First, Just The Facts…

1.      Health reform passed by the Obama Administration (the Patient Protection and Affordable Care Act or PPACA) includes a requirement that states establish regional or statewide Health Insurance Exchanges by 2014, or to participate in a federally-run exchange.

2.      A Health Insurance Exchange is a “marketplace” where patients/consumers can purchase their health insurance.  Individual purchasers are connected to private sector sellers of health insurance.

3.      There are a set of ‘rules’ for the Exchange which define how the health insurance will be bought and sold.  The rules must be carefully established and enforced in order to meet both public policy objectives and the needs of buyers and sellers in the Exchange.

4.      Today, for individual purchasers and small employer groups that are ‘high risk’ (or are perceived to be by insurance companies), health insurance can be unaffordable and sometimes unavailable.

Why Do We Need Exchanges?

The health insurance system in the United States is broken.  Healthcare costs and premiums continue to rise disproportionally.  It is a fact that approximately 30% of what we spend is wasted dollars (on unnecessary, inappropriate, and poor quality care).  And, we are at a major competitive disadvantage in the world economy.

Insurance is driven by the ‘law of large numbers’, and Exchanges address a critical problem by combining individuals and small employers into a large risk pool.  There are no exclusions for pre-existing conditions, with designated periods of time (“open enrollment”) when private insurance companies offer to sell their insurance plans to all the participants in the Exchange.

It is here that competition on the basis of cost and quality takes over.  There must be transparency—accurate and useful information available to patients and consumers so that they can make informed choices, including: patient outcomes, quality measures, premium and cost information, satisfaction levels, and so forth.  Those health insurers that provide the highest quality products at the lowest prices will be the winners in an Exchange model.

Are There Current Examples of Exchanges?

There are examples of Health Insurance Exchanges that already exist, such as the Federal Employees Health Benefits Program, or FEHBP.  Under this plan, insurance companies submit competitive bids once a year to the federal government’s Office of Personnel Management (OPM).  Federal employees then get information on benefits, costs and services, and can make their annual election of a carrier and a benefits plan. Competition to attract members on the basis of cost, quality and outcomes is what keeps costs down while providing the best possible care. Many states have similar plans for state employees.

Exchanges for private sector employees are also operational in Massachusetts and Utah.  They are very different models and there are lessons to be learned from each.  The early results from Massachusetts (the Massachusetts HealthConnector) are that the program has succeeded in providing health insurance to nearly all state residents, but has so far failed to address rising healthcare costs.  The Utah Health Exchange is designed differently, focusing on ‘defined contribution’ approach, but it is too early in its operations to draw any firm conclusions.

Where Do We Go From Here?

There is much more to be learned and written about Health Insurance Exchanges.  However, “perfection is the enemy of the good”, so the time is NOW to start building Exchanges throughout the United States.  When designed and implemented properly, they will be a major step forward towards fixing our health insurance system, so let’s get going.

Friedman says that health care can be universal and public—but “Free, no.” Doctors and hospitals don’t work for free, it’s just that the patient doesn’t pay them. “Treatment isn’t free, it’s just depersonalized. Everywhere there’s a schedule, a quota the doctors have to meet; next!…And what do patients come for? For a certificate to be absent from work, for sick leave, for certification for invalids’ pensions (i.e. disability): and the doctor’s job is to catch the frauds. Doctor and patient as enemies—is that medicine?”

Friedman’s answer—give people the option to purchase insurance with a very high deductible, i.e., a policy for medical catastrophes, which would be decidedly cheaper. The difference can be deposited in a special “medical savings account” that can be drawn on only for medical purposes. Mr. Friedman was talking about Health Savings Accounts before we called them HSAs. It is still the best way for employers to purchase health insurance to obtain the maximum value for your health dollars.

Governor Daniels’ Mission

Mitch Daniels, a former Director of the U.S Office of Management and Budget (OMB), assumed the Indiana governorship in January of 2005. Gov. Daniels knew that he would have to immediately begin to address the State’s annual $600 million budget deficit if he was succeed in his mission to improve quality of life in the Hoosier state. Indiana has over 30,000 state employees, and one of Daniels’ early decisions was to offer an HSA option to these workers.

