The Impact of Private and Public Health Insurance Exchanges

A few examples of the fallout from Obamacare: Even the most enthusiastic states are scrambling to set up exchanges; small employers and those of low-wage workers may drop coverage.

By Ian Morrison

With the emphatic re-election of President Obama and the resignation by all that Obamacare is “the law of the land,” much interest and concern centers on a cornerstone of coverage expansion: health insurance exchanges. Public exchanges are off to a rocky start with many states that bet against Obamacare now scrambling to find a solution, including defaulting to a federally run exchange.

At the same time, large multistate employers are eyeing private health insurance exchanges (benefit marketplaces run by private sector intermediaries without benefit of federal subsidies) as a possible solution that may allow them to migrate to a defined contribution model of health insurance. Since private health insurance is the lifeblood of most health systems’ financial success, any changes in the private market caused by exchanges (both public and private) will have enormous short- and long-run implications on providers. What should you watch for as the story unfolds?


The Law and the Issues

Obamacare (also called the Affordable Care Act, or ACA) aims to expand coverage by growing Medicaid (to an estimated 16 million or so, if all states pursue the expansion as envisioned) and by providing subsidies for people to purchase insurance through state-based health insurance exchanges. Coupled with the individual mandate to purchase insurance and the requirement that businesses with more than 50 employees offer coverage to employees who work more than 30 hours a week, Obamacare optimists believe we will be well on the way to expand coverage to an additional 16 to 20 million beyond the Medicaid expansion. That’s the idea.

The theory survived Supreme Court challenges (sorta, more on this later) and was given further credence by the re-election of President Obama (as anticipated in my column written the day he was inaugurated in 2009). Now the clock is ticking for a go-live date of coverage expansion that is less than a year away. And most states are nowhere near ready.

There are two sets of issues to follow on the creation of exchanges; the first involves wonk issues of state and federal politics, policy, budget, and implementation challenges. The second set involves the likely behavior of market actors including employers, health plans and consumers.


The Wonk Issues

Medicaid’s slow-pedal expansion. The focus of the column is on exchanges, but you can’t think about exchanges without thinking about the Medicaid expansion, especially if you are a wonk. The Supreme Court decision opened the door for states to resist or at least slow pedal Medicaid expansion. The hope from the left is that red state governors may eventually come around to expanding Medicaid given that (on paper) the federal government picks up almost all the tab. (The federal government pays 100 percent of the expansion costs for newly eligible citizens for the first three years, sliding down to 90 percent after 10 years).

But red and blue states alike worry that the fiscal cliff discussions, austerity 2.0, or whatever other federal budgeting shenanigans we come up with over the next two or three years will undermine that deal and leave the states on the hook for a substantial share of a massive new entitlement program. It will therefore be no surprise if states take their sweet time to implement an expansion. And this would be consistent with the birth of Medicaid: It took 18 years for all states to join Medicaid. Arizona did it in 1982! Better late than never.

Similarly in Canada, Saskatchewan piloted universal hospital insurance in 1946 and was followed by a couple of other provinces. But it was not until 1957 that Canada passed the Hospital Insurance and Diagnostic Services Act that enabled provinces to receive 50 percent of  federal funding for universal hospital insurance.

Even then, it took almost five more years for all provinces to sign up. (Ironically, because pioneering Saskatchewan got federal help for their already existing hospital insurance scheme, it used the money to pioneer universal medical insurance for physician services in 1961. Yet the national Medical Care Act was not passed until 1966 [five years later again] to produce the national single payer system we would recognize today). So overall, Canada took 20 years to deploy its national program.

The irony, of course, in the halting U.S. coverage expansion is that the two states (after big dog California) that have the most to gain (and potentially be on the hook for expansion) are Texas and Florida, whose governors have been among the most vocal opponents of Obamacare. The financial stakes are substantial. For example, according to John Dorschner in a Nov. 28, 2012 post in The Miami Herald:

“…a Kaiser Family Foundation study showed that if Florida accepts Medicaid expansion, it will cost the state about $8.9 billion over 10 years to insure an extra 1.6 million people in the state-federal insurance for the poor.

