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Exchanges may play key role in an overhauled health system

When Michael Kovner decided to buy health insurance earlier this year, he logged onto his computer, entered his age and ZIP code on a special website and studied the nearly 20 different policies that popped up.

Within a half-hour, Kovner, a 53-year-old technology consultant, picked a midpriced one and clicked “enroll.” Back came an immediate e-mail confirmation: “Congrats, you’re in.”

Instead of using an insurance broker — or calling insurers one by one — Kovner signed up for coverage through Massachusetts’ “health insurance exchange.” The marketplace is available to residents as part of that state’s 2006 health reform law.

The seemingly simple idea behind exchanges — one-stop shopping for insurance — masks the cornerstone role they may play in a national overhaul of the health system. President Obama supports the idea, and exchanges are included in most of the health care proposals now before Congress.

Done right, proponents say, exchanges could transform how insurance is sold, giving individuals and small businesses improved purchasing power, increasing price competition among insurers and creating standardized benefits.

Done poorly, analysts and critics say, exchanges could drive up insurance costs and encourage employers to drop coverage, unraveling the system that insures most working Americans.

While it’s still unclear what Congress will do, Senate Democrats have looked closely at Massachusetts. Here’s how it works there: The state established its exchange, called the Health Connector, mainly for the benefit of individuals who aren’t insured by employers. They include the self-employed and the unemployed, two categories of people who traditionally have the most difficulty obtaining policies. Although not required to buy through the exchange, doing so gives them group-purchasing power. Lower-income people are eligible for state subsidies.

To keep employers from dropping coverage, Massachusetts charges those who don’t offer insurance an annual fee of $295 per worker. There’s no evidence, officials say, that employers are dropping insurance.

Other critical elements of the Massachusetts system: Most people must have insurance or face a fine and insurers cannot deny coverage based on a person’s health. The Connector initially gave consumers a choice of 27 policies from six private insurers, but public confusion recently led the board to slim the menu to nine types. Jon Kingsdale, executive director of the Massachusetts Health Connector Authority, says the exchange wasn’t meant to be perfect from the start. The authority is working to “continually improve it.”

About 200,000 people have obtained policies through the Connector. Based on a study by the Urban Institute, the state says 97 percent of residents have insurance, the highest percentage in the nation.

Proponents say the Connector has encouraged price competition among insurers by making it easier for consumers to comparison shop. Premiums for subsidized plans have risen an average of 4.7 percent a year — 5.1 percent for non-subsidized policies. Actuaries say those increases are generally smaller than those experienced by most Americans who buy their own policies.

Is bigger better?
But Congress may balk at certain features of the Massachusetts model. Some lawmakers oppose compelling people to buy policies or penalizing employers who don’t offer coverage, for example. And lawmakers expect fierce debate over government subsidies: who should qualify, their size and how to fund them.

It’s not just politics complicating the picture. Insurance exchanges are more complicated to design than, say, sites like Travelocity and Orbitz, where consumers shop for plane tickets and hotels. Critical decisions must be made, for example, about who participates and how insurance prices are negotiated.

Generally, economists say, larger groups have more bargaining power. “The goal of an exchange is to give every American access to the advantages of group purchasing,” says Len Nichols, director of the health policy program at the New America Foundation, a think tank in Washington. “It’s way cheaper to sell 10,000 policies all at once than one at a time, so it lowers cost, is more efficient and allows you to lower the premium.”

If bigger is better, then a national exchange would in theory have more clout than a series of state or regional exchanges. An exchange also would have more marketplace leverage if it negotiated prices on behalf of consumers, according to a report last April by Linda Blumberg, a senior fellow at the Urban Institute’s Health Policy Center and Karen Pollitz, a professor at Georgetown University.

The proposals before Congress currently do not prevent exchanges from negotiating premiums; they also allow exchanges to select insurers for participation. Lawmakers haven’t settled on the size of exchanges: a Senate proposal specifies state-based exchanges, while the House plan calls for a national model, with an option for state-based programs.

Small businesses, which have little leverage in negotiating insurance prices, see hope in exchanges. Amanda Austin, policy director for the National Federation of Independent Business, says administrative costs — marketing, commissions and other expenses — can add 25 percent to 30 percent to the cost of insurance for a small business. “You could drive that down some with exchanges,” says Austin, whose group is the largest representing small businesses.

