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CMS on Obamacare's Health Insurance Exchanges: 'Let's Just Make Sure It's Not a Third-World Experience'

March 22, 2013

By Avik Roy

Obamacare’s reorganization of the U.S. health care system is slated to go on-line on January 1, 2014. That’s when the law’s key provisions go into effect: its individual mandate; its rules requiring higher premiums for young people; and its expansion of insurance coverage through Medicaid and the law’s subsidized private insurance exchanges. Increasingly, officials in the Obama administration are worried that the rollout of the exchanges will be chaotic, given the law’s complexity and unrealistic deadlines. "We are under 200 days from open enrollment" on the exchanges, noted Henry Chao, deputy chief information officer at the Centers for Medicare and Medicaid Services, at a recent conference. "I’m pretty nervous—I don’t know about you."

Jane Norman of Congressional Quarterly reported Chao’s comments, which took place alongside those of Gary Cohen, another CMS official involved in exchange implementation, at a national policy forum sponsored by an insurer trade group. "It’s only prudent to not assume everything is going to work perfectly on day one," said Cohen. "As we move closer to October, my hopes are the range of things that could go wrong gets narrower and narrower."

Chao said that he’d once held high hopes that the exchanges would run smoothly from the beginning, but that those hopes had been dashed. "The time for debating about the size of the text on the screen, or the color, or is it a world-class user experience, that’s what we used to talk about two years ago," said Chao. "Let’s just make sure it’s not a third-world experience." Both Chao and Cohen said that it’s likely that some of the state-based exchanges might not be ready on time, in which case the federal government would step in as a backstop.

Rate shock is a bigger danger than implementation

It’s almost certain that the rollout of the exchanges will be choppy, in terms of the user experience, the Byzantine application process, and the degree to which insurance plans are capable of formulating their products on time, given how late HHS has been at giving regulatory guidance to carriers. But while exchanges are complicated to set up, it’s not an impossible task; after all, Massachusetts has had an Obamacare-like exchange for years.

The real problem is that the blizzard of mandates and regulations that accompany Obamacare’s exchanges will force many people to buy far costlier insurance than they’ve had to in the past. "In some markets," said Aetna’s CEO, Mark Bertolini, insurance premiums could increase "as high as 100 percent. And we’ve done all that math. We’ve shared it with all the regulators. We’ve shared it with all the people in Washington that need to see it. And I think it’s a big concern." Privately and publicly, most of Bertolini’s peers at UnitedHealth, WellPoint, Humana, and Cigna have said the same thing.

What will cause the rate shock? A number of things. First, Obamacare forces young people to pay far more for health insurance, in order to mildly subsidize premiums for those in their early 60s, using a provision called "community rating." Second, the law forces insurance plans to have a higher "minimum actuarial value," which makes plans more financially generous but also more expensive.

Third, the law’s famous "guaranteed issue" provision forces insurers to take all comers, even if they are already sick: a great deal for the sick, but not for the healthy. Fourth, the law gives HHS the power to force insurance plans to contain all sorts of extra benefits that customers wouldn’t otherwise pay for, driving up the cost of those plans.

Fifth, the law contains an utterly nonsensical premium tax that insurers will be forced to pay, and pass on to their customers in the form of higher premiums. It also contains taxes on pharmaceuticals and medical devices that will also be passed on in the form of higher premiums.

Republicans should advocate common-sense exchange reforms

Each of these cost-increasing provisions of Obamacare is harmful because they make health insurance less affordable to the middle class, while also driving up the cost of subsidizing insurance on the exchanges: forcing the government to extract even more money from taxpayers. By reforming and/or repealing the worst of these provisions, Republicans can make health insurance cheaper for millions, while also reducing the amount of federal spending needed to subsidize the exchanges.

In particular, Republicans should repeal the health insurance tax, along with age-based community rating. They should reform the law’s essential health benefits provisions, such that insurance plans have more flexibility to offer more affordable products. Finally, the law should give insurers more latitude to design plans with higher deductibles and co-pays, along with health savings accounts, in order to provide more cost-effective insurance.

For decades, progressives have had a more appealing argument than conservatives when it comes to health care. Progressives were in favor of expanding coverage, whereas conservatives were opposed to it on limited-government grounds. However, now that nearly everyone will have coverage, the dominant question in health care debates will be the cost of coverage, especially how much costlier coverage will be under Obamacare. This is a debate that will take place, increasingly, on conservative turf.

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