Healthcare Reform: Exchanges Will Force Health Insurance Companies Outside Their Comfort Zone

One of the biggest mysteries of the post healthcare-reform landscape is what the new health-insurance exchanges will actually look like. Even if plenty of insurance carriers participate in these groups, regulatory restrictions could render the plan choices for individuals and small groups about as exciting as an ice cream shop that only serves vanilla, chocolate, and maybe strawberry.

The exchanges, which will be managed by the states, will offer alternatives to employer-sponsored health plans. The Affordable Care Act requires insurers who participate in the exchanges to sell four basic packages, all of which must include "essential" benefits that the government will define to the insurance industry by 2014.

So how can insurers stand out in the exchanges? A new report from consulting firm PricewaterhouseCoopers suggests a radical shift: They'll have to compete on everything other than benefit design. That means improving their customer service, creating highly interactive and easy-to-use Web sites, and streamlining their processes so they pay claims in a timely manner. And they'll have to accomplish all this while at the same time cutting costs; the new law places limits on the percentage of premium that insurers are allowed to funnel into administrative expenses and profits.

This will be a tall order for the health care industry, even as the flood of new patients guarantees a vastly expanded revenue stream. And the challenge will be compounded by the fact that they can't discriminate based on pre-existing conditions. "Historically in the individual and small-group market, the success factor was underwriting -- attracting the right type of risk and managing it," says Mike Thompson, a principal for PwC's global human resource solutions group. "That will go away."

Insurers' ability to be creative will hinge largely on the regulations that states put in place for the exchanges. If those regulations allow for a certain amount of risk adjusting, carriers may be able to throw some pistachio into the mix. For example, Thompson says, they might sell plans specifically for people with diabetes, which would include extra services and incentives to help members keep their blood-sugar under control. "If you don't allow risk adjusting in a pool, insurance companies will avoid doing anything that attracts people who are sicker," Thompson says. But plans that aim to help people manage chronic diseases may become more popular, he says, "if companies can adjust for those risks."

The notion of tailoring plans to the needs of individual patients is already being tested in some workplaces. Last year, United HealthCare introduced The Diabetes Health Plan, which waves co-pays and other out-of-pocket expenses for patients who adhere to certain treatment guidelines. General Electric and 15 other employers implemented the plan this year.

The question is, will such innovation be possible in the new hyper-regulated era of health reform? Will patients who must go to insurance exchanges to get their health care be offered something richer than the four-sizes-fit-all plans that the federal law mandates? State legislators and the insurance industry will have to work together to ensure they are creating a rich menu of health care choices.