But an official at the Blue Cross Blue Shield Association, representing Blues plans around the country, says reductions in administrative costs and other efficiencies claimed by proponents are overly optimistic. It will still cost insurers more to enroll 10,000 individuals through an exchange than to simply sign up a single employer with 10,000 workers, says Kris Haltmeyer, executive director of policy. Yet he says exchanges could make the market more price sensitive “and could cause health plans to be more competitive.”

In Massachusetts, Connector officials say that rates for individuals fell by as much as 50 percent in the non-subsidized plans immediately after the exchange opened. Dr. Marylou Buyse, president and CEO of the Massachusetts Association of Health Plans, says premiums have dropped significantly for individuals because for pricing purposes they’re now pooled with hundreds of thousands of people who get work-based coverage.

But Buyse says the state’s reform law focused on reducing the number of uninsured, and “right now, we’re grappling with ways to manage (medical) costs,” which help drive insurance prices. As a result, not everyone can afford insurance: in 2007, the state exempted about 76,000 mainly middle income people from having to carry insurance. They didn’t make enough money to buy a standard policy, yet made too much to qualify for a subsidized plan.

Insuring workers
Kathy Tarantola, 50, a self-employed commercial photographer in Waltham, Mass., is among those who say they have benefited from the exchange. When an individual policy she bought in 2001 for $199 a month kept rising in price until it reached $793 a month, she used the Connector to shop around. “People can’t pay this much: $800 a month is crazy,” she says.

Armed with information on policies sold through the exchange, she switched companies, accepted a $2,000 annual deductible and saw her monthly premium drop to $437. Although she wound up buying through an insurance broker she had used before, Tarantola praises the Web site. She says it provides enough information to make decisions and can be simpler than talking to insurance sales agents.

As helpful as exchanges may be to individuals buying insurance, many experts and lawmakers worry about the impact on employers. Will an exchange lead employers to drop coverage altogether or shift workers onto the exchange? The answer, policy experts say, depends on several factors, especially whether health reform requires employers to offer coverage.

Businesses offer insurance to attract and retain workers, but insurance costs are among the fastest-rising expenses companies face, and many have cut back — either dropping coverage or offering cheaper, less comprehensive policies.

If Congress makes it easier for people to qualify and purchase insurance nationwide through an exchange “then you’ve taken off the table” a main reason to offer insurance, says Paul Fronstin, of the Employee Benefit Research Institute, a nonpartisan group in Washington. “Employers could drop coverage or give employees the money and send them to buy coverage on their own through the exchange.”

Lawmakers have several options that would affect how employers — and employees — respond. As Fronstin observes, if Congress requires employers to either offer insurance or pay some kind of fee, such as a payroll tax, fewer employers would be tempted to drop coverage. On the other hand, lower-income workers might be tempted to forego employer insurance if the government provides them generous subsidies and allows them to buy through an exchange.

Pollitz, at Georgetown, says exchanges by themselves won’t affect employer coverage. What’s key, she says, is whether all individuals are required to have coverage.

“Once people feel compelled to have insurance, it seems employers are more likely to offer it because workers are really going to demand it,” says Pollitz.

In Massachusetts, employers generally have not dropped insurance. In fact, many of newly insured are getting coverage through work: they had previously turned down their employer’s plan but under the reform law they had to sign up or pay a fine. The state does not prevent workers with job-based insurance from buying their own policies. But most would find that more expensive than sticking with job-based coverage because mid-sized and large employers must pay at least 33 percent of workers’ premiums.

In addition, workers who are offered job-based health insurance cannot get a subsidized policy, an effort to prevent employers from shifting lower paid workers to government-sponsored coverage. Critics say that policy traps lower income workers in work-based coverage that may be too expensive for them.

Proposals before Congress also place limits on who can get subsidies. But workers with job-based coverage considered unaffordable — exceeding 10 percent of income in one bill, 12.5 percent in the other — could go on the exchange and buy subsidized coverage.

A related issue is whether employers would be able to use the exchange to buy coverage for their workers. The proposals before Congress would allow only small businesses to join.

Allowing bigger companies to voluntarily join the exchange could, theoretically, lower costs for everyone if they brought in many younger, healthier workers, economists say. But if only those companies with older, sicker workers joined, it could drive up costs.

