California First With Exchange, but What Will It Look Like?

Lost amid the hype and hope surrounding the California Legislature’s landmark creation of a Health Benefits Exchange network is the fact that very few people in the state — even the legislators who passed it — really know how the exchange will work.

The exchange will provide consumers with a marketplace of health insurance plans through a website with standardized, detailed information about the plans. It will offer health plans in five categories, ranging from catastrophic coverage for young adults to high-end plans with extensive benefits. The exchange also will provide resources to connect eligible Californians to federal subsidies for health coverage or government programs such as Medi-Cal, California’s Medicaid program.

California’s exchange is likely to be the largest health benefits exchange operated by a single state, with as many as 8.3 million residents expected to be eligible for coverage.

How many Californians will actually enroll in the exchange? How many health plans will participate? What will the provider payments look like, compared to current payment levels? Will middle-class families sign up for it, or will it end up catering more to poorer patients, such as those in Medi-Cal?

No one really knows.

But health care experts in California have some ideas about what needs to happen for the health benefits exchange to work.

How Exchange Is Expected To Work

According to California Health and Human Services Secretary Kim Belshé, there are approximately 6.5 million uninsured Californians. Those patients are currently able to receive health care services, the cost of which is passed on to insured Californians in the form of higher health plan premiums and through residents’ taxes.

The idea of the exchange is to insure almost all underinsured and uninsured Californians, as well as other currently insured Californians, pooling risk to create a statewide health plan network that has low premium rates for consumers and high reimbursement rates for care providers.

Massachusetts already has set up a successful exchange, but California is the first state to respond to the national health care reform law by passing legislation to create one. California is particularly well-suited to launch this program, according to John Ramey, executive director for Local Health Plans of California, in light of the health care reform plan the state pursued just three years ago.

“It’s amazing how similar national health care reform is to what California was trying to do in 2007,” Ramey said. “The national reform has most of the same characteristics.”

The proposed exchange, he said, is similar to what the state has already put in place with its Healthy Families program, in terms of establishing an application and tracking process to handle enrollees. (Healthy Families is the state’s Children’s Health Insurance Program.)

“California policymakers are more familiar with the whole thing because they have Healthy Families as a model. A lot of the concepts are the same,” he said.

He added, “It will offer multiple health plans, the same plan for differing premium prices. The exchange will determine which health plans are eligible to be offered. And under California law, the exchange will have additional authority over things like quality and price.”

The Challenges

How the state agency that will be created to run the exchange operates will be critical, Ramey said. Decisions need to be made clearly and simply, he said, without the waffling and equivocating often found in government agency policy stances.

“There will be significant challenges for California,” Ramey said. “The new exchange governing board will have a significantly difficult task.”

But, he added, “they’ll also have big advantages, because the health care community is more familiar with those challenges.”

Most of the confusion about the new system likely will stem from the “no wrong door” capability the system hopes to have, he said.

“The biggest challenge is that, between Medi-Cal, Healthy Families and the exchange, it needs to be essentially interchangeable,” Ramey said. “The design requirements in the federal law mean that you shouldn’t reapply to Medi-Cal to qualify for the exchange.”

And even more important than having the exchange mesh seamlessly with existing programs, he said, is that hopefully a crush of non-Medi-Cal patients will also join the system — to make the pool of patients larger and spread the risk more evenly. That goal presents a big logistical hurdle, Ramey said.

“How that’s going to work is a major challenge,” he said. “There is no interface now between Medi-Cal and the county welfare application process, that’s a closed system. And no one knows exactly how they’re going to coordinate Internet-based applications and uniform application processes.”

“Then there’s the whole issue of grading the plans,” Ramey said. “To try to apply some kind of quality standard. That’s certainly not without controversy.”

We Did This Before

In 1992, California legislators helped create the Health Insurance Plan of California, which later became PacAdvantage (which was formally named Pacific Health Advantage).

The idea was strikingly similar to the current California Health Benefit Exchange — a health care insurance pool designed to give small employers better and more affordable access to health insurance coverage.

John Grgurina was the executive director of PacAdvantage when it shut its doors in 2006, and he has a strong familiarity with what worked — and what did not work — in the insurance pool.

One of the big reasons the system failed, he said, is that some private insurance companies working with PacAdvantage offered lower rates outside the network to some of the healthier customers, essentially cherry-picking the healthy patients and increasing the degree of risk with remaining patients.

“I don’t blame them; it made good business sense,” Grgurina said. “They wanted a group to not go through the exchange, but instead take a slice of that business. So if you take 10 healthy patients out of a group of 40, that increases the risk in the exchange.”

Also, he said, HPIC made it clear from the start that the price paid by health insurers would be higher than the market. It was an attempt to flex its pooled muscle. But, Grgurina, said, “Every one of those carriers had a block of that business already. And any time you have a product that’s more expensive, you’d be reluctant to take it on. Why would any carrier want to participate?”

In the new state exchange, he said, it will be imperative to match the marketplace — to charge the same price as other insurers, but provide a bigger range of choices for consumers.

Also, he said, health care agents, people who represent groups of insured patients and find the best insurance deal for them, were not paid similarly to what the market was paying them. “That was a non-incentive for agents,” Grgurina said. “They did not have an incentive for including their plans.”

Huge Opportunity

The brightest hope for success, Grgurina said, lies in the inclusion of a pool of about two million patients who are privately insured but could get a better deal on coverage through the exchange.

“There are [federal] subsidies that go up to 400% of poverty — that’s well above median income rate in California,” Grgurina said.

That level of 400% of poverty rate tops out at an income of more than $88,000 a year for a family of four, he said. The eligibility ceiling is a gradual one, so families wouldn’t qualify for much health insurance aid at the upper end of that scale.

But, Grgurina said, “It still means a family of four making $70,000 could save a lot of money.”

There will be insurers who want to participate in the exchange, he said. If the exchange quotes the same pricing plans as the private market, that would help avoid the problem of private insurers’ use of adverse pricing and cherry-picking of healthy customers.

“The [exchange] plan is saying you can get it cheaper if you come to us. That is a big driver and motivator [for consumers] to be in the exchange,” Grgurina said.

Into the Future

At its root, the exchange basically gives the state — and its citizens — much more buying power, which may mean lower premium rates and a wider array of choices in those health plans.

“Look, large employers like IBM can get decent rates because they have 40,000 people to insure,” Grgurina said. “How would it be different if the state does that?”

It’s the same concept that CalPERS uses, too, he said. Many customers, lower price, greater choices of coverage.

“The captive audience is absolutely huge,” Grgurina said, “and you have to make sure that whatever the rules are in the marketplace, that’s what the exchange has to do.”

Different states will set up exchanges in different ways, Ramey said. Some will have very little regulation, and some will have more influence over the health insurance plans offered — and the latter model is where California is headed, he said.

“In California, it’s also about price and quality,” Ramey said. “Clearly, California policymakers have leaned toward a more aggressive model of the exchange.”

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