“If Florida opts out of the expansion — as the U.S. Supreme Court allows states to do — the state’s Medicaid enrollment will still go up by about 370,000 people, with an added cost to the state of about $3.5 billion over 10 years, according to the Kaiser analysis….

“Once that group of 370,000 people is factored in for $3.5 billion, the additional cost of expansion would be a net of about $5.4 billion over 10 years to cover an additional 1.2 million people, according to the Kaiser analysis.”

Read “New study: Medicaid expansion could cost Florida $8.9 billion over 10 years” here. Forty dollars a month of state tax revenue to cover poor people seems like a deal to me, but on the other hand $5.4 billion over 10 years is real money compared with doing nothing.

The gap: too poor to subsidize. The reason exchanges are affected by Medicaid is that subsidies are available only for those with incomes between 133 percent and 400 percent of the federal poverty level. If states refuse to expand Medicaid to that level, millions of Americans will be left in the gap (like the 1.2 million people in Florida).

This could become a bargaining chip in national budget discussions: Why don’t you (feds) let us (states) scale back Medicaid expansion but give us some money for private insurance subsidies in the exchange? Problem is, private insurance subsidies for very low income people would be more expensive to the federal government than Medicaid expansion, but perhaps more ideologically acceptable to Red state governors.

Playing silly buggers (part 1). The Cambridge University Press English Dictionary defines “Playing silly buggers” as a British and Australian expression meaning “to behave in a silly, stupid or annoying way,” as in the normal usage example they cite: “There’ll be a serious accident sooner or later if people don’t stop playing silly buggers.” Well said. Many states have been playing silly buggers by flagrantly ignoring the law, passing spurious state-based attestations that they won’t comply, and launching myriad legal challenges in the hope of finding an Achilles’ heel that brings the entire Obamacare edifice crashing down. It hasn’t stopped with the election decided.

Look folks, this Rube Goldberg edifice of convoluted complexity that is Obamacare could come crashing down on its own. It just seems to me completely counterproductive to passive-aggressively undermine the implementation of a law, however clunky, that tries to improve the health care coverage, care and health of the least among us. We should be pulling together to make the best of this, not pulling it apart so it fails. Just saying.

The states that are ahead are thinking they are behind, so the states that are behind are really behind. California has been steaming ahead to implement its exchange. Sixteen other states are nominally doing the same thing. However, board members of these exchanges and astute local observers are both publicly and privately concerned that there is no way they can be ready in time for the open enrollment process in the fall of 2013. For example, states like Connecticut, Washington and Maryland are enthusiastic about implementation of exchanges but are in shock and awe at the implementation timetable when you actually have to do the work.

For those hold out states that did nothing or next to nothing to prepare, the situation is even more difficult. You just can’t bust an exchange out of your hat over a long weekend, as Governor Rick Scott of Florida found out over Thanksgiving.

The federal tanks are coming, really? Facing an impossible deadline? Call the federal government for help. Some 17 or so of mostly red states have come out post-election and said to the Obama administration: “OK smarty pants: you do it.” This will work really well, right? We have delegated significant authority to the states to decide non-trivial things like covered benefits and allowable deductibles in the exchanges, yet the states that seemed most likely to exercise restrictions in those areas are now looking to the federal government to install an exchange. Federal standards are likely to be more expansive than restricted; who will adjudicate that fight?

An exchange is not like a refrigerator or small appliance that you ship to Florida and plug in. An exchange requires massive back-office integration with existing multi-various state Medicaid systems. My back-of-envelope calculations (based on consulting contracts given to large system integrators for exchange implementation in a couple of states) is that the system integration budget nationally would be considerably north of $5 billion. Does the Obama administration have the money appropriated?

Experts say that the costs of operating exchanges will be covered by a 3.5 percent insurance surcharge for product going through exchanges. (Yet another delicious irony: We are charging a surcharge to make it cheaper. You can’t write jokes better than that.) But the system integration costs are an up front investment, so I am not sure how all this is going to work. Many Washington insiders and old hand system integrators are skeptical that the feds are capable of rolling out the federal exchange on time. (See, for example, Sarah Kliff’s excellent reporting on this in her Nov. 12, 2012, blog at the The Washington Post: “Is Obamacare too much for the Obama administration?”).

