The Real Fix? The Exchanges Aren’t Working. Here’s Why …

Last week President Obama announced that he will try to keep his oft repeated promise to Americans in the individual market that they can keep their plans if they like them … for a year. The media have done an excellent job explaining why President Obama’s temporary patch to the ACA may endanger its existence; in the process the American public has learned more than it ever wanted to about adverse selection, cream skimming, and most importantly crass politics.

Though the full costs of adverse selection will be muted in the first year by risk corridors and reinsurance, it is clear that the failing website, the bad press, and the recently announced delay are placing maximal stress on even those backup provisions of the bill.

Even if the ACA survives this additional insult against the economics that support its very existence, we have witnessed yet another missed opportunity for positive reform to President Obama’s signature legislative achievement. And this time we can’t just blame intransigent tea-party Republicans and their quixotic efforts at repeal; here the buck stops at 1600 Pennsylvania Ave, NW.

While many of the plans that are affected by the President’s temporary patch might actually be plans that don’t qualify as “insurance” (i.e. they have low lifetime caps on expenditures or don’t cover hospital services), numerous others actually offer quite good coverage that just don’t meet the exceptionally high standards of the newly developed minimum essential health benefit (EHB).

In many ways, the first dollar coverage for preventive care and the wide ranging number of services covered by the ACA aren’t truly insurance either. Instead, these features amount to a very generous pre-payment plan for medical services supported by the United States treasury.

These elements of the EHB are too costly and unnecessary. Perhaps even more concerning, they are just the ante. As time goes on, vested interests for everything not included in the EHB will work tirelessly to insure that their favorite benefits are included. If you want evidence of this eventuality, you need look no further than the remarkably long and growing list of benefits mandated by most states.

Keep in mind that as the EHB grows more generous the premiums and subsidies on the exchanges will also grow. And we know who will pay their “fair share” of those increases.

Given these facts, the President should have used the recent attention on the individual market as an excuse to pause, and carefully reconsider whether the EHB has actually been set far too high. Doing so would allow insurers to develop innovative benefit designs to create health insurance plans that provide quality coverage without exacerbating the growth of medical spending. Instead, the President chose the easy path. Let’s kick the can down the road and perhaps we can delay the next round of news stories about policy cancellations in the individual market until after the 2014 mid-term elections.

Beyond simply delaying the inevitable, the “policy” change announced last week could threaten the very existence of the ACA. To understand why, we provide a short history lesson. Stanford Professor Alain Enthoven described a prototype for health insurance exchanges in 1978. Over the next two decades, the idea for exchanges was fully developed; the estimable Jackson Hole Group of leading academics, policy wonks, and industry executives produced at least two serious national health insurance (NHI) proposals centered on exchanges. A bipartisan NHI proposal featuring exchanges was debated during President Reagan’s tenure, and again at the time of President Clinton’s ill-fated NHI proposal. Finally, in the mid-2000s, Massachusetts launched its exchange.

During this time, academics came to understand what it would take to have a viable exchange. The young and healthy would have to participate, which in turn meant there would have to be a complex system of subsidies and penalties. And while it would do a world of good to end employer- sponsored insurance (see our previous blogs), the short term disruption and political roadblocks would be severe. So exchanges would have to compete side-by-side with other insurance options, which would have to be regulated lest bare bones plans skim the healthy enrollees from the exchanges. This, in turn, would surely force many individuals to lose their current coverage, and a number of those individuals who don’t qualify for subsidies will likely face much higher premiums. This is how we ended up with the hybrid ACA proposal and, because the plain economic truth was hidden from us, the broken promises.

From the beginning, opponents of the exchanges fell into two camps. The first and by far the larger camp offered a purely political reaction to any proposal offered by President Obama. We could expect such a reaction from tea party Republicans who are still searching for the President’s birth certificate. But we are disappointed by the moderate, supposedly pro-business Republicans who failed to see how moving away from employer-sponsored insurance could unshackle America’s businesses, especially small companies and entrepreneurs. We would have hoped that the establishment members of the Republican Party would have taken the opportunity then, or at least now when President Obama appears to be more amenable to compromise, to make the exchanges into a positive economic force. For example, they could have crafted a compromise to lower the EHB and expand the availability of high deductible health plans on the Bronze tier of the exchanges.

Exchanges and their many rules may sound crazy, but there is method to the madness. The President may have lied about the implications of these rules, but they are at least internally coherent. At least they were internally coherent before the latest delay.

And that brings us to the second camp. From the beginning, we joined with many free-market economists and other skeptics in opposing the ACA because we feared that ugly politics would trump sensible economics. The heavy hand of politics appeared early on, when a variety of budgeting tricks were employed to make the ACA appear to be revenue neutral. (Does anyone recall that the tax increases to fund the exchange subsidies began fully three years before the first dollar in subsidies would be paid out?) States were supposed to launch their own exchanges, but the federal option was introduced to deal with political realities. Efforts to rein in spending on high cost/low value medical technologies were abandoned to avoid any notions of “death panels.” Finally, and more recently, the employer mandate for insurance was delayed by a year because of difficulties in implementation. We can now add to this list the “you can keep your plan” lie and the temporary patch for those who did not keep their plans. All of these are example of how the ACA has become much more about politics than about sensible policy. Both sides must take the blame for this result.

