JUL 13, 2011 11:43am ET

Insurance Exchanges: Why Do States Have To Pay For Them?


The more I think about it, the more I start believing that state health insurance exchanges and the subsequent the move toward an individual market could be the ultimate catalyst to bring that major change in U.S. health care industry everyone is waiting for. But it could simply be the wishful thinking on the part of an increasingly frustrated, middle-aged health care professional.

I’m going to throw out a few thoughts and would love to hear back from you readers if they make sense or read like idle daydreams.

Why do these exchanges have to cost anything to states at all?

We all know that states are not in robust financial health, and imposing another new liability on them for operations of exchanges may not be a great idea. I’m not proposing that the feds ante up for these costs either. Look at the whole health care system and try to find who actually has money (and I’m being relative here). The states don’t.

The feds are already footing 40 percent of the health care bill, with the $13 trillion in national debt sitting on their heads, they don’t have money to burn either. Providers barely eke out a living these days. So that leaves the payers. Mind you, I’m talking about this whole thing in relative terms. Now that the payers are being pushed to maintain the 85/15 medical-loss ratio, and every single cent of administrative spending is under scrutiny. Taking into account these realities, let me propose a slightly radical idea …

What if payers actually fund the exchanges?

Before you all from the payer side pull out your daggers, give me two minutes (i.e., six to 10 lines) to explain. Four to 5 percent of the cost of sale goes toward broker fees, which if considered as a part of the administrative side of the 85/15 MLR mandate is a significant chunk of money.

 Now the controversial question: What’s the need for traditional brokerage services under the exchange concept? Brokers are traditionally adept at group services, and individual services typically do not require collective-driven considerations. Look at auto insurance sites. Look at travel sites. Look at home mortgage sites. For that matter, look at income tax filing.

Sure, there are consultants available to facilitate these processes, but they’re optional and could be either provided by the sponsor (via call centers akin to what insurers Progressive or Geico use) or could be paid for by the prospective buyer (H&R block, etc). But they’re not the first step of the process, which allows the sponsors to reduce the overhead costs drastically, thereby passing portions of the benefits back to consumer. Why can’t the same be done for health care insurance individual markets?

The biggest argument is that individuals may be prone to make “adverse” selections, which is a more serious issues when it comes to health care coverage as opposed to auto insurance or tax filing. But I disagree … has anybody ever tried to fill in their tax returns while running a non-profit for the wife and sending the kids to school and, unfortunately, making a bit of money in the stock market? Filling in a health insurance questionnaire has nothing on it J!

On a serious note, the question I like to ask in response to this argument is: How much time does an individual need to spend with a broker for the broker to understand their unique health requirements and for the broker to ensure that there is no adverse selection?

I can’t imagine a brokerage model working on that principle. So why not provide an intelligence built into the platform itself that can significantly reduce the probability of adverse selection? Why not leverage the clinical data specific to the individual and make plan recommendations for their unique health requirements? Of course there’s no guarantee this will eliminate adverse selections altogether, but it can’t do any worse in most cases than having a broker-assisted environment. For special cases, there could always be a broker/consultant option.

If this pans out, the cost of sale can easily be restricted to 2 to 3 percent with a decent profit for the exchange operating agency. I’ll go a step further and suggest including Medicaid in this exercise and save even further by leveraging the economies-of-scale while providing a single, streamlined enrollment process for consumers.

The bottom line is that states don’t have to pay anything for the exchanges. The consumers don’t have to pay anything, and they get a single point of access to all government-sponsored initiatives as well as subsidies. The providers don’t have to pay anything. The exchange operator makes a decent living. And payers save critical dollars that go toward the reduction of their administrative-loss ratio.

So where’s the downside? I have through long and hard and still can’t think of one. May be you guys can point it out to me.

Rajiv Sabharwal is the chief solution architect in the Healthcare and Life Sciences unit at Infosys Technologies LTD. He can be reached at Rajiv_Sabharwal01@infosys.com.


Comments (3)
You have provided good information. In the United States life expectancy is 42nd in the world, after some other industrialized nations, lagging the other nations of the club.
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Posted by kareen p | Thursday, August 11 2011 at 8:53AM ET
Interesting observation though I have a slightly different point of view.
- States are going to foot the bill. The initial federal grants are only for setting up the architecture and governance models. In addition the feds will fund the exchange operations only for the first year and states will have to bear the cost from 2015 onwards.
- Utah's exchange cost was quite more than 500k and they have built only a small employer exchange till now. the big daddy individual exchange is yet to come.
- As far as the availability of CDR and CDSS tools is concerned, you are correct that the eutopian scenario is still quite far off but I may not put it at 10 years. The reason why I say that is because with the advent of meaningful usage, ACOs, and P4P initiatives, the market is moving towards EMRs faster than it has ever done so and the numbers are growing by the day. Also as the exchanges will be in place by 2014 only, the situation regarding electronic records will be drastically different by then.
- The legal issue is definitely a very valid one but I would think, people who operate the exchange will have some almost-water-tight disclaimer and will definitely purchase some kind of liability insurance. It is not much different than a physician practicing medicine. If any thing, it is a lot less complicated and is more of a recommendation rather than diagnosing
- The payers have a simple but very powerful incentive. either play on the exchanges or forever forgo the possibility of attracting upto 45 million new members. Payers are pretty aware of that and they seem to be scampering for individual market, evidenced by many initiatives and acuisitions they have undertaken over the last 2-3 years
Posted by RAJIV S | Friday, July 15 2011 at 12:28PM ET
Let me preface my comments by saying that I completely agree with the way you're thinking, but there are a few points getting in the way of your thoughts coming to fruition.

On one level, the states aren't exactly footing the bill for the exchanges. There are federal grants (up to $1M per state) as well as "innovator" funding from Wash D.C. that should be enough to get a basic clearinghouse exchange up-and-running. For instance, Utah built its exchange to the tune of ~ $500k (at least according to one source I heard at the AHIP Exchange Conf this year). Furthermore, the HIXs should be able to self-sustain without additional funding at the state level. One way I see that happening is exactly how you've described (i.e., reconfiguring the commission structure to support HIX operations and minor investment) or by charging the payers a transaction fee for a new customer or for a renewal.

On another level, the blocking & tackling to implement decision support tools, like the one you described, is simply not available. If personal health records (electronic and dynamic) were available and functioning for all citizens, then maybe that would be a possibility. Yet, the reality is that we're close to 10 years away from that level... What's more, if you created such powerful tools, who know if consumers would actually use them correctly? If they didn't, and they were hit with a bankrupting medical bill, just think of the number of legal sharks swimming around waiting to sink their teeth into the exchange for "misleading" consumers...

Lastly, what's the incentive for all health insurers to enter into the market and provide "cost" effective plans when the lion's share of the underlying costs is not administrative in nature? Eliminate all health insurer profits, commissions, administrative waste etc. and you're just skimming the surface of the true cost of health care...
Posted by Mark T | Wednesday, July 13 2011 at 4:50PM ET
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