California. California is ahead and it is the biggest state with the most uninsured. It is the whole game. If reform, ACOs and exchanges all fail in California, national health reform implementation would be on the rocks. Governor Brown is so focused on budget and tax issues that making health reform work is way down on his priority list.

But, luckily the key player is the head of the California exchange, now called Covered California, Peter Lee (an old friend) who is unmatched in his smarts, energy and optimism. If anyone can crank up the Rube Goldberg machine to actually cover people and bring value-based purchasing principles into the market, it’s Peter and his very capable board. We are cheering them on, but early rumors are that most of the plans that get offered in the exchange will be either a high-deductible Kaiser product or skinny network high-deductible PPOs. And the public is not prepared for the after-subsidy sticker shock when all these things get priced.

Premium increases in anticipation of Obamacare disruption. The last wonky issue is that these exchanges are going to be constructed against a backdrop of massive premium increases in the small group and individual market in anticipation of the regulatory requirements of Obamacare. The reasons? A lot of plans out there have lower actuarial value than the Obamacare requirements; there are new taxes and surcharges that kick in; there is pricing power on the provider side because of consolidation; and most importantly, exchanges and Obamacare migrate the pricing in the individual market to tighter age-based rate bands.

Specifically, exchanges have to price by age on a curve that goes up a little bit each year of age from 1.00 for young people to 3.00 for 65-year-olds (all plans in the exchange have to use the same curve according to recently released regulations, and that’s good). But the 3:1 age rating (which was in Obamacare from the onset) does not reflect the actuarial reality that 64-year-olds are six to seven times as expensive as 30-year-olds, so younger groups and individuals will see premiums rise enormously while 64-year-olds may see a slight decrease.

For a thorough recent discussion of this, see the always savvy Bob Laszewski’s Dec. 5, 2012, blog “The (Not So) Affordable Care Act — Get Ready for Some Startling Rate Increases” at The bottom line is that exchanges and Obamacare will be blamed in the media for causing rate increases even before the program gets off the ground. That is a big political and policy problem.

The Market Issues

Playing silly buggers (part 2). The next group to play silly buggers is employers. The game has already started. Large employers will definitely increase the use of part-timers and temps to avoid increasing the workers eligible for health insurance. Darden, Wal-Mart and other employers with armies of low-wage workers have already started to do it; more will follow. Because many corporations in retail, hospitality and service businesses have mostly low-wage workers, this is an appealing strategy for big players. Equally, small businesses under 50 employees who are exempt from the mandate to offer workers coverage will, in turn, face pressure from workers who will have to purchase insurance through the exchanges.

If exchanges are unaffordable, employees may clamor for coverage on a group basis, in order to activate the tax subsidies available to small businesses. However, there has been a longstanding secular trend toward the erosion of employer-sponsored coverage in small businesses under 50 employees. In particular, Commonwealth Fund surveys of employers found that only 33 percent of workers had employer-sponsored coverage in small businesses with under 50 employees, down from 42 percent in 2003. Among low-wage workers (under $15 an hour), only 18 percent had employer-sponsored coverage. Wow. We have a big gap to close in the sector where all the new jobs are supposed to come from.

Employers aren’t running away…yet. If there is any good news in all this, it is that employers will not all run for the exits in the short run. Long run, different story (more of which below).

A Harris Interactive Strategic Health Perspectives survey taken in the fall of 2012 asked employers of all sizes their attitude about providing insurance directly to their employees over the next five years. (See figure 1 below.) The good news is that 60 percent of employers (of all sizes) anticipate continuing to provide health insurance to their workers, and 13 percent say the exchanges may provide a coverage expansion opportunity. The bad news (if you worry about exchanges) is that 21 percent say they are actively considering strategies to migrate employees to exchanges, and that proportion remains pretty constant for small employers and jumbo employers alike.


Figure 1: While a majority of employers plan to continue providing health insurance to their employees over the next several years, about 1 in 3 employers may transition employees to exchanges.


Base: All Employer Health Benefit Decision Makers (n=303)

Q1418: Which statement below best describes your company’s attitude about providing health insurance directly to your employees over the next few years?

