While federal and state policy makers face many complex decisions about the design and operation of new state-based health insurance exchanges, the overarching goal of the exchanges is straightforward—promoting healthy competition among insurers to provide better health care at lower total cost, according to a new Policy Analysis from the nonprofit, nonpartisan National Institute for Health Care Reform (NIHCR).
Written by Chapin White, Ph.D., a senior researcher at the Center for Studying Health System Change (HSC), the analysis examines five key design decisions related to the degree of benefit and premium standardization of health insurance products sold in the exchanges.
“Within broad federal guidelines, states inevitably will make different policy decisions, but all states will face a similar set of trade-offs,” according to the analysis. “The most basic trade-off is between simplicity and flexibility—a highly standardized health insurance market simplifies the consumer shopping experience and intensifies insurer competition but limits insurers flexibility to develop innovative products.”
Under national health reform, new federal rules will govern the nongroup and small-group health insurance markets, including a requirement for state-based health insurance exchanges, or marketplaces, to be operational by Jan. 1, 2014.
According to the analysis, “There are at least three rationales for standardizing plan designs in the new health insurance exchanges: promoting price competition, preventing favorable selection by some plans through designs that would encourage healthy people to enroll, and determining which plans qualify for subsidies and satisfy the individual mandate for coverage.”
- Promoting price competition. In a well-functioning market, consumers can easily assess the quality, price and features of products and make informed choices. Overpriced or inferior products will quickly be driven out. Health insurance markets diverge from this ideal because of the complexity of the product. Competing health plans can differ in countless ways. When consumers have difficulties assessing the quality of competing products, two negative consequences arise. The first is an undermining of the role of price competition—instead of consumers trading off price and quality, some consumers will choose the lowest-priced product, some will choose randomly and others will rely on a seller’s reputation. The second is the risk of unpleasant surprises, where the buyer learns the limits of the product only after buying.
- Preventing plan designs that selectively appeal to healthy people. Health insurance markets are unusual in the degree to which sellers’ costs and profits depend on exactly who buys their product. A toothpaste manufacturer cares little who buys its product, while a health insurer’s financial success depends keenly on who enrolls and, more specifically, whether enrollees are healthy or sick and how inclined they are to use medical care. A health plan that, for example, includes free gym memberships but does not cover diabetic testing supplies would tend to attract healthier people. Standardization of health plans—for example, requiring all health plans to cover diabetic testing supplies and banning gym memberships—limits insurers’ latitude to appeal selectively to healthy individuals. There are trade-offs, however—individuals want and value different benefits, and offering free gym memberships, for example, could be socially worthwhile if it leads to improved fitness and better health.
- Determining which plans are eligible for subsidies and satisfy the individual mandate. Starting in 2014, lower-income people will be eligible for subsidies for nongroup plans purchased through the exchanges, and almost all people will be mandated to have health insurance. The subsidies and the mandate both require some set of minimum standards or floors to determine whether individuals have purchased an insurance product eligible for subsidies and whether they have satisfied the mandate. The floors will result in some degree of plan standardization.
As federal and state policy makers implement state-based health insurance exchanges, they will face many important questions about the design and operation of the exchanges, including:
- How much latitude should insurers have in designing cost-sharing features?
- How to define the standard population to calculate actuarial value?
- Should states regulate relative premiums?
- How should exchanges implement out-of-pocket limits for families with income between 250 percent and 400 percent of the federal poverty level?
- Should variation in the scope of covered benefits be reflected in actuarial value?
The Policy Analysis—Promoting Healthy Competition in Health Insurance Exchanges:
Options and Trade-offs—is available here.