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Health Reform and Insurance Companies: California Considers Wrong Way to Regulate Insurance Exchange

(This is Part 2 of our series on how insurance companies might influence the outcome of healthcare reform. Part 1 concerned the health plans' attitude toward clinically integrated networks of independent physicians.)
California lawmakers are considering bills that would require the state's future health insurance exchange to negotiate rates with insurance companies on behalf of individuals and small companies. While that sounds like a no-brainer, it could have unanticipated consequences, as the history of California's insurance purchasing cooperative proves. What California and other states should do -- if the federal Affordable Care Act permits -- is to require individuals and small firms to purchase insurance through the exchanges.

The California measures, as currently written, would establish the state insurance exchange and require it to bargain with insurers on rates. But the insurance industry is pushing back, claiming that, as a result of this provision, some smaller plans would be excluded from the exchanges and that some companies might withdraw from the California market. The latter claim is doubtful, considering the size of the market. More significant is the plans' opposition to a provision that would require the insurers to offer the same kinds of policies inside and outside of the exchange. That signals their true intentions.

California went through all of this in the 1990s, when it formed the Health Insurance Plan of California (HIPC), a purchasing cooperative for small employers and individuals. Originally state-run and later turned over to the Pacific Business Group on Health, an employer coalition, HIPC negotiated rates with participating plans. But it never had more than 150,000 covered lives -- a drop in the bucket in California. So it had little bargaining power and was unable to bring down rates very much. Over time, the insurers lured away healthy people and employers with healthy workers by offering them lower rates outside the HIPC. Eventually, the cooperative went belly-up.

When the federal requirement to buy insurance goes into effect in 2014, and when the government offers millions of Californians subsidies to buy coverage, we can expect far more than 150,000 people to join the state exchange. But the problem is that only people who receive subsidies are required to buy insurance through the exchange. That's still a lot of people; but if the exchange tries to negotiate rates with the insurance companies, I guarantee that they will offer cheaper plans outside the exchange in an effort to lure away as many participants as possible.

As former HIPC executives Peter Lee and John Grgurina have pointed out, this will lead to "adverse selection," in which healthy people leave the exchange to get lower rates. As a result, insurance premiums in the exchange will rise to cover the sicker population, more people will exit the exchange, and the plans in the state-run market will lose money.

The Affordable Care Act specifies what benefits plans in the exchanges have to include and how much of the cost of care they must cover. If the insurers are allowed to provide different plans outside the exchanges, however, they will market low-benefit, low-cost plans to capture the healthiest individuals and firms. These might be cheaper than any plan in the exchange, even with the federal subsidy for individuals. Small employers will get a tax credit of 50 percent for buying insurance through exchanges in 2014 and 2015, and that might deter them from buying coverage outside an exchange. But the credit expires at the end of 2015.

In a nutshell, insurance companies will continue to play games with insurance buying coops as long as people are not required to purchase insurance through the exchanges. That's the area the states need to address, not price negotiations.

Image supplied courtesy of Flickr.

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