Building a Market-Based Health-Insurance Exchange in New York

The Patient Protection and Affordable Care Act (ACA) requires that every state establish a health-insurance exchange by 2014. The exchange will serve as a marketplace in which individuals and small businesses can shop for coverage. The ACA's controversial mandate provision requires every individual to purchase qualified insurance or face a financial penalty. Ideally, the range of plans available on the exchange—combined with subsidies that help in their purchase—would lead to the reform law's goal of universal coverage as well as a slowing of long-term growth in overall health-care costs.

The idea of the exchanges has, like the ACA more generally, prompted disparate views about their value and expected range of offerings. Proponents believe that the exchanges have the potential to inject much-needed consumer choice and competition into the markets for individual and small-group health insurance, improving the coverage, the cost, and even the care. By creating large, predictable markets for buyers and sellers, exchanges could bring much-needed stability to the small-group and individual sectors, where administrative costs are higher than for large groups and where premiums tend to fluctuate widely as people drop into and out of coverage.

Critics (including some opponents of the ACA who nevertheless support the concept of insurance exchanges) are concerned that the exchanges may become overly bureaucratic and impose excessive regulatory or benefit requirements that will restrict consumer choice and drive up costs. They also point to the enormous discretion that the federal government reserves to certify the exchanges, potentially restricting state options in design and implementation. These are legitimate concerns. Overly restrictive exchanges may fail to attract enough insurers to offer consumers and small businesses a wide variety of affordable plans that meet their needs. If an exchange offers only a handful of very expensive options, it may fall short of signing up a critical mass of healthy enrollees, leaving it with a population of very sick (and thus very expensive) subscribers. Over time, that imbalance could make the exchange financially unsustainable.

The New York Landscape

Some of these feared outcomes are the present realities of the New York insurance landscape. New York is home to one of the most expensive individual and small-group insurance markets in the country, largely as a result of its 1992 community-rating/open-enrollment law. The law imposes "guaranteed issue" provisions that require insurers to offer coverage to all applicants, including those who are already sick, although it does allow plans to impose some limitations on preexisting conditions. And it employs "community rating" regulations that require plans to offer the same price to all applicants regardless of age or health status.

Additional regulations under the 1995 point-of-service law further restricted the types of plans available in New York and required insurers to offer a very generous package of minimum benefits and services (tied to limits on maximum co-pays and deductibles).

As a result of high costs, the market for individuals in the state has been in sharp decline for years. As recently as 2001, more than 128,000 individuals were enrolled in HMOs in the direct-pay market. By 2010, enrollment had plummeted to just 31,000. Premiums approximately tripled during this period. In all, about 15 percent (2.6 million) of New York's residents are uninsured, a group that is largely young (about half are aged eighteen to thirty-four), in good health, and without dependents.

The danger is that the premiums of these plans will be off-putting to budget-conscious consumers, even with federal subsidies defraying some of the cost. And because the penalties for not buying insurance, in many cases, are not that painful, it is reasonable to conclude that many younger, relatively healthy individuals and households may choose to remain uninsured. This outcome will put great financial strain on the exchange system, which will be left to serve an increasingly high-risk subscriber pool. Eventually, the exchange could collapse, leaving the state in the same position it was before the Affordable Care Act passed.

Accordingly, we recommend that New York policymakers construct an exchange featuring:

• Competition among all qualifying health plans. The exchange should primarily be a clearinghouse for insurance competition based on the ACA's minimum standards.
• Flexibility in insurance design. New York should allow insurers to experiment with a wide range of co-payment and deductible designs, including Health Savings Accounts and other high-deductible plans.
• Affordable insurance options for younger and healthier enrollees. New York should expand the state's age-banding rules to the ACA allowed 3-1 premium ratio (a reform that would require legislative action).
• Freedom from political influence. The exchange should be chartered as a quasi-independent public authority or chartered nonprofit rather than housed in an existing state agency, such as the Department of Insurance or Health.
• Defined contribution plans for small businesses. The state's small business exchange should include a defined contribution option for small businesses, combined with a premium aggregator function to help many more small businesses and their employees find affordable health-insurance options.

Barriers at the State Level

On the state level, legislation would likely be needed to permit plans to offer a wider range of deductibles and co-pays and fewer benefits in return for lower premiums. (The Affordable Care Act allows HSAs to be sold on the state exchanges; if state law conflicts with the ACA, it may require the state to offer HSAs.) HSAs have been criticized as vehicles for the "healthy and wealthy" to skimp on coverage and maximize their tax-deferred savings, leaving higher costs for patients who need more coverage. Another criticism is that HSAs force consumers to skip critical preventive or routine health-care services, saving money in the short term but leading to higher costs down the road.

