The Default Future for Health Care

Covered California may provide a vision of the future, no matter who is running the country.

By Ian Morrison

Once again Chief Justice Roberts is the adult in the room as the Supreme Court strongly reaffirms the legitimacy of subsidies for coverage under the Affordable Care Act (ACA).   “Congress passed The Affordable Care Act to improve health insurance markets, not destroy them.” Amen.

President Obama declared: “The Affordable Care Act is here to stay.” And certainly through his presidency that is now true. But there is an election in 2016 and Republicans running for president now have to decide whether health care is finally settled, or whether “repeal and replace” is potentially a winning political formula.

Republican candidates may choose to pivot to immigration, jobs, ISIS, or shrinking government as the principal issues they want to campaign on. Or they may choose to stay the course and campaign on “repeal and replace” in the presidential primaries and the election itself. We will see.

In the wake of the Supreme Court decision, The New York Times was quick to suggest that there was no future for the struggling state-based exchanges; and to be sure, if you are in Oregon or Hawaii, now looks like a better alternative than trying to maintain a state-based exchange infrastructure.

But I think it would be wrong to assume that health insurance markets will be completely federalized for three reasons. First, the ACA provides flexibility to states to go above and beyond the ACA in its regulation of insurance – including, for example, creating active purchasing provisions, putting limits on cost sharing, and regulating network adequacy. Second, Medicaid is still a state delivered program, and there is significant interaction between exchange populations and the Medicaid eligible population. And third, many, many states are using 1332 waivers to get creative with Medicaid expansion and in reforming state-based insurance and health care delivery markets.

There may be a Default Future emerging, no matter who is running the country – one that has regulated health insurance marketplaces at the state level, subsidies for low-income consumers for both Medicaid and exchanges, and where consumers choose among competing plans and delivery systems on the basis of cost and quality. This future may apply to seniors through Medicare Advantage and perhaps even many employees with employer-sponsored health insurance as employers migrate to defined contribution models of health benefits over the next decade.

Points of Difference

Obviously it matters who is running the country. At the core, the question is, Will rich people continue to write a check to help cover poor people, and how big will that check be?

Republicans are less likely to tolerate Medicaid’s reaching 100 million enrollees over the next decade, to support generous subsidies for middle-income families, or to accept tight regulation of insurance product offerings. But they are also likely to recognize that the bottom half of the income distribution will not purchase health insurance without premium support (individual mandate or not) delivered in the form of tax credits, vouchers or some other conservatively correct term for subsidy.

They will find it hard, if not impossible, to abandon guarantee issuance. This will require regulation of insurance markets, particularly if the individual mandate is somehow repealed or weakened. And many Republicans, most economists and a lot of Democrats favor the gradual elimination or curtailment of the tax deductibility of employer-sponsored health insurance whether through the Cadillac Tax or some other means.

To date, Republican politicians at all levels have been unified in their loud trashing of Obamacare and commitments to repeal and replace. And up until now it has been a winning political strategy. Obamacare is an empty vessel into which all the perceived ills of American health care can be poured.

With a little help from shadowy unknown donors who outspent Obamacare supporters 10 to 1 on negative adds in key states in the last Congressional elections, Obamacare hating helped secure control of the U.S. Senate for the GOP.

But now it is different. As Colin Powell said about invading Middle Eastern countries: “You break it, you own it.”

You cannot run for president or control Congress for that matter and just be against Obamacare. You actually have to be for something (as well as remember all three of the federal departments you are planning on closing). It is a much higher bar to clear.

Sane conservative thought leaders realize that there are affordability gaps, that there must be subsidies, and that insurance markets need regulation to prevent meltdown through the classic sources of market failure: cream skimming, adverse selection and moral hazard. The Supreme Court ruling strongly reaffirms this understanding.

The most thoughtful conservatives wax lyrical about possible models such as Singapore and Switzerland as bastions of free enterprise and freedom from government meddling in health care. Many of us see these systems as highly regulated marketplaces, where consumers pick among tightly prescribed offerings supported by income-based subsidies in an exchange marketplace. Not exactly Adam Smith gone wild.

Three Futures

It seems to me there are three possible futures:

Subsidized unregulated marketplaces. This is close to the Republican Congressional vision of more limited subsidies, more limited regulation and many bewildering choices of cheap insurance products that don’t cover much available across state lines.