Base: All Employer Health Benefit

SOURCE: Harris Interactive, Strategic Health Perspectives 2012 Employers Survey


The self-insurance advantage. The ACA provides a slight advantage to self-insured employers because the health insurance tax is applied to only the administrative costs component of a self-insured employers health costs, not the premium equivalent if they were fully insured. This irks Kaiser and others, and provides a 3 percent to 4 percent advantage in the market for administrative services only (ASO) plans. That’s why, anecdotally, we are seeing a cavalry charge to self-insurance among ever small employers (some who have no business being self-insured). It will take just one tiny neonate in a small self-insured pool to change their mind, but then it is too late. Nevertheless, this self-insured advantage provides a market reason for employers to keep away from exchanges.

Private exchanges: a sleeping giant? I have always been skeptical about why private exchanges are a hot new thing. First, they don’t have federal subsidies attached to them. And second, there was nothing to stop their creation up to now and it didn’t happen.

But, I am coming around to the view that private exchanges will be a force. Why? Because large employers are weary of the costs shifted to them and the resulting cost shift to their employees. They are looking at a 50-state mish-mash of different public exchanges, and their C-suites wax lyrical about doing to health benefits what they did to pensions: shift from defined benefit to defined contribution. “Here is $10,000 a year more in salary forever, and here is an exchange run by Towers Perrin Crosby Stills Nash and Young; you pick what you want and have a nice life.” CEOs get misty-eyed at this.

The Harris Interactive Strategic Health Perspectives survey shows that 23 percent of employers say they are extremely or very confident that public exchanges may provide a viable alternative for their employees in the next few years (up from only 7 percent last year). But a larger proportion of employers, 28 percent, thought that private exchanges will present a viable alternative. This one will be fun to watch.

The long run private exit strategy. All this feeds into a possible exit strategy for employers in the long run: 2017 and beyond. If public and private exchanges are viable, if the law stands that large employers can join exchanges after 2017, if the Cadillac Tax kicks in, limiting tax deductibility of health benefits (or indeed gets accelerated through budget negotiations), and if underlying health care costs and premiums keep rising, then we may have all the conditions for a long run exit of employers from providing commercial insurance direct to their employees.


Three Scenarios

There are three possible scenarios for how public and private exchanges may change the landscape.

Scenario 1: Managed competition Nirvana. Some combination of public and private exchanges enables employers to create the transfer away from defined benefit health plans to defined contribution plans where consumers, depending on income and employer preference, would be in marketplaces where they pick among value-based provider networks. Consumers would have an incentive to pick lower cost plans or pay the difference themselves. This is the managed competition Nirvana that my friend Alain Enthoven conceived of decades ago. And it might not be all bad.

Scenario 2: Minor miracle. In this scenario, public and private exchanges grow as an important force and get off the ground to expand coverage to perhaps 10 to 15 million more Americans (no mean achievement). But the mainstream of health care for most non-elderly Americans is employer-sponsored commercial insurance, with all the good and bad of that. This seems the most likely path in the short run.

Scenario 3: Single player. A third scenario, a dream to some, a nightmare to others, is that public exchanges flourish, private exchanges do not. Exchanges grow in leaps and bounds and become the default insurance vehicle for most and there is enormous clout in the hands of three purchasing actors: Medicare, Medicaid and the exchanges. If they acted in concert in a value-based purchasing frame, that would have enormous consequences, some good and some bad, depending on where you sit. This is less likely in the short run, but maybe a reality in the long run. This would put enormous downward pressure on reimbursement rates.


Closing Thoughts for Health Systems

First of all: Don’t panic. Watch this stuff closely because it is important. The more exchanges grow and move the market toward retail decision-making, the more consumers will pick high-deductible plans and skinny networks. If exchanges, particularly concentrated public exchanges, grow, they may flex their market power in putting downward pressure on commercial reimbursement rates. And finally, think about how this interacts with your ACO strategy…a topic for another day.

Ian Morrison, Ph.D., is an author, consultant and futurist based in Menlo Park, Calif. He is also a regular contributor to H&HN Daily and a member of Speakers Express.