The evidence undermines those arguments. One recent study found that "a wide range of preventive-care services counts toward plan deductibles (or are covered on a ‘first-dollar' basis) under most HSA-qualified policies.... [T]he rates at which enrollees in HSA-qualified plans draw on preventive care or rely on treatment of chronic illness are roughly equal to the rates shown by policyholders in comprehensive plans." Another analysis found that "necessary care was received in equal or greater degrees relative to traditional plans." Though HSA enrollees in the past tended to be of higher income, most of the income differences were not present in 2010, a survey by the Employee Benefit Research Institute (EBRI) found.

Meanwhile, the raison d'être for HSAs—curbing costs—continues to exist, since traditional plans have failed to control health-care inflation. Ironically, many more expensive HMO/PPO plans now have deductibles that approach those of HSA-qualified high-deductible plans. However, higher-deductible or catastrophic plans continue to exhibit cost trends significantly below those of traditional plans.

Much of the savings can be traced to those who enroll in HSA high-deductible plans. The 2010 EBRI survey found that enrollees "were more likely than those with traditional coverage to exhibit a number of cost-conscious behaviors," including asking for a generic drug prescription instead of a branded product and discussing care options and costs with their physician.

Issues on the Federal Level

Under the terms of the new federal law, five benefits packages must be on the ACA's exchange menu, in descending order of cost and coverage: platinum, gold, silver, bronze, and catastrophic. HSAs are allowed on the exchange, but making them more attractive for consumers will require that ACA rules be interpreted in ways that will help keep them more affordable than traditional plans. The problem is that ACA rules could put high-deductible plans and HSAs at a disadvantage. The rules are still evolving, and the situation may well change. But for now, the issues are twofold:

Actuarial Values. Actuarial values define the percentage of expected health-care costs that will be covered by a given plan. The minimum actuarial value for plans on the exchange is set at 60 percent for bronze coverage (the top value is 90 percent for platinum). But HSAs typically have an actuarial value below 60 percent, before any insurer or employer contributions to the savings account are taken into consideration. If the federal government does not count those contributions in calculating the actuarial value, the premium costs of HSA-eligible high-deductible plans may increase significantly because coverage would have to increase. The rise in premiums would make this hybrid coverage less attractive compared with traditional plans.

Medical Loss Ratios. The MLR requires insurers to spend at least 80 percent of plan premiums on health benefits and services, with the remainder for administrative costs and profits. Minimum MLR requirements may encourage carriers to offer fewer high-deductible plans because the high-deductible feature, by definition, means that the plans will be processing fewer claims relative to their (low) premiums compared with higher-cost plans. To meet the minimum MLR, carriers offering HSA-qualified plans would have to blend spending across all their products within the individual, small-group, and large-group markets in each state. Carriers with relatively more HSAs might find themselves penalized and required to offer rebates to policyholders. Such a requirement would, again, diminish the attractiveness of HSA plans, notwithstanding their potential for increased cost savings.

The Market for Small Business

New York's small-group market is not as dysfunctional as the market for individual coverage, partly because of the wider range of insurance products, including HSAs, that are already available to small groups and sole proprietors. But the state is still among the most expensive small-group markets in the nation, partly because it does not allow rates to vary by age or health status.

Since many of the uninsured work at small firms, expanding affordable insurance options for small employers and their employees should be a priority for New York policymakers. According to one estimate, a properly configured New York exchange could enroll up to 120,000 small firms and cover up to 1.2 million employees and their dependents.

New York would benefit by borrowing some elements for its small-business exchange from one established in Utah in 2009, before the ACA was passed. The Utah Health Exchange was created to address escalating premiums and an accelerating decline in employer-based coverage, especially among small employers. Although the state had a lower uninsured rate (10.6 percent) than the national average, policymakers still believed that the rate was too high and that incentives in the system were not aligned to provide consumers with cost-effective, high-quality, affordable insurance. Less than half of Utah's small businesses offered insurance to their employees.

Because policymakers were focused on the small-group market, the exchange incorporated several features designed to make insurance more affordable for employees of small businesses, including a premium aggregator to bundle contributions from multiple employer sources. The exchange also functions as a defined contribution market, in which employers give employees a predetermined level of funding to purchase coverage, akin to a voucher system.

Another innovative mechanism that the exchange is testing is an all-payer database, which allows researchers to analyze all statewide health claims to better measure the effectiveness of disease prevention and wellness initiatives, among other things.

After a yearlong pilot program, the state opened the exchange in 2011 to all small employers, and 3,000 people are now receiving coverage. A similar private insurance exchange, New York's HealthPass, covers more than 30,000 enrollees in New York City, Long Island, and the mid-Hudson Valley.

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