The full implementation of the Patient Protection and Affordable Care Act, also known as Obamacare, is less than seven months away now. For many people, the confusion around what this bill will do, what it won't do, why it was implemented, and what the potential benefits and risks are remains as elusive as ever. With each passing poll from Gallup and various other sources, the only prevailing theme I can come up with is uncertainty.
So today, I thought it would make sense to take a closer look at the state health exchanges that are being created under the PPACA and see how they could positively and negatively affect you and the insurance sector in the coming months. If you have a question, we may certainly have the answer below...
Source: White House on Flickr.
Why create a health exchange?
To fully understand the benefits and risks of state health exchanges, we first need to understand why they were created in the first place.
One of the primary goals of Obamacare is to ensure that as many people as possible have access to health insurance as an individual, through their employer, or via Medicare. Another primary objective is to keep the costs of health premiums from soaring. One way to accomplish both of these goals is by creating state-run exchanges where insurance companies can compete against one another on a level playing field with similar health offerings and transparent pricing. The thesis here is that consumers will be able to make smarter insurance purchasing decisions by being able to compare similar insurance packages with one another in a transparent setting.
How will these exchanges affect you?
The answer to this question is going to be different for everyone. If you're receiving health insurance through an employer or via government-run Medicaid or Medicare, you're probably not going to see too many drastic changes. If, however, you purchase health insurance for yourself, then there will almost certainly be changes to your coverage and/or pricing.
One of the new mandates of the PPACA is that it will create more encompassing minimum insurance policies. For people who purchased catastrophic insurance plans or bare-bones plans in the past, they could be in for quite the rate shock in January with a requirement of more encompassing policies. Conversely, people with preexisting conditions and/or those in need of premium health plans could see their costs fall as competition among insurers increases.
Who will run these exchanges?
The ultimate hope of the PPACA is to have the individual states set up and manage their own insurance exchanges. Admittedly, setting up an exchange isn't as simple as it sounds -- it'll require sophisticated software to display and store vast amounts of insurance policy data. In addition, politics plays a key role among state governors -- and suffice it to say that not all are in agreement that the PPACA is right for America. According to federal officials, just 17 states have opted to run their own exchanges with the remaining 33 to be run by the federal government.
What are the benefits of an exchange?
With transparent pricing and easy-to-understand price tiers (such as California's state exchange, which will feature bronze, silver, gold, and platinum packages), consumers should benefit as insurance companies are forced to openly compete against one another for new members. If one company fails to price its policies accordingly, it will lose business, plain and simple. In short, competition will promote innovation and lower premium prices.
What could go wrong?
While this sounds like a "happily ever after" plan, there are plenty of factors still left to be solved.
For instance, what if many of the national health insurers choose not to participate in many of the state exchanges? In May, California unveiled the participants in its state-run exchange. Of the 13 health-benefits providers, notably absent was UnitedHealth Group (NYSE: UNH), Aetna (NYSE: AET), and CIGNA (NYSE: CI). Although these three insurers dominate the commercial side of the business and only maintain 7% of the cumulative individual insurance market in California, it seems rather ominous to me that they would pass on their chance to compete in California's huge patient pool. Furthermore, it points to the growing skepticism that many insurers (even the big ones) have about the upcoming implementation of Obamacare and the initiation of state exchanges.
If you think California was just an oddball example, you may want to think again. When the nation's biggest insurers were asked how many state exchanges they'd enter, UnitedHealth guided to a minimum of 10, but no more than 25. WellPoint (NYSE: WLP), the company behind Blue Cross Blue Shield, is only entering the 14 states where it already currently operates. It's the same story for Aetna, which plans to enter just 14 states.
If these insurers choose not to compete in new states, then that could result in the bulk of health insurance underwriting falling into the hands of a select few parties in each state. Although the medical loss ratio will mandate that 80% of premiums collected be spent on health care services, we have seen time and again that pricing power ultimately lies with the health-benefits providers. Less competition could create fewer choices and less incentive to be price competitive.
How is this good for insurers?
Health exchanges are going to be great news for insurers that are focused on attracting the roughly 16 million people who will be covered by the Medicaid expansion. Insurers have been angling for the past two years to get a bigger piece of the government-run health care pie known as Medicare. Take WellPoint as an example, which purchased AMERIGROUP for $4.5 billion to become the nation's largest Medicaid-based insurer last year. Another example is CIGNA, which purchased HealthSpring in 2011 for $3.8 billion, a hefty 37% premium at the time. The point is that the margins on government-run Medicaid might not be anything to write home about, but the sheer strength in numbers is enough to make this is a very profitable venture for these two health-benefits providers.
How will exchanges hurt insurers?
One of the biggest detriments to insurers at the moment is the lack of knowledge most people have with regard to what Obamacare can do for them. In a March Kaiser Health Tracking Poll, a whopping 48% of people responded as "hearing nothing at all" as to whether their state was setting up a health exchange! How are insurers like WellPoint or CIGNA expected to gain new members if the people they're trying to attract have no clue where to go, or how their state's exchange is being run?
Another factor to consider is that even if consumers have the information in front of them, will they be able to use it in a meaningful way to make smarter decisions? Many polls thus far demonstrate how few Americans are well-versed in what Obamacare could mean for them, so the prospect of the consumer making an educated choice isn't a certainty, either.
Don't discount the possibility, as well, that high levels of competition could make it too costly for insurers to enter certain markets. That could be the precise case why UnitedHealth, despite its size, chose to keep its feet out of the water in California.
When can I buy insurance on my state's exchange?
For those states that are ready, consumers will be able to begin buying health insurance from exchanges as early as Oct. 1, with the full implementation of the PPACA going into effect on Jan. 1.
Now you know
Hopefully you now have a better understanding of why the state-based health exchanges were formed, how they will benefit consumers, and what drawbacks might be present. Furthermore, understanding the reasoning, benefits, and risks behind the health exchanges is almost certain to give you a better understanding of the insurance sector and its major players. Ultimately, as long as health-benefits providers still control their own premium pricing, I don't feel that the sector will have too much to fear -- but that's just one man's opinion, of course.