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 Web site and studied the nearly 20 different policies that popped up.
Within a half-hour, Kovner, a 53-year-old technology consultant, picked a mid-priced 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.
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.