers will be on the hook for these costs. Secretary Sebelius has handed out checks of no more than one million dollars each to states to plan their exchanges. She has some discretion to give more but this power comes to an end on January 1, 2015. And it probably won’t even last that long.
Having voted to repeal Obamacare, the House of Representatives will soon take away Secretary Sebelius’ check-book. In anticipation of repeal, the new majority will likely seek to restore Obamacare’s half a trillion dollar of cuts to Medicare, or the punitive tax hikes on businesses and investors. They are most likely to find that money in the subsidies to the exchanges, thereby killing them in their cradle.
States establishing Obamacare exchanges are making a one-way, lose-lose bet. If Obamacare persists, exchanges will become bloated administrative nightmares. If Obamacare is repealed, states will have wasted time and energy that should have been directed towards that effort. Obamacare is President Obama’s problem. Don’t make it your state’s problem.