The business federation argues that employers of up to 50 people should be allowed into the exchange right away, with larger groups allowed in later. “The small group market, with two to 50 workers, is the most struggling market (for buying health coverage),” says Austin of the NFIB.

This year, Massachusetts began a pilot program allowing businesses with 50 or fewer workers to purchase health insurance through its Connector. Audra Menfi and her seven employees at Hopedale Airport Industrial Park signed up.

Menfi, who leases commercial buildings at a small airport, offered health insurance to her workers before the state passed its reform law. But, she could afford to offer only one plan, and it had a high annual deductible.

Now Menfi can select any policy offered through the Connector and decide how much of the premium — but at least 50 percent, under the rules — to pay on behalf of her workers. They can pick that plan, which has lower annual deductibles than the one she used to offer, or any other in the exchange offering comparable benefits.

“It’s an advantage to be able to offer different insurance plans, but pay only one bill,” says Menfi.

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Comments (12)

  1. Submitted by Paul Udstrand on 07/14/2009 - 12:08 pm.

    This isn’t a news story, it’s a marketing piece produced by the health care industry.

    The Exchange failed to cover everyone in MA, were it not for the public option there would still be tens of thousands left uninsured, a fact conspicuously absent from the piece. Nor has the exchange controlled costs.

    Furthermore, what does it tell you that some coverage is more expensive than other coverage? It’s rationing according to ability to pay, you get the health care you can afford. I thought the whole point of insurance was to provide health care you can’t afford by distributing the costs.

  2. Submitted by Bernice Vetsch on 07/14/2009 - 12:30 pm.

    So employers can pay $295/year/employee for NOT buying insurance for $5,000 – $12,000 per year. Why would any company not choose the $295 cost?

    There are questions to be answered about a national exchange/connector. Number One is, if insurance companies are allowed to sell their products across state boundaries (as McCain and other Republican candidates wanted to do), would the state mandates painfully acquired over 50-75 years be lost? Patients could then find out at the time that they are diagnosed with an expensive disease like cancer or diabetes that, “Oh, we’re so sorry, your policy doesn’t cover that.”

    I’d like the see the attorneys general of the 50 states study all the current health care system proposals to see how they might hurt rather than help ordinary citizens. And, if necessary, sue the government and/or the Congress to prevent their enactment.

    Number Two: The punitive Massachusetts plan is not saving money for that state but is running hundreds of millions of dollars over budget each year, partly because of more enrollees than anticipated and — probably mainly — because it adds more layers of complexity and bureaucracy and therefore more $$millions?? to both public and private administration costs. Do we really want to multiply their experience by 50?

  3. Submitted by Glenn Mesaros on 07/14/2009 - 01:05 pm.

    This is a transcript of the 1971 conversation between President Richard Nixon and John D. Ehrlichman that led to the HMO act of 1973. If you had any doubt, that this HMO policy is a carbon copy of the Nazi “useless eater” dogma, just read this exchange:

    John D. Ehrlichman: On the, on the health business.

    President Nixon: Yeah.

    Ehrlichman: We have now narrowed down the vice president’s problems on this thing to one issue, and that is whether we should include these health maintenance organizations like Edgar Kaiser’s Permanente thing. The vice president just cannot see it. We tried 15 ways from Friday to explain it to him and then help him to understand it. He finally says, “Well, I don’t think they’ll work, but if the President thinks its a good idea, I’ll support him a hundred percent.”

    President Nixon: Well, what’s… what’s the judgment?

    Ehrlichman: Well, everybody else’s judgment very strongly is that we go with it.

    President Nixon: All right.

    Ehrlichman: And, uh, uh, he’s the one holdout that we have in the whole office.

    President Nixon: Say that I… I… I’d tell him I have doubts about it, but I think that its, uh, now let me ask you, now you give me your judgment. You know I’m not too keen on any of these damn medical programs.

    Ehrlichman: This, uh, let me, let me tell you how I am…

    President Nixon: [Unclear.]

    Ehrlichman: This… this is a

    President Nixon: I don’t [unclear]

    Ehrlichman: … private enterprise one.

    President Nixon: Well, that appeals to me.

    Ehrlichman: Edgar Kaiser is running his Permanente deal for profit. And the reason that he can … the reason he can do it. I had Edgar Kaiser come in talk to me about this and I went into it in some depth. All the incentives are toward less medical care, because…

    President Nixon: [Unclear.]

    Ehrlichman: …the less care they give them, the more money they make.

