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Published 11/1/2010
Adrian J. Thomas, MD; Manish K. Sethi, MD; A. Alex Jahangir, MD; Alok D. Sharan, MD; Samir A. Mehta, MD; the Washington Health Policy Fellows

Health insurance exchanges

What are they and how will they affect orthopaedics?

In March 2010, President Obama signed the “Patient Protection and Affordable Care Act” (PPACA) with the goal of ensuring that all Americans have access to quality, affordable health care. Under the PPACA, each state must establish a health insurance exchange by 2014 to help individuals and small employers obtain and maintain coverage. Given that these exchanges can reshape the American healthcare landscape, it is critical that orthopaedists examine how they have worked (and failed) in the past and reflect on how they may affect orthopaedic practices.

What is a health insurance exchange?
A health insurance exchange is an organized marketplace for the purchase of health insurance. The exchange offers enrollees a choice among private health insurance plans; in the future, a national public insurance plan may also be an option. Covered services and cost sharing (deductibles, coinsurance or copayments, and out-of-pocket limits) are organized or standardized to make comparisons across plans easier for consumers.

Who can access the exchange?
Consumers without access to employer-sponsored insurance or a public plan (including the self employed and individuals receiving income-related subsidies) could obtain insurance through an exchange. Under PPACA, small businesses could offer their employees coverage through an exchange. This would facilitate broad coverage choices and eliminate administrative costs for these firms.

Coverage purchased through an exchange can be uncoupled from employment, helping to make health insurance more portable for people moving from job to job. Because employment-based coverage might still exist under some proposals, however, insurance may not be fully portable.

How will exchanges change health insurance purchasing?
Standard benefits packages will give consumers more choices and enable informed decisions based on cost and quality. This format also levels the competitive field, with both smaller, local plans and large national plans having equal opportunity to offer coverage to the individual consumer. Affordability credits will be available for people with incomes up to 400 percent of the federal poverty level ($43,000 for individuals or $88,000 for families) on a sliding scale basis.

Plans will be required to explain their coverage in plain language, so that consumers can make informed choices. Exchanges can also play a role in cost containment. An exchange might create more competition among health insurers if it had authority to negotiate premiums. Insurers could also be excluded from participating in the exchange based on their premium price. Providing similar or standard benefit packages would reinforce incentives for insurers to set competitive premiums.

Although standardization increases comparability of plans, risk sharing, and competition, it could also reduce the number of choices available. A public option could enhance competition among offerings.

Exchanges would also create an administrative mechanism for enrollment. Typically, employers facilitate enrollment and premium payment for covered employees. An exchange would serve that function for people who buy insurance on their own or who work for small businesses. The exchange could also be used to determine eligibility and administer income-related subsidies.

Can exchanges work?
In Texas, small businesses were typically charged higher rates than their large business counterparts. In 1993, the insurance purchasing alliance was created by the Texas legislature to help small businesses.The alliance pooled small employers in purchasing groups large enough to negotiate for the lower rates comparable to those paid by larger companies.

Initially, 63 percent of businesses that participated were able to offer their employees health coverage for the first time. Administrative costs normally passed on to small businesses by insurers decreased, and firms with older or less healthy workers were not charged higher rates. In turn, insurers outside of the alliance lowered their prices.

Within 6 years, however, the exchange had failed. Private insurance companies, which could offer small business policies both inside and outside of the exchange, began signing up small businesses with healthy employees and offloading companies with older or sicker employees. The people in the exchange had high healthcare costs and there weren’t enough healthy people to share the risk. Premiums began to rise, making the insurance offered on the exchange unaffordable. Small businesses and insurers began to shy away from the exchange, leading to its eventual demise. Exchanges in Florida, California, and North Carolina have all had a similar fate.

In an organized marketplace, an exchange can play a key role in reinforcing market rules and risk stratification by penalizing or excluding companies that violate insurance market regulations. The exchange can also establish rules of market conduct to prevent companies from evading insurance regulations through sales tactics and other informal means. The Commonwealth Connector in Massachusetts performs these functions today.

Established under comprehensive health reform in 2006, the Commonwealth Connector differs slightly from previous exchange models. For example, the Connector does not hold any risk for its commercial products. A carrier’s Connector plan experience is pooled with all of its other small/nongroup plan experience to mitigate risk selection problems.

Additionally, the Connector does not negotiate better prices for its members compared with the private market. Its visibility, however, enables the Connector to put some pressure on carriers to keep rate increases low overall.

Finally, the Connector was established in a unique environment. The reform provisions included modified community rating, guaranteed issue, and market reform to merge nongroup and small-group markets. These insurance reforms, in combination with an individual mandate, allowed for a broader pool for spreading risk.

The impact on physicians
Physicians tend to focus on the toll that healthcare reform will place on them as providers. What may be overlooked is the impact of health reform on physicians as consumers.

Many orthopaedic surgeons are either self-employed or small business owners. Providing affordable coverage for themselves and their employees is key to the health of the practice. Exchanges, by making adequate health insurance
affordable, understandable, and available to everyone regardless of health status can benefit all physicians who need coverage for their families and employees. Lower health insurance premiums can decrease overhead, increasing practice net revenues.

What are the lessons?
Health insurance exchanges are organized marketplaces that will provide standardized benefit packages, enabling consumers to comparison shop and make informed choices based on cost and quality. Exchanges will bring transparency to the healthcare marketplace and will require plans to explain their coverage in plain language. By learning from previous exchanges—both successful and failed—new state-created exchanges can make it possible to organize health insurance markets efficiently and effectively.

Many different problems need to be addressed in the insurance marketplace before Americans can have affordable coverage. An exchange can help coordinate tasks and guide markets to comply with consumer protections and compete in cost-efficient ways. An exchange is not a cure-all for the problems of the American healthcare system, but if it is carefully designed, it can facilitate and monitor the movement of the system toward achievement of many national healthcare reform goals.

The Washington Health Policy Fellows include Adrian J. Thomas, MD; Manish K. Sethi, MD; A. Alex Jahangir, MD; Alok D. Sharan, MD; Samir A. Mehta, MD; Ryan M. Nunley, MD; Taruna Madhav, MD; Aaron Covey, MD; James Genuario, MD, MS; John H.Flint, MD; Sharat K. Kusuma, MD; and Anil Ranawat, MD.

Source of Health Insurance Coverage by 2019 (PDF)