Managed marketplaces. States are organized into regulated marketplaces with robust Medicaid and activist insurance exchanges that create competition among insurers offering standardized benefit designs.

Dumb regulated markets. All premiums and provider reimbursement rates are highly regulated regardless of provider efficiency, plan performance or consumer responsiveness.

For me, managed marketplaces at the state level make the most sense, provided they get subsidy support through federal taxes. But I recognize that most states have struggled with establishing functioning exchanges. There have been technological, political and managerial meltdowns in several states such as Oregon, Hawaii and even Massachusetts (ironically). Many states lack the scale and sophistication to operate their own exchanges, and the infrastructure for those exchanges may have to be purchased from a national source ( to the rescue) as in Oregon and Hawaii.

Lessons from Covered California

Covered California remains the salient example of a state-based exchange that seems to be working at scale much the way it was intended. As we identified in previous columns, a lot was riding on Covered California as a test case of Obamacare and as a harbinger of the default future. (See “Eyes on California” and “The Future of Exchanges.”)

Covered California has received many criticisms, and there are certified haters out there. One particularly poisonous but brief critique came from the prestigious Columbia Journalism Review, a piece that for my tastes was a little light on journalism and lacked a comprehensive review of the facts.

In a series of interviews I asked Covered California’s executive director, Peter Lee, to respond to the idea of a default future, to review how it is all going and to answer the criticism from the haters. (Bias alert: I have known Peter Lee for 20 years as a friend and as a client while he was the CEO at the Pacific Business Group on Health. I am a huge fan and supporter of his work, passion and dedication. He is irrepressible and with his energy and intellect is the perfect person to champion the future.)

The final recent interview took place while he was driving at 6 in the morning to the airport and while drinking a double-shot Americano. Below is what I learned about the default future from the leader of the most important exchange in the country amped up on Starbucks.

Off to a Factual Start

As of March 2015, Covered California has 1.3 million Californians who have effectuated enrollment (that is Health and Human Services speak for paid their premium and have active health insurance). [See summary figure below from Covered California.] Over 1.8 million Californians have been served by Covered California since its inception. It’s not as many as McDonald’s, but it is a good start and a major contributor to cutting California’s uninsured rate in half since 2013. It should be noted that Covered California has helped reduce the uninsured by not only signing up folk to the exchange, it has also been the vehicle for nearly 3 million Californians accessing Medi-Cal coverage since 2013 (approximately 2 million who are newly eligible). In addition, Covered California is the place to get coverage for the many Californians who move in and out of eligibility as their income and life status changes. “We provide the glue to the employer-based health system when life happens to enrollees,” Lee told me.

Covered California and the MC Hammer Effect

Covered California is here to stay. Federal funds have been appropriated for its establishment. Covered California has a strong balance sheet (unlike most other state-based exchanges that lived hand to mouth by begging for support from their legislatures for operating funds). It has revenue to sustain its operations and can increase revenue by increasing per member per month assessments on plans. As Lee put it: “We totally control our own destiny” even for the one fiscal year, 2016–2017, when Covered California estimates it would draw down on its substantial reserves for maintenance of ongoing operations. Apart from the fact that Covered California is in the black, the subsidies are in current law, so it would seem as MC Hammer famously said: “U Can’t Touch This.”

However, Lee acknowledges that future Congresses and presidents could ratchet down subsidies for both exchange customers and Medicaid eligibles, thereby altering the relative attractiveness of insurance to lower- and middle-income Californians. As in most states the vast majority of Californians (88 percent) who purchased insurance through Covered California received a subsidy.

MC Hammer also provides the context for the longer-term future of Covered California: It has become “Too Legit to Quit.” Covered California estimates it will collect $6.5 billion in premiums in 2015, making it the second largest purchaser in the state (apart from Medicare and Medi-Cal), just behind CalPERS. While the effect on the delivery system is mediated through the four major plans that account for 95 percent of Covered California (Kaiser, Blue Shield, Anthem and Health Net), the exchange is now a major force for shaping insurance design in the state. Covered California has influenced narrow networks and innovation in benefit designs of standardized plans — the recent announcement of cost-sharing limits for specialty pharmaceuticals being one example.