    President Nixon: Fine. [Unclear.]

    Ehrlichman: [Unclear] and the incentives run the right way.

    President Nixon: Not bad.

  4. Submitted by David Thompson on 07/14/2009 - 01:09 pm.

    Bernice, I really do not understand your objections. The Exchange is a way for individuals to get group rates. As the story states, “insurers cannot deny coverage based on a person’s health”. It sounds like a big step forward, and as a self-employed person with no health insurance, I wish it were available here.

  5. Submitted by Bernice Vetsch on 07/14/2009 - 03:14 pm.

    Dave (#4) — I’m just pointing out some of the things we do not know about a national exchange. I don’t think any legislation should be passed until people like attorneys general study their impact on people.

    Since the insurance and other medical “industry” lobbyists are telling Congress what they want the plan to have, I find it hard to believe that it will benefit any ordinary person as much as it does their bottom lines.

    Thanks for asking, though.

    Check out HR 676, John Conyers’ proposal for single payer universal health care (publicly funded, privately delivered with 100% free choice of providers) that would save $400 billion per year in administrative costs. And John Marty’s SF118 Minnesota Health Plan for single-payer in Minnesota (with the money in a special place where neither the governor nor the legislature can use it for anything else).

    Both plans cover not just physical illness but preventive efforts, eyeglasses and hearing aids, nursing homes and long term care, home health care, mental health and anything else you and your doctor (rather than your insurance company) decide is necessary. And cover 100 percent of the population with not one soul left living in fear of getting sick.

  6. Submitted by Steve Titterud on 07/14/2009 - 04:50 pm.

    This whole piece seems written from the point of view the insurers and the national legislature are taking in this whole debate:

    “How can we preserve as much as possible of the current health insurance system, with its existing revenue streams – and still make it look like we’ve done something?”

    Or put another way,

    “How can we create a Rube Goldberg contraption that preserves industry profits in the near term, and is bound to fail in the long term?”

    It’s all about the money.

    It is the industry, spending about $ 1.4 million PER DAY on lobbying, that keeps this article’s framing of the issues at the fore. An army of lobbyists and the weight of massive amounts of money overwhelm many of our Senators and Congressmen, and the industry’s masters of public relations overwhelm our news sources. The industry is demanding, and getting, a return on investment for all those campaign contributions over the years.

    Massachusetts has a population of approximately 6.5 million. The article boasts that 200,000 people have acquired insurance through the “Connector”. This is about 3.08% of the population of Massachusetts. 3% doesn’t cut it in Massachusetts, and it ain’t going to cut it in the nation as a whole, either.

  7. Submitted by Paul Udstrand on 07/15/2009 - 08:37 am.

    Dave//The Exchange is a way for individuals to get group rates. As the story states, “insurers cannot deny coverage based on a person’s health”. It sounds like a big step forward, and as a self-employed person with no health insurance, I wish it were available here.

    As a self employed person myself, you can can “group rates” from Blue Cross Blue Shield in MN if you want. All the Exchange in MA does is put multiple insurance companies in one location so you can shop, it’s just a publicly financed marketing scheme for private insurance.

    The problem here isn’t marketing, it’s health care. The idea that the creation of a “market” will yield universal, affordable, quality health care has long long long since been revealed as a faith based market fantasy. The markets failed by 1963 and we’ve been moving deck chairs ever since.

    The MA plan isn’t working, it didn’t even meet the basic goal of providing 100% coverage even though it requires that everyone buy insurance. People are simply paying the penalty because it’s cheaper than buying insurance. The insurance industry loves it because it’s a mandated customer base, it’s forced half a million into their rolls. I mean just look at it, they’ve created an entire administrative state agency just to market private insurance, talk about unnecessary administrative cost! Just imagine a state run plan that automatically enrolls everyone in the state, viola! no marketing, no “connector”, done. Are you breathing? Are you in the state of Massachusetts? If “yes” then you’re covered- done. Instead of choosing insurance plans you choose which doctor or hospital to go to and you go. Instead of comparing insurance, you just focus on your health, you go to the doctor and get health care. Don’t you think that would be nice to have?

  8. Submitted by Casey Selix on 07/15/2009 - 09:42 am.

    I always enjoy reading what MinnPost’s commenters have to say about any given subject, particularly health reform these days.

