Healthcare House of Cards

When President Obama signed his healthcare plan into law in March, California Gov. Arnold Schwarzenegger was ecstatic. “We need to roll up our sleeves and get to work fixing this broken system,” he wrote to Health and Human Services Secretary Kathleen Sebelius a month later.

The former professional weightlifter and movie star may be able to move mountains, but his memory is as hazy as the state’s ozone layer. California already had an essential element of ObamaCare, a state health exchange, and it was a key part of what he called “this broken system.” But it had already died in 2006.

Now, encouraged by the “success” of the Massachusetts health insurance exchange, a slim Congressional majority has turned the health exchange idea into law. Each state must have at least one by January 2014, and, thanks to advocates like Schwarzenegger, California will be the “stress test” to see if it works.

So move over, Massachusetts. California is bigger—and, in this case, badder. “We have huge financial issues,” warns Californian Charles Rosson, chairman of the Council of Employee Benefits Executives.

Massachusetts has 6.5 million people, almost all of them enrolled in its healthcare plans. In contrast, California has more than eight million uninsured. The once Golden State is reeling from a $19 billion deficit, which is why Schwarzenegger hopes the federal government will pick up much of the tab for healthcare. Nor does California have much hope for additional revenue. For the first time since World War II, personal income in the state plunged over the past year—and by $40 billion. Will a new health exchange help or hurt?

The Centerpiece

The health exchange is only one part of the nine-year $950 billion Patient Protection and Affordable Care Act. But the Financial Times called it “the centerpiece.”

That’s because ObamaCare is laden with the political candy that gets legislation passed. Coverage now extends until children turn 26 years old. In coming years, insurance companies cannot deny coverage due to pre-existing conditions, and lifetime limits on the dollar value of coverage will no longer apply. All of these measures add costs for taxpayers, employers and insurers.

The health exchange, in contrast, could theoretically reduce costs. It’s a government-run clearinghouse where health insurers competitively offer their products on an electronic platform. The website serves both individuals with inadequate insurance and small businesses that lack the power to negotiate with big insurers. These clients review the supposedly simple offerings, conveniently labeled bronze, silver, gold or platinum. Then they push a button to buy—in 30 minutes or less, according to advocates. But the bill also contains a provision to pay for exchange “navigators” to help clients find their way through the system, indicating that it may not be so simple (more on navigators later).

A free market with more buyers and sellers—provided there’s consumer protection—should be cost-efficient and transparent and should drive down the cost of coverage similar to the way international stock and bond markets operate, particularly if the exchange includes multiple states.

Conspiracy Theories

That makes the health exchange the most important—or the most insidious—part of ObamaCare. Nothing touched by politics is ever simple. Even Jon Kingsdale, the former executive director of the Massachusetts health exchange, admits there’s a lot of wiggle room in the new law. For example, should an exchange select health plans through negotiations or competitive bidding? Should it showcase all licensed carriers or just a favored few? Kingsdale believes any health exchange should be insulated from political influence. 

But can governors and insurance commissioners—who are often would-be governors—keep their hands off?

That’s only one of the unanswered questions. While HHS Secretary Sebelius has touted other parts of the new law, she’s been silent about the exchanges. Despite repeated calls, emails and a request for an interview, her staff said they were unable to comply.

This silence has led to conspiracy theories. Some brokers, who didn’t want to be quoted, believe the ultimate purpose of pitting a public exchange against private carriers is to run insurers out of business and get the “single-payer,” government-run system that liberals always wanted.

There could be other reasons for Sebelius to keep her own counsel. States have three years to plan and build their health exchanges, and the 50 different laboratories may come up with a host of different results.

Some states may opt to do nothing. ObamaCare was never popular with at least half the U.S. population, according to recent polls, and less than an hour after it was signed into law, 13 states went to court to block it. Five other states later joined the suit, and one state filed a separate action. If these states don’t act, the law requires the federal government to step in and install an exchange. Many call this a violation of state sovereignty. Others see it as costly and possibly doomed.