The Value of an Active Purchaser

The ability of Covered California to shape the marketplace of standardized benefit designs is one of the many advantages of an active purchaser exchange. California is one of only a handful of active purchaser states and certainly the largest and most successful.

Active purchasing helps shape the market in a number of important ways:

Consumer-friendly choice, not endless choices. All too often we assume more choice is better for consumers. Wrong. A growing body of research in psychology and behavioral economics is showing that you can have too much of a good thing in the form of choice, especially of health insurance plans. A good example is the analysis that Covered California provided of the choices available in three cities: Los Angeles, Denver and Miami. At the Silver level alone there were seven plan choices in Los Angeles, and 35 in both Denver and Miami. I went on the Colorado exchange website and found more than 70 total plan choices for the ZIP code I picked in Denver. I have a PhD and am supposed to know a little about this stuff. I have no idea how you could possibly decide among the seemingly endless variants of deductible and co-payment combinations. Lee wryly dubbed this as leaving consumers to the mercy of “the invisible hand of Cigna,” meaning consumers don’t benefit from endless, confusing choices that are almost impossible to compare.

Steering consumers to enhanced Silver. A major critique of exchanges is that they are providing relatively high-deductible plans to relatively low-income people. Growing out-of-pocket costs for middle-income people is becoming a bigger and bigger political issue. But the ACA does provide help, and for most lower-income folk an enhanced Silver plan would seem the most sensible trade-off because of the cost-sharing limits for lower-income enrollees available in enhanced Silver plans. Covered California has succeeded in getting 58 percent of all its enrollees in such plans through a combination of outreach and providing a limited number of standardized, clear and transparent benefit designs. This is in contrast to exchanges in states like Washington and Colorado which provided a dizzying array of choices to a population where marijuana is legalized. It is probably no accident that those two states had the highest proportion of bronze purchasers as stoners defaulted to whatever was the cheapest rather than the best choice: “Dude, the Rocky Mountain high $10,000 deductible PPO Bronze looks super affordable.”

Making plans compete on network and price. By standardizing benefit design among a limited number of plans, Covered California makes plans compete on network and price, not benefit nuances. While there have been legitimate complaints about network transparency of exchange product, as we will address below, the creation of a regulated active purchaser marketplace has forced plans to develop narrower networks in order to have a competitively priced exchange offering, thereby helping consumers.

Managing new entrants. From its inception, Covered California was positioned as an active purchaser that would not simply accept any insurer on the exchange. Covered California evaluated all applicants and discreetly and confidentially excluded some applicants whom it judged could not meet the requirements. Covered California also determined that any plans that were active in California at the time of launch would have the choice to apply to be on the exchange or wait for three years to enter the market. The rationale was to protect those bold pioneers from fast followers getting a free ride on their hard and risky initial work. That explains why United could not enter California for the second year of enrollment because it chose not to apply in the first year. (United did enter exchanges in more than 20 other states across the country in year two and, given the Supreme Court’s ruling, will be able to function as expected.) The exception to the three-year wait rule is that completely new plans to the market will have the opportunity (but not the certainty of acceptance) to apply to offer in the exchange. So perhaps we will see new entrants like the start-up insurer Oscar in California next year. Also, Covered California’s board has a modified policy to allow a wider range of entrants to offer policies in regions of the state where there are an inadequate number of competitors.

On Target

Many news stories and a few health care consultants who should know better characterized Covered California’s recent enrollment as disappointing and missing targets. Lee explained to me the underlying assumptions about enrollment growth and reviewed progress from his perspective.

A number of points made by Lee and other sources are worth repeating here:

Churn is inevitable and was expected. Lee had been clear to the public and press at the end of year one’s enrollment that there would be churn in the exchange marketplace as individuals got jobs, got married, qualified for Medi-Cal or moved on throughout the year. Indeed, Covered California estimated that about a third of the exchange population would churn in the first year by about half a million in a year, a number that proved to be accurate. As Lee told me: “We needed to grow by 400,000 or more just to stay in place.”

Medi-Cal was swamped. Medi-Cal in California is massive and growing; apparently, according to industry sources, it did not

do redeterminations of Medi-Cal eligibility which affected perhaps 200,000 enrollees who would have moved from Medi-Cal to Covered California. Nevertheless, even with these head winds Covered California hit within the mid-point range of its expected enrollment growth.