    As the MinnPost editor/writer who recommended that we run this story on how exchanges work, I think you’ll be interested to know that Kaiser Health News is an editorially independent operation although it receives funding from the Kaiser Family Foundation. The writers are professional journalists, and other news publications/services (McClatchy is one)are picking up their stories because of the solid reporting and evenhanded approach.

    I admit to being skeptical initially because of the Kaiser name and its connection to the health industry, but as I’ve read more of their work, I’ve thought some stories were worth sharing with MinnPost readers during the reform debate. You can see more of their stories at

    Just one more point: Here are a few of the paragraphs that showed me there was balanced reporting in the story package:

    “Done poorly, analysts and critics say, exchanges could drive up insurance costs and encourage employers to drop coverage, unraveling the system that insures most working Americans.”

    “But Congress may balk at certain features of the Massachusetts model. Some lawmakers oppose compelling people to buy policies or penalizing employers who don’t offer coverage, for example. And lawmakers expect fierce debate over government subsidies: who should qualify, their size and how to fund them.

    “It’s not just politics complicating the picture. Insurance exchanges are more complicated to design than, say, sites like Travelocity and Orbitz, where consumers shop for plane tickets and hotels. Critical decisions must be made, for example, about who participates and how insurance prices are negotiated.”

  9. Submitted by Peggy Girshman on 07/15/2009 - 02:30 pm.

    As Casey Selix notes, Kaiser Health News has no relationship to Kaiser Permanente nor the health insurance industry. We are a journalist-run, editorially independent news service committed to in-depth coverage of health care policy and politics. KHN is a major program of the Kaiser Family Foundation, a non-profit private operating foundation, based in Menlo Park, Calif., dedicated to producing and communicating the best possible analysis and information on health issues.
    We encourage all to check us out:

    Peggy Girshman
    Executive Editor, Online
    Kaiser Health News

  10. Submitted by Bernice Vetsch on 07/15/2009 - 02:40 pm.

    Additional news re: Massachusetts Plan from today’s (July 15) New York Times — Because The Plan is running so far over budget, the state is having to find ways to reduce the program’s costs. Like cutting off from coverage 30,000 legal, taxpaying immigrants.

    The plans under consideration in Washington are Mass-Plan clones written to please the industry. Bad. Bad. Bad.

  11. Submitted by Paul Udstrand on 07/16/2009 - 09:09 am.

    I wouldn’t complain about this story being posted, it provoked a good deal of thought and comment. Every story should be judged on it’s own merit rather than it’s source organization.

    On it’s own merit this is simply not a critical examination of the health insurance exchanges, it’s clearly a defacto promotion under the guise of an informational piece. Independent journalists are obviously capable of producing stories like this so independence isn’t the issue.

    I’m not impressed the authors mention of possible failure or difficulty in Congress, these are mundane observations posing as objectivity. The fact is it already has failed, that’s the starting point for any discussion about the MA insurance exchange system. If done poorly? Show us where it’s been done right, anywhere in the world? The criteria for success seems to be that it exists and people are using it- talk about setting the bar low. It exists because the state created it, and people are using it because they are actually required to do so by law.

    Again, MA has failed to accomplish its two primary and basic objectives, they do not have universal enrollment(despite mandating it), and they have not controlled or lowered costs. Any story about the exchange that does not acknowledge those facts is simply not a critical examination.

    I don’t know why the author wrote this story. If it was intended to be a critical examination, it fails, if it was intended to be an informational story- it fails. Those failures result in a defacto industry promotion. We’re not residents of MA, we don’t need to know how to use the exchange. Our interest is one of public policy, how do we get universal coverage at affordable rates? What we have here is a story that describes the exchange system as if no meaningful conclusions about public policy can be derived from it’s existence. That’s promotion by neglect.

    Again, I’m not complaining, I think these are all important observations that need to made. I’m not critical because it’s from Kaiser, I’m critical because I read it.

  12. Submitted by Steve Titterud on 07/16/2009 - 03:19 pm.

    I agree with #11 – the objections raised in the commentary essentially go to the content of the subject matter, not to the credibility of the source nor the editor.

    Much of the health care debate has amounted to sidetracks and diversions, so very effectively framed by this industry.

    In terms of public speech, including journalistic coverage such as this article, the interests that can spend many millions to promote their agenda get a huge bullhorn to project their message. Everyone else gets a kazoo.

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