Death Spiral

In the case of California, they were right. The Health Insurance Plan of California, known as the HIPC, began in 1993 and creaked along for 13 years. At its peak, the HIPC had only 150,000 members—“never enough to drive administrative costs down,” recalls Shawn Pynes, a principal at the benefits firm Barney & Barney in San Diego. “Healthy employers could find coverage on their own, so the HIPC became a dumping ground for bad risk.”

This adverse selection is one of the biggest problems any exchange faces. Insurers try to select good risks—young computer jocks, non-smoking executives of growing companies. But the bad apples—landscapers with faulty pickup trucks and sinister characters who take frequent “slips and falls”—weren’t being kicked to the curb as they would be in a free-market system. Instead, they were kicked into the health exchange.

That was particularly true for California because the HIPC competed for the same customers as giants like Anthem Blue Cross, Aetna and Kaiser. Due to its small size, the HIPC was a 90-pound weakling with no bargaining power to stop these musclemen from kicking sand in its face.

“A lesson learned from the failure of earlier exchanges is that the…rules must be the same, inside and outside the exchange,” according to a report by the Robert Wood Johnson Foundation. Otherwise adverse selection leads to what Physicians for a National Health Program has called the “death spiral,” in which clients and insurers drop out of the exchange until no one healthy is left.

The Big Tent

In 2006, just as the HIPC faded, Massachusetts started its health exchange, called “The Connector.” But it had a different goal: bringing everyone under the big tent of universal healthcare.

And it has worked. Less than 3% of its residents are now uninsured, the state says, and more than half of those previously uninsured have gotten coverage through the health exchange.

But this victory comes at a huge cost to both insurers and the state’s policyholders. Massachusetts’s Blue Cross last year reported a $149 million loss. A family of four now faces annual healthcare costs of nearly $13,788, “the highest in the country,” according to Grace-Marie Turner, president of the Galen Institute in Virginia, a public policy research organization focusing on healthcare reform.

What went wrong? “Overreaching social planning by the…exchange,” Tim Murphy, the state’s former health and human services secretary who helped create the law, wrote recently in Politico.

Brokers say the Bay State has turned its big tent into a game of chance in which the wheel is rigged. For example, they say, a runner will jump into the system after tearing a meniscus, have an operation, then dump the insurance as soon as he’s cleared by a surgeon. And while some merely abuse the system, others commit outright fraud, crossing state lines to enroll.

Incentive to Cheat

The same thing is likely to happen in California and anywhere else where normally honest people are given an incentive to cheat. Michael Craford, owner of Craford Benefit Consultants in San Rafael, Calif., says that one of his son’s uninsured friends had a serious bike accident. A week later he got coverage through San Francisco’s liberal healthcare ordinance.

Benefits consultants say “after-the-fact coverage” defeats the basic principle of insurance. “We believe everybody should have affordable healthcare,” says Pynes. “But if the purpose is to get people covered, just give lower-income people a tax credit. Don’t bother with the exchange.”

But that isn’t the way the system is designed. In fact, the new law does a bit of cheating itself. Instead of being an open marketplace, the health exchange is part of an elaborate system of cost shifting.

The key is universal healthcare. Obama wants it. Through Massachusetts’s liberal health exchange, which has enrolled nearly half of the uninsured, the state has come close to achieving it. And, if the past is prologue, states like California, which has more than 12% of the U.S. population, won’t just use the health exchange as a marketplace. “After the law is fully implemented in 2014, estimates are that 94% of Californians will be insured,” boasts the state’s website.

But who’s going to take on the burden of the uninsured and underinsured? The health exchange? Then who’s going to pay for the health exchange?

The Pushme-Pullyou

The new law is reminiscent of Doctor Doolittle’s “pushme-pullyou,” a creature with heads at both ends trying to go in different directions at the same time. The “pushme” funnels bad risks into the health exchange to make it unattractive, while the “pullyou” goes in the opposite direction and creates rules to make the exchange appealing.

The Obama administration boasts that the new law will open up a whole new world for insurers: the 46.3 million people who don’t currently have health insurance, according to the U.S. Centers for Disease Control and Prevention.