The HSA Model for Indiana

The principle behind the HSA concept is that individuals spend their own money for routine expenses, and they are “insured” above some pre-determined, high deductible level. If they incur high expense due to a serious illness or injury, they have full insurance coverage above the deductible. But otherwise, they are spending their own money and they are therefore more likely to be concerned about the cost and value of the services they are receiving. For those Indiana workers choosing the HSA, it works as follows:

• Employees have a choice between a traditional PPO model and an HSA.
• Depending on whether the employee chooses single or family coverage, the state will deposit money into an account controlled by the employee, used to pay for all health bills (average deposit in Indiana is $2750 per employee per year).
• After the deductible, the state and employee share costs up to an out-of-pocket maximum, after which the employee has 100% coverage.
• Employees pay a share of their premium for PPO coverage but there is NO PREMIUM paid by the state worker for their HSA coverage.

In the first year of the program, 4% of Indiana workers signed up for the HSA, and there has been a steady growth in participation since.

Financial Results

Today, over 70% of Indiana workers participate in the HSA and the financial impact has been impressive:

• In 2010, Indiana will save at least $20 million in its state budget from this program.
• Workers choosing the HSA option save an additional $8 million compared to workers in the traditional PPO plan.
• The average balance in the HSA bank accounts is $2000 and growing rapidly, thereby adding to a worker’s take home pay.
• HSA participants spend an average of only $65 in medical costs for every $100 incurred by traditional PPO plan participants (e.g., for prescription drugs, costs are $18 lower per script).

The success of Indiana’s health benefits program is a model for other states as well as for private sector employers—it is a ‘win-win’ for both the employer and their employees.

Impact on Employee Satisfaction and Consumer Behavior

More good news!! As the enrollment in the HSA model has steadily grown, the participants seem highly satisfied—only 3% have chosen to switch back to the traditional plan. The state reports that workers are visiting emergency rooms and physicians 67% less frequently than co-workers with traditional health care, and they are admitted to hospitals half as frequently. Most importantly, there is no apparent evidence identified by the state or its consultants that HSA participants are neglecting to receive needed healthcare services in order to save money. Indiana employees are satisfied; they are receiving good health care and it is costing less.

Implications For Business

At RMP, we’ve been setting up programs like the one in Indiana longer that any other health insurance advisor in the area. My article, called HSAs Work, Here’s Why was published in the Philadelphia Business Journal in 2006. RMP client case studies, particularly from those who have been with us for a few years, can attest to this fact. The concluding words from Governor Daniels best sum up this story:

The prevalent model of health plans in this country in effect signals individuals they can buy health care on someone else’s credit card…. What seems free will always be overconsumed, compared to the choices a normal consumer would make. Hence our plan’s immense savings.

Our conclusion—it IS possible to get equal or better healthcare for less money. If you are buying health benefits for your employees, or otherwise purchasing healthcare services, you can most likely do better. Call us at 610-975-4415 if we can help.

Client Objectives
We stress to our clients the importance of developing a multi-year strategy for controlling healthcare costs. Some of the elements of that strategy are to give employees “skin in the game” (i.e., financial incentives to make good healthcare decisions), to buy less insurance and self-fund where appropriate, to build balances in personal heath savings accounts, to provide education and information to make better decisions, and to shift the balance of power away from the insurance carrier in favor of the employer. These activities require time and are the product of a well-thought-out strategy, not last-minute decision-making under the pressure of a renewal deadline.

Timing Is Important
When you “invite” other brokers to submit a bid 3 months before your renewal, you are pitting broker against broker to submit a proposal that addresses your needs only for the next 12 months. The incumbent broker’s interests are best served if you renew your current program with little or no change. There is no planning or preparation for the future, and you inevitably will go through the same dysfunctional process the following year. How is the annual health insurance renewal process currently working for you?

A better approach is to create competition between carriers, and this cannot be done if competing brokers to submit bids at the last minute to get your business. By definition, the brokers will be looking only in 1-year time frames, which does not allow for proper planning for future years beyond the next 12 months. Find your trusted advisor at least 6 months prior to renewal, and allow that advisor to develop an optimal arrangement using competition to your advantage.

Do you have a health insurance purchasing strategy that’s been successful for your company? Please share it with us!