Comparisons with Florida and Texas are confusing because of Medicaid expansion status. I have been bemused on my travels across the country by all those who dislike Obamacare and exchanges who are shocked to hear that almost a million people in Texas and 1.4 million in Florida have signed up and paid their premium on the federal exchange in 2015. Part of the reason the exchanges have signed up so many (more even than Covered California in the case of Florida) is that these states refused to expand Medicaid. Perhaps 40 percent to 50 percent of the exchange population would have been eligible for Medicaid if their state had expanded coverage up to 138 percent of the federal poverty level (FPL) as originally planned in the ACA.

Fluffing up income to qualify? Florida and Texas each have over a million people in the so-called coverage gap: too rich for Medicaid, too poor for an Obamacare subsidy (available at 100 percent of FPL). Remember that in most of the South, as a childless adult it is easier to get into Princeton than it is to get a Medicaid card. If you make more than 29 percent of the FPL in Mississippi you are too rich for Medicaid. So when exchanges became available and low-income Floridians and Texans actually realized they were eligible for exchange subsidies, many signed up. Indeed, industry insiders point to Florida where the number of people between 100 percent and 138 percent of FPL who signed up exceeded the total estimated number of eligibles in the state in that income category, suggesting that folks in the coverage gap may be fluffing up their income to qualify for subsidized coverage. I don’t blame them.

Three Key Successes

In all the political score-keeping on Obamacare enrollment and the measurement of coverage, we often miss the essential purpose of Covered California and the ACA: to get health care (not just health insurance) to those who have been left out. Covered California can boast:

Care, not just coverage. Despite the doom and gloom predictions, a Kaiser Family Foundation study from May 2015 shows the following trends: “91 percent of Covered California enrollees reported it was ‘very’ or ‘somewhat easy’ to travel to their usual source of care, which matches the findings for what the study calls the ‘Other Private’ market. 59 percent of Covered California enrollees had a checkup or preventive care visit by the fall of 2014, which is nearly twice the rate for preventive care visits among the uninsured. This is not significantly statistically different from the data for the ‘Other Private’ category, and, if extrapolated out over time, this means more than 800,000 preventive care visits have been provided through Covered California plans since January 2014.”

Reaching diverse populations. Covered California was criticized after the first year of enrollment for not reaching Latinos and other ethnic groups in proportion to the number of eligibles in those groups. When I asked Lee if they got closer in year two he said: “Forget close; we hit it out of the park.” For example, a Kaiser Family Foundation study found that “Covered California enrollees are more racially diverse than the group of Californians with private coverage. 60 percent identify as a race/ethnicity other than white. Latinos make up 37 percent of the total.” University of California simulation studies estimate that 38 percent of eligibles are Latino, so Covered California hit the target almost exactly.

Keeping premiums low. As rate submissions for 2016 are starting to become public, it is encouraging that while some plans in some markets across the country are asking for significant rate increases (asking not yet getting, it should be noted) the typical Silver plan is asking for only 4.5 percent increase and the second lowest Silver (the benchmark for subsidies) only 1 percent. So, too, in California: average rate increase is 4.2%, and real affordability has been achieved for many with 77 percent of enrollees paying less than $150 per month after subsidy and 120,000 Californians paying less than $10 per month in premium.

Work to Do

Covered California, like all exchanges, has been criticized for network adequacy and provider transparency. On narrow networks, Lee is unapologetic: “Narrow networks are a good thing, not a bad thing, if they deliver consumers a high-quality, affordable choice of providers.” And even in special cases such as children’s hospitals, Lee is proud that “Every children’s hospital in the state is in one or more of our plans.”

Critics of narrow networks on exchanges point to a lack of transparency about which providers are actually in the network. On this point Lee acknowledges that there is work still to do. Accuracy of provider directories of networks was a problem for both consumers and providers before Covered California was launched, and it will get better in 2016 and beyond, Lee said. Indeed, Covered California and the plans did a joint mailing to all doctors in the state to explain their network status.

A Vision of the Future

As we enter a new political season, health care is likely to be on the table. Don’t be surprised when all the dust settles three years from now if state-based exchanges play a prominent role (enabled by federal infrastructure and premium support for low income people). The successful state-based exchanges will be active purchasers in a managed marketplace. Covered California provides a vision of that future. We should be grateful for their efforts.