Does it matter whether health insurance exchanges are state-level or national? I used to think that it wasn’t a major issue, but my opinion has changed.
During the health reform debate early in 2009, I thought that other exchange design issues were more important than whether they are organized at the state or national level. In my view, who is eligible to join (all small business employees or just those who receive subsidies?), whether the exchange is the exclusive market for individuals and small groups, and how the exchange will be protected from an adverse selection “death spiral” are critical design features and will determine whether the exchanges are successful.
It seemed to me that the arguments put forward by advocates of a national exchange were not compelling. The most common argument was that a national exchange was needed in order to gain sufficient size, which would supposedly give the exchange more bargaining power with health insurers. But I always thought that size was more important at the local level. Health insurers negotiate provider contracts locally, not nationally, and they gain leverage based on their size locally regardless of how big they are nationwide. In addition, the “bargaining power” argument is relevant only if the exchange is negotiating rates with insurers. In an “all comers” model, the exchange isn’t negotiating rates; it relies on healthy competition among insurers to drive down premiums.
There is another argument, however, for a national-level exchange. A problem with state-level exchanges is the likelihood that they would be different from each other in variety of ways: participation rules, quality standards, enrollment processing, payment coordination, management effectiveness, etc. In other words, they would be non-standardized, and this would create a serious barrier for participation by large, multi-state employers. This isn’t an immediate problem, since the current health reform bills permit only individuals and employees of small employers to use the exchange in the near term. But the lack of standardization would effectively limit the exchanges to these groups for the long term. Most large, multi-state employers would look at the patchwork of state-level exchanges and decide that it wouldn’t be worth the hassle. (One of the reasons that these employers fiercely defend ERISA’s federal preemption of state insurance regulations is the administrative complexity caused by the differences in state laws.) If the exchanges were administered nationally, however, some large employers might seriously consider participating.
One of the major goals of the current reform bills is to put in place the framework for an effective health insurance system. If the framework is robust and flexible, we can make improvements and allow the system to evolve. If we get it wrong, however, a flawed framework can block the evolution. We don’t have to decide right now if we want the exchanges to completely replace the employer-based system in the long run, but shouldn’t we at least give large employers the option to use the exchange if it makes sense to them? We can do that with a nationally administered exchange; it won’t work with a 50 state approach.
(Note: I should be clear about definitions. This is not a single nationwide exchange including only insurers who have provider contracts throughout the U.S. It is a nationally administered exchange, with insurers choosing to participate in selected locations. There could be local administrative organizations to which the national exchange administrator could delegate certain tasks, e.g., health plan certification, coordination with state Medicaid programs, etc. There would be some national insurers in the exchange, of course, but it would also include insurers who have only a local or regional presence. People would have a choice among several national insurers as well as the local insurers that participate in their area. This is the model used successfully by FEHBP and nearly all large, multi-state employers.)
Bill Kramer is an independent health care consultant, focusing on health care management, finance and public policy. Bill served as a senior executive with Kaiser Permanente for over 20 years, most recently as Chief Financial Officer for Kaiser Permanente’s Northwest Region. More information about Bill may be found at his website. You can read more of his commentaries on health care management and policy at his blog, Now’s the Time, where this post first appeared.