Insurers see this as false advertising, and they’re scared of the coming influx of bad risk in 2014. They also worry that, after the initial federal subsidy, the cost of running the exchanges will shift to them. Like Joseph in Egypt, they are fattening up for the years of famine to come.

“Insurers are trying to get everything they can right now,” says Craford. “One client just got a 58% rate increase.”

That could play right into the hands of those who favor the new law because, by 2014, the exchanges may be the only game that small business can afford to play. “The healthcare legislation did nothing to cut costs and, in fact, added a lot of costs that will be piled onto small employers,” says Howard Hagen, a New York City-based insurance brokerage consultant. “They won’t have any choice except the exchange.”

However, small employers who pay at least half of their workers’ health insurance will get a 35% tax credit this year, rolling into a 50% tax credit in 2014. And some of them, like David DuPell, owner of Big 1 Appliances in Grass Valley, Calif., are looking forward to the health exchange. “We hope more choices in the open marketplace will offer an opportunity to purchase a better value health insurance plan,” he says.

Even with incentives, the California HealthCare Foundation suggests the only way to make exchanges work is for government to take total control and be the only source of insurance for businesses with 100 workers or fewer.

“Any exchange…will have a difficult time achieving its objectives if it is not the exclusive source of coverage for small employers,” according to the Foundation.

The new law also leaves open the possibility of enlarging the employer pool in 2016 to include companies with more than 100 people. Utah already has a “pilot program” for large employers.

Navigating into the Rocks

That would give the health exchanges more critical mass, but it could also invade the broker workspace, which right now isn’t much affected by health exchanges like Massachusetts’s. Brokers say they’re not discouraged. They’ll keep their fingers in the health exchange pie and sell its offerings. The problem is that the pie may be smaller.

“Brokers will play an active role in selling the exchange option to businesses of all sizes,” says Steve Williams, president of benefits consultant Heffernan Financial Services in San Francisco. “But we are expecting the commissions to be substantially less than they are now.”

How much less? A broker panel sponsored by AISHealth.com suggests that small-group commission rates could decline to the point where large groups are now. But the panel also envisioned “a growing role” for brokers and agents as “navigators,” who would be paid to help small and medium-sized businesses negotiate the deep waters of the health exchange system.

However, the navigator portion of the law is so loosely constructed that almost anyone—even an activist community group like ACORN—could qualify, according to Robert Goldberg of the Center for Medicine in the Public Interest. The border is blurred between where “community outreach” stops and acting as a broker who understands all the intricacies of health insurance begins.

At the National Association of Insurance Commissioners meeting in August, 23 states supported a resolution warning that the navigator program “could provide an avenue for untrained individuals to evade…licensing requirements and expose consumers to harm.”

No Savings 

Let’s put one big myth to rest right here: Health exchanges won’t save anybody money. A report by the Robert Wood Johnson Foundation took a look at Rhode Island’s health exchange options and found they were worlds apart from those in place in Massachusetts. For one thing, “it seems unlikely” the federal funds the Bay State got for tinkering and expanding the system will be available to other states.

“Without a subsidy, states need to think carefully about whether the infrastructure they build can be financially viable,” the report warns.

The report is even more ominous on the subject of costs: “To date, exchanges have done little to constrain the growth of healthcare costs.”

That’s no surprise to brokers. “It may help with competition and choice but not cost,” says Peter Cella, the CEO of benefits consulting firm Beere & Purves in Walnut Creek, Calif., which specializes in small-group employers—exactly the market that the exchange will serve.

Done Right?

Despite all the negatives, no one is saying that a state health exchange can’t perform its basic function of providing good quotes for policies. And, if done right, it may even offer some opportunities for brokers, just as selling a car offers the dealer the chance to add customer-friendly accessories.

“If the exchanges come out with a skeleton plan,” Williams says, “then we’ll sell products that will fill in the gaps, employee options such as long-term disability, cancer coverage and additional life insurance.”

Given the chaos in the current system, the lack of competition in many states, the high, seemingly unexplained rates charged by some insurers, and more than three years to work it out, health exchanges may be a good idea, if done right.

But that’s a big if.