The Exchange

When Is an Insurance Exchange Not a Marketplace?

The Exchange

By Scott W. Atlas, MD

New marketplaces of health insurance offered to employees are apparently working well. A number of large employers have been offering their employees a sum of money – a defined contribution – for health benefits, instead of offering the health insurance itself. From that set sum of money, employees shop for health insurance of their choice from an online marketplace. Expensive insurance with extensive benefits, low co-pays and low deductibles, or cheaper insurance with higher deductibles and higher out-of-pocket expenses, are chosen as desired by each worker.

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This truly consumer-centric, private health insurance exchange that empowers individuals with more choice and the autonomy to decide how to spend their money was put into place in the fall of 2012, and the initial results are now in.

According to the consulting firm Aon Hewitt, a large percentage of workers, when given the opportunity and responsibility to consciously spending their own money, elect cheaper coverage associated with the risk of more out-of-pocket payment. For this first year, 39 percent of workers chose high-deductible plans, increasing from only 12 percent the previous year when they had no cash health benefit and no chance of selecting coverage from an exchange. Overall, a striking 42 percent of employees picked less costly policies with less extensive coverage, while 26 percent chose more expensive coverage. Predictably, when people have more choices and are consciously spending their own money, they make value-based decisions and costs come down.

A Private Market for Health Insurance

Moreover, according to Darden Restaurants (DRI), the parent company owning national chains like Olive Garden and Red Lobster, the number of workers opting to buy insurance increased in the new benefits arrangement … meeting the most commonly stated goal of ObamaCare, increasing the insured population. Numerous employers, from widely diverse industries ranging from retail to restaurants to consulting, have now announced that they, too, will offer defined health insurance benefits and the choice of coverage via these private marketplaces. The private sector responded once again with creative solutions that worked.

Supporters of the Affordability Care Act insist that the health reform law also relies on insurance marketplaces and its exchanges represent a significant compromise toward those who favor private markets for insurance coverage. After all, the government’s insurance exchanges, now renamed the “Health Insurance Marketplace,” are designed to “give you more choice and control over your health insurance options” (as explicitly stated on the government’s website), an idea held up as originating directly from conservative policy experts and stemming from conservative principles.

Insurance Exchanges Meet the Real World

But the reality of the ObamaCare exchanges is quite different. Government regulations delineated in the ACA will distort market forces so severely that these exchanges are destined to fail. The government exchanges force sellers to price their insurance products based on arbitrary, wholly artificial criteria - price fixing by government regulation that dictates profit and cost percentages (“minimum loss ratios”), rather than determining price by the marketplace; they force the coverage to be bloated by defining an extensive and naively considered list of coverage (ironically named “minimum essential benefits”) that directly causes higher prices for all consumers, many of whom we now know would choose cheaper, less extensive coverage; and they force sellers to disregard the projected risks fundamental to pricing all insurance premiums.

By disallowing different premiums for those with voluntary behaviors that portend worse health and more care utilization, and by guaranteeing coverage while virtually eliminating any personal responsibility, insurance companies will either go broke or shift massive costs onto healthier insured Americans. Regardless of all of the administrative challenges not even addressed herein, insurance companies under the government exchanges will likely fail to withstand the hyper-regulation about price and the disallowance of risk consideration; insurance prices will rapidly increase, subsidies will be insufficient, and the exchanges will ultimately implode.

Lessons for ObamaCare?

What should our government leaders learn from the success of new private insurance exchanges? Clearly, health insurance exchanges can offer access to a wide array of insurance choices at competitive prices … but the devil is in the details. Insurance exchanges overridden by anti-competitive regulations and edicts that escalate prices will inevitably fail.

But just as importantly, the impact and value of defined cash benefits to individuals should be acknowledged. American consumers want freedom of choice, and from the empowerment derived from defined contribution benefits arises better value for individuals and ultimately lower prices.

As Ken Sperling, Aon Hewitt's national health exchange strategy leader stated, “Employees who want richer coverage are free to purchase it — and they do. Health care is personal, and people have different needs. This model lets employees decide which plan and which insurance company is best for them, and they are free to modify that choice.”

In principle, insurance exchanges can work to benefit Americans seeking both value and better access to health coverage, but free market exposure empowering consumers, not over-regulated government schemes, are the best pathway to success.

Scott W. Atlas, MD is the David and Joan Traitel Senior Fellow at the Hoover Institution, Stanford University

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