And so the greatest danger of large scale government intervention is laid bare for all to see. We greatly admire our colleagues who have diagnosed the ills of the U.S. health insurance system. We agree with them that “properly implemented” exchanges can assure that nearly all Americans obtain insurance coverage, promote competition among insurers, and liberate Americans from the yoke of tying insurance to employment. But in a two party system, especially with today’s two and a half (we can’t count the tea party as a distinct party but it is hard to lump them in with more sensible Republicans) parties, national politics continues to trump economic theory. Exchanges may be working reasonably well in Massachusetts, but nationwide? Good luck to that. (Wasn’t that Romney’s message? Like him or not, he sure got it right that solutions that work well in one state might not translate to the nation.)

As each day brings sadder news about the exchanges, we are reminded that it is easier for a camel to pass through the eye of a needle than it is for politicians to properly implement complex economic policies.

David Dranove, PhD is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.”

Craig Garthwaite, PhD is an assistant professor of management and strategy at Northwestern University’s Kellogg Graduate School of Management.

Dranove and Garthwaite are the authors of the blog, Code Red, where this post originally appeared.

6 replies »

  1. It would have been hard enough to force the young and healthy to buy insurance adequate for their own needs. They are becoming acutely aware, however, that they are expected to fund the medical expenses of the seriously ill, and they are balking. One of the topics often discussed on the sites they frequent is the unenforceability of the “penalty.” It appears that the IRS is not permitted to initiate criminal proceedings against “penalty” scofflaws, nor can it levy a penalty on the “penalty.” These youths will continue to show up in emergency rooms, latest I-phones in hand, demanding treatment. They zealously supported Obama, but what they really wanted was “free” medical care, equal in quality to that enjoyed by the most affluent. The actuarial consequences of this “glitch” in the system will soon become apparent.

    Patrician sneers at Tea Party Kulaks do not seem to me particularly appropriate in a discussion of what might have been done here to improve the quality and reduce the costs of health care. The collectivist zeal of the proponents of Obamacare disdainfully rejected the very thought of tort reform, which would have at least discouraged “defensive medicine.”

  2. HHS had the perfect opportunity to address theses issues two years ago but it disregarded the advice it had sought and kicked responsibility to the states.

    At the behest of HHS, the Institute of Medicine (IOM) studied the essential health benefit (EHB) issue and produced a 297 page report for the Secretary of HHS in October 2011, entitled “Essential Health Benefits: Balancing Coverage and Costs.” The specific charge of the IOM was not to decide what would be covered in the EHB but rather to propose a set of criteria and methods that should be used by HHS in deciding what benefits are most important for coverage.

    In its deliberations, the most critical issue identified by the IOM was the need to explicitly address the tradeoff between the cost of a benefit package and the comprehensiveness of coverage. The IOM concluded that the benefit package should be designed within the context of financial constraints, using a structured public process to establish priorities.

    The IOM report analogizes HHS’s task of defining the EHB package to going grocery shopping. One option is to go shopping, fill up your cart with the groceries you want, and then find out what it costs. The other option is to walk into the store with a firm idea of what you can spend and to fill the cart carefully, with only enough food to fit within your budget. The IOM report recommended that HHS take the latter approach to developing the EHB package and to keep in mind what individuals and small employ-ers/employees can afford.

    The report recommended that HHS determine what the national average premium of typical silver level plans would be in 2014 and ensure that the package’s scope of benefits did not exceed this amount. This premium target would be used only as a criterion in developing the package; the premium that a particular individual purchaser ultimately pays for a plan with the package could be different because of a variety of other factors.

    Unfortunately, HHS disregarded this advice and proposed EHB regulations that passed off the decision as to what would be considered EHB to the individual states, and directed the states to choose a benchmark plan or policy already sold in the state (or a federal benefit program) as the EHB standard for that state. Essentially, HHS kicked this important responsibility to the states and then told the states to take the first approach identified by the IOM report; that is, to fill up the cart with the healthcare you want, and then find out what it costs later.

    The rest is history and quite predictable at that.

  3. Great post. Prevention is the new growth industry. We will work ourselves sick trying to keep up with the ever expanding EHB.

  4. Allow me to share an idea I have about the Affordable Care Act and to ask for support.

    Some people in the individual market who got substandard policies have had these policies canceled because of the Affordable Care Act. I propose an alternative to having these policies temporarily reinstated as a political “fix.”

    Simply guarantee that these people will get a better deal in the federal (or a state) exchange. In most cases, this is already true.

    In the exceptional cases in which premiums and/or deductibles are higher in the exchange, allow those individuals to purchase a policy with a lower or comparable deductible, with their premiums subsidized so that they will not pay more, even if they do not qualify under the income standards for the subsidies.

    In other words, provide an ad hoc subsidy in these rare cases, so that no one is financially disadvantaged by the cancelations. Indeed, in all these cases, these individuals will end up with better coverage.

    Perhaps it is possible to do this administratively, so that it does not become entangled with Republican obstructionism in Congress. If it does require legislation, the president will be in a strong position to veto anything else besides this proposal, as it will improve the circumstances of those whose policies were canceled.

    Please click on the link below to sign on to this as a We The People petition. Over one hundred supporters will be required before the petition will be made public online.