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Daunting Challenges Await Exchange Board

It will be a powerful job, and a tough one, too. The five people who will oversee the Health Benefit Exchange in California will be helping to set up an extremely complicated and far-reaching bureaucracy.

Those five people will need to please health insurers, health care providers, politicians, advocates — and many millions of Californians. They need to run an insurance exchange that is attractive to small-business owners, people on individual plans, safety-net patients, middle-class families, seniors and the so-called young invincibles.

That’s a lot of pleasing.

“Think of it as a massive startup,” said Sumi Sousa, the Assembly speaker’s health care adviser. “It’s a huge undertaking. We need to touch every constituency with the exchange. And that’s why you have to have really smart people in there, … and good luck to them, because it’s an impossible job,” she added with a smile.

Three members have been chosen for the board — current Secretary of Health and Human Services Diana Dooley, former HHS Secretary Kim Belshé and Gov. Arnold Schwarzenegger’s (R) former chief of staff, Susan Kennedy. The other two members will be named shortly after the budget is finalized at the start of March, according to Dooley and Sousa.

Even though the exchange won’t begin operating until 2014, the board will have to begin building its infrastructure as soon as possible, Sousa said.

“Someone has to start writing checks soon,” Sousa said. “This board will need to move [quickly].”

Reinventing the Massachusetts Wheel

A successful exchange was established in Massachusetts before the federal health care reform law passed. It has been a model for the design of the California version, which is the first exchange law in the nation in response to the passage of the Affordable Care Act.

“The law in California is quite good,” according to Jon Kingsdale, founding executive director of the Massachusetts Health Connector, the agency that runs the state exchange. “I think the California law’s very well-drafted.”

It’s the implementation of that law that’s going to be challenging, he said. For instance, the California exchange will break new ground by incorporating a large market of individual purchasers of insurance. Kingsdale calls them the non-group market.

“In Massachusetts, we were lucky. Our non-group market was only about 36,000 people. Here [in California], it’s several million.”

The individual market — consumers buying coverage directly from an insurer, not through an employer — tends to have either higher rates or poorer coverage because of the lack of group buying power, according to some consumer advocates. Insurers spend more time screening consumers with individual plans, advocates say, to cherry pick the lower-risk ones, and so the administrative cost of those individual policies may be higher than that of group policies.

At the same time, because they offer fewer benefits, individual policies sometimes can be less expensive. The cherry-picked nature and inherent pricing problems of individual policies create a big problem for the new exchange, Kingsdale said.

“Your problem in California is, you have the opposite of Massachusetts. Here [in California], you have about two to three million non-group policyholders, and they could see a huge increase (in their premiums) to continue in the non-group market,” Kingsdale said.

Also, he said, the individual market has some hidden pitfalls. Consumers can play the system, moving in and out of plans as their circumstances change.

“Once you make the non-group market functional, it creates other problems. You have people jumping into and out of markets, like if you know you’ll now need a bunch of services, you switch plans then,” Kingsdale said.

“There’s a big storm coming over this,” he said. “There’s a lot of great stuff in here in the California exchange, but this is a big problem.”

Learning From Past

California has had an exchange before. Pacific Health Advantage, set up in 1992, was established by the Pacific Business Group on Health and originally was named the Health Insurance Plan of California.

The exchange shut down in 1996, in part falling victim to adverse selection, according to John Grgurina, who ran PacAdvantage, as the exchange was known.

“There are many giant decisions the exchange must face,” Grgurina said. “The exchange is going to be pressured to be Superman, all things to all people, and the [private health insurance] market will take advantage of that.”

For instance, he said, “If the market raises premiums 50% on smokers, and for public policy reasons the exchange decides it will only raise premiums 20% on smokers, well then, you’re going to get a rush of [higher health risk] smokers into the exchange.”

The idea of adverse selection is a lot like that, he said. Health insurers might offer lower-cost policies to healthy people outside the exchange, so that the only patients left in the exchange have bigger, more expensive health challenges.

“California is very aware of adverse selection from the experience of HIPC,” Kingsdale said. “And there’s a lot in the reform act to address that.” For example, he said, “Insurers within the exchange can’t just offer to one level of coverage. They have to offer at several levels.”

The Market Rules

“If there’s one thing you must do in this exchange,” Grgurina said, “you must follow the market rules.”

That’s one reason the exchange board in California is limited to only five members, Sousa said, so it can make more rapid decisions to reflect market shifts.

According to Kingsdale, perception of the insurance you can get through the statewide pool is just as important as the actual insurance product.

“If you want to be a good retailer [of health insurance], you have to sell a brand name people like,” Kingsdale said.

That means selling people an attractive, easily understandable package, because it’s something most people don’t spend much time shopping for, he said.

“It may come as a bit of a surprise to you, but most people hate insurance,” Kingsdale said. “Not just insurers, but insurance. No one reads it, no one wants to hear about it. No one goes down to the corner broker to smell the new ink on their policy,” he said.

“It’s a push sale. A grudge buy. And if you want this exchange to have some sway, then you need large numbers. You need a lot of people to want to sign up. It’s very important that the exchange be a positive, likeable, attractive insurance store,” he said.

Because people don’t like insurance and they don’t want to hear about the details of coverage, it’s vital to make the prospect of using the exchange easy and painless, he added.

“For all of these reasons,” Kingsdale said, “beyond the humanity of getting everyone insured, it’s important to get everyone signed up — to a document they will never read, and don’t understand.”


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