Understanding the Health Insurance Exchange

OK, I'm getting repetitive, but I can't resist posting this short item focused just on the issue of the HIE. I've made all these points before, but here it is shorter and sweeter:

As a practicing pediatrician and long-time health policy analyst, it has been very painful for me to see how little my very intelligent and engaged friends understand what is being proposed for health care reform. True, some of it is complex – mostly the funding, which I grant you is not straight-forward, and I, too, worry about cost and the deficit. But to me the most important part of the reform is the Health Insurance Exchange (HIE). Even if the Public Option were not adopted, even if the funding for the lower middle class were not generous, the HIE would be extremely important just in and of itself.

Why does our current health insurance system not work? It’s because competition in capitalism is supposed to result in better and better deals for the consumer, as with cell phones, for instance, yet it doesn’t in health care. Health insurance competition works against the customer rather than for him or her. How do health insurance companies make their money? By excluding those likely to be costly from purchasing a policy, by driving policy costs higher for those with little choice, by rescinding policies from those who get sick, andby confusing buyers with policy details that are nearly impossible for the ordinary customer to fathom.

This is a situation tailor-made for government intervention. If the rules of play work against the customer, it is the role of government to reset the rules, so that the game works differently.

The HIE would do just that. The government would set the minimum standards for offering policies at three or four different levels. Rules for all levels would be: all applicants would be accepted, premiums would vary by age within limits, no policies would be canceled retrospectively, there would be no lifetime money limits to coverage, conditions covered would be standard, mental health coverage would be equal to physical health coverage, etc. The major difference among the levels would be how much out of pocket the policy-holder would be at risk for.

So, the problem of policy availability would be solved. The problem of understanding details and being hit with large bills that the consumer thought would be covered would be solved.

How, then, would the health insurance companies compete and make profits? They would have to be efficient and they would have to be creative. Efficiency in claims processing speaks for itself. Creativity – maybe some companies would create networks of only the best and most efficient physicians and split the savings with them, so that a customer would pay less yet get more efficient service. Maybe companies would partner with hospitals and see them run with increased efficiency. Maybe companies would contract with primary care physicians to pay special attention to their patients (with higher payments) and avoid costly referrals. There would be innumerable ways to compete – and in this competition, consumers would reap better care and cheaper prices, just as we have with cell phones.

It might be, on the other hand, that these hide-bound companies might not be able to transform themselves to innovators. Some might die. Others might be able to conform to the efficient claims-processing model, and miss the creativity, but they would at least lower the cost.

Because technical health care quality is harder for consumers to detect than cell phone quality, government would have to arrange for professional quality assessment, so consumers could have that knowledge in choosing health plans. Or maybe Consumer Reports, the Institute of Medicine, and US News and World Report could compete in assessing quality.

As this competition among health insurance companies continued, what would be the role of the Public Option? I think the PO would offer plain vanilla care, and would become a safety net of health insurance – if a competing company went belly-up, the PO would be there to pick up the customers immediately so that coverage would not be interrupted. (Actually, I believe that it would be better if we had at least two PO companies per region, one Federal and one state, to compete with each other and the private companies.)

One of the biggest problems with the health insurance market is that, over 90% of markets in the United States are oligopolistic. To perfect this competitive market, beside providing its own sponsored entity, government might have to do one more thing - ensure easier access to the marketplace for other private companies. I don't quite know how to do it now, but it needs to be done. Truth to be told, that's really the essence of the PO at this point, killing oligopoly.

Of course, as in all capitalistic competition, there will be corner-shavers. Companies will try other angles that I can’t now predict to attract customers that are not really in their interest – who knows where the tailfins of health insurance policies will arise? But I would think these problems would be minor and transient.

The only problem I see with the HIE is that it is too slow to come – 2013 would be the target date - and too limited in scope – open only to the uninsured or the very smallest groups. It should come earlier, and be open to everyone – why not?