Will Health Exchanges Add High Admin Fees to Premiums?

As states develop their health insurance exchanges one of the unresolved issues is how they will become self-sufficient by 2015. Here is an article from AIS that looks at the question:

Analysts are at odds about whether health insurance exchanges being set up for individuals and small groups will result in significant premium hikes to consumers — because the entities will be required under the reform statute to handle numerous administrative functions.

John Sheils, the vice president of consulting firm The Lewin Group who conducts reform analyses, says it only stands to reason that exchanges, which are required under the reform statute to perform about a dozen functions now handled by insurers and brokers, “can’t run for free. If you’re going to have exchanges perform functions not performed today, it will increase costs.”

“It’s possible to have huge economies of scale to get 10,000 people [enrolled in a plan] at once, but the exchange would have to absorb costs and pass them on to consumer cost,” Sheils asserts to HRW. “The only argument that exchanges can save money is [when] insurers get a list of 10,000 people, and don’t have to put 10,000 together [themselves]…but the costs haven’t disappeared.”

Among its administrative duties, an exchange must enroll people for coverage — “and there’s no reason to think an exchange will sign people up for less,” he says. “It may be more expensive if the insurer still has to maintain some part of the process to sign up people. The insurance company may get a list, but still has to set people up in their system, so there’s a possibility of duplication of services.”

Exchanges Will Have Unprecedented Functions

Exchanges also must make arrangements for collecting premiums, handle premium subsidies, certify that participating health plans meet federal and state requirements, inform employers of termination of coverage, run a toll-free information line and offer a rating system that allows a comparison of plan quality and cost. “We’re talking about functions that have never been performed before,” Sheils says of some of them.

In making his argument, Sheils points to the history of a now-defunct private exchange called the Health Insurance Plan of California (later called PacAdvantage), which ended up adding 4.5% to premium costs to cover its administrative expenses. “I’m concerned it could be much higher, though,” he says. “Like processing eligibility for premium subsidies: That’s a cost that’s going to be heaped on the exchange.”

Rick Curtis, president of the Institute for Health Policy Solutions, a nonpartisan organization giving technical assistance to California and other states on exchange design, disagrees about the potential impact. “I think [administrative] functions of the exchange, other than the eligibility function, should be a wash,” he tells HRW.

Curtis contends that states’ newly created exchanges should be “considerably bigger” than was PacAdvantage because small employers will want to participate in them in order to get tax credits. The now-defunct California exchange, he notes, was for small groups, so its 4.5% premium cost add-on may not translate to individuals. He says pricing for that exchange was difficult because it couldn’t rate for health status although the outside market could do so, and there were inefficiencies and duplicative administrative efforts because only a small portion of participating small groups’ employees chose it as an option. He asserts that the Connecticut Business and Industry Association’s Health Connections exchange is a more instructive model.

Brokers represent another question mark, Sheils says. “The state can decide not to use brokers [for the exchange], and that can save them 8% [on typical small-employer group commissions] on some of these numbers,” he says. “But taking brokers out also will reduce the numbers enrolled.” Moreover, employers, who rely on brokers for various kinds of insurance beyond health, may balk at the idea of not using them, according to Sheils. He asserts that by using brokers, “You insert a layer of bureaucracy, and you’ll pay more for that bureaucracy.”

Some people may think that the exchanges will save money if they somehow regulate the industry a little more, eliminating high-cost health plans, Sheils tells HRW. “But there’s nothing more efficient about running the exchange, particularly if you’re going to keep brokers….It’s hard to see how exchanges will save costs.”