Price Leader: The California Health Benefit Exchange as a C A L I FOR N I A H EALTH C ARE Driver of Low Premiums F OU NDATION Overview primary focus of a price-leader Exchange would With health insurance premiums increasing be to offer plans with the lowest premium prices more rapidly than the rate of inflation, many possible. Californians are unable to afford coverage and remain uninsured. Even many who now have While carrier participation across different lines Issue Brief health insurance worry that they may be unable of business may not be uniform when new to afford it in the future.1 Respondents to a 2009 regulations take effect in 2014, the lure of the large Commonwealth Fund survey indicated that 73% Exchange market is sure to result in keen interest of people who tried to buy insurance on their from a number of carriers. Early estimates predict own over the previous three years were prevented the Exchange will enroll approximately 2.5 million from doing so because premiums were too high.2 individuals.4 With the exception of the few large, Clearly, the cost of health insurance continues multi-state carriers, this expected enrollment is to pose a challenge to goals of expanding health higher than the membership of the vast majority insurance coverage. of health insurance carriers. The potential size of this market, coupled with California’s diversity One of the fundamental promises of health reform of carriers and provider networks (closed, broad, is to make health insurance more affordable and and limited) has strong potential to create the accessible for individuals and small businesses. competitive market that would be essential for this When signing the Patient Protection and model’s success.5 Affordable Care Act (ACA) into law, President Obama indicated that it was driven by “the core This paper articulates key features envisioned for a principle that everybody should have some basic price-leader Exchange model, and articulates how security when it comes to their health care.”3 In the Exchange would execute on this vision. many ways, the success of the California Health Benefit Exchange (CHBE) will be judged by its Values and Benefits ability to fulfill this promise. A price-leader Exchange would prioritize affordability and accessibility, aiming to put health The creation of CHBE offers a unique insurance within reach of as many consumers opportunity to implement policies that emphasize as possible. This model would not preclude the affordability of health insurance. A price-leader possibility of plans pursuing delivery system Exchange focused on affordability would aim to change and other innovations. In fact, it would drive down insurance premiums through selective reward such plans if they achieved lower costs as a contracting and through maintaining lean, result of these efforts. But the focus of the price- efficient operations. Qualified health plans (QHPs) leader model discussed in this paper (in contrast offered through this Exchange would be required to a change-agent Exchange model, discussed in to meet established quality standards, but the a companion paper) is on controlling premium A ugust 2011 prices, not on promoting a particular vision of long-term, Key Features and Operational system-wide transformation. Considerations A price-leader Exchange would encourage low premiums Similarly, the vision for a price-leader Exchange does by selecting health plans that offer the lowest price. It not preclude CHBE from attending to other critical would use a variety of mechanisms, many of which would dimensions of health insurance, such as health care likely have greater success in highly competitive, non-rural quality and service, both of which contribute significantly markets. These include: to achieving positive outcomes and consumer experiences, ◾◾ Limiting the number of carrier participants in order and which are necessary for CHBE to be successful. to achieve higher volume per carrier and an easier However, the price-leader Exchange would be driven consumer shopping experience. by the recognition that price is a fundamental factor in whether people purchase insurance. It would focus first ◾◾ Using negotiations with this limited set of carriers to on offering low premiums in order to attract, enroll, and drive down prices and achieve goals such as statewide secure affordable access to care for as many Californians coverage. as possible, as soon as possible. ◾◾ Encouraging carriers to develop new plans solely for Prioritizing affordable premiums in the California the Exchange, which may achieve lower price points Exchange would likely yield strategic and political through limited networks. benefits. Many constituents will judge the Exchange’s ◾◾ Maintaining focus on minimizing administrative costs ability to keep premiums low as an initial indicator of and creating automation and self-service capabilities the organization’s success. Further, because the start-up wherever possible (while meeting all state and federal timeline for CHBE is very short, it would benefit from requirements for customer service). remaining committed to a single primary goal. Keeping a tight focus on this very tangible metric would assist with ◾◾ Focusing on carriers with lower premiums, where the prioritizing resources and setting realistic expectations price can be scaled and/or replicated. with stakeholders. Consumer Choice The vision of a price-leader Exchange described in this A price-leader Exchange would exercise its authority paper includes an achievable set of activities for the short- under state law to engage in selective contracting and term, but could expand to include additional priorities in would limit participation to carriers with the lowest the future. For example, after the price-leader Exchange prices. By offering fewer carrier options, participating is implemented and functioning well, the CHBE Board carriers could expect to have access to a greater percentage could consider pursuing additional priorities, such as of the Exchange population. Expectations of higher providing greater consumer options and support, or more membership could boost carriers’ willingness to to accept actively promoting broader health system reform. (Models a lower price point in the Exchange. focusing on these priorities are outlined in the companion papers.) While federal law imposes a new structure on the types of plans the Exchange may offer, it still allows for some variation, primarily in the area of cost sharing. California law explicitly gives CHBE authority to further standardize these levels by being more prescriptive 2  |  California HealthCare Foundation about how the actuarial value is achieved.6 Although within a single benefit level. However, feedback from allowing cost-sharing variation within a given level could consumers indicated preference for a simpler shopping encourage carriers to develop innovative products for the experience with fewer options. So, over time, the Exchange, greater standardization could go further in Connector fixed benefit designs and reduced the number achieving price containment goals. of plans.7 Establishing uniform benefit designs allows consumers Customer Service Issues to accurately compare prices across products, making A price-leader Exchange’s service functions would price variation for the same coverage more visible. When focus on minimizing operating costs through lean benefits are not standard, it is difficult for consumers to administration, and on maximizing opportunities for determine the cause of price differences between products; automation and self-service by consumers. With lower the price point could be driven by breadth of coverage, operating costs, carrier assessments would not need to be cost of the networks, size of the negotiated provider as high, which, in turn, would allow selected carriers to discounts, administrative efficiency, population health offer products at a lower price point. management, size of margins, or other variables. Without standardization, consumers may mistakenly assume that a This is not to say that the price-leader model would higher premium represents more comprehensive coverage. provide bare-bones customer service or that it would consider service to be unimportant. This Exchange model By way of reference, the Massachusetts Connector would fulfill all of the requirements of customer service (Massachusetts’ health reform program implemented in as defined by federal and state legislation, including 2006) initially allowed significant cost-sharing variability developing the roles of “navigators” to assist consumers, as well as meeting all language and accessibility requirements. The baseline requirements of the price- Product Standardization: The Massachusetts leader Exchange could include evening and weekend Experience hours for live customer support, workers embedded The Massachusetts Health Connector’s unsubsidized within the community, and other service requirements insurance exchange (“Commonwealth Choice”) began with little more product standardization than required that may be necessary for the Exchange to meaningfully by the ACA, but soon found that consumers wanted support its prospective and current members. Self-help more choice of carriers and fewer, less confusing benefit tools would assist consumers with support they could design options to better enable comparison shopping. manage on their own before seeking a more advanced tier Without product standardization, many shoppers wrongly assumed that the lower-priced but actuarially equivalent of service. benefit plans offered less coverage, and that the higher price was a proxy for coverage or quality. This had However, as an exchange focused primarily on price, the opposite of its intended effect, driving consumers additional service functions emphasized in a more toward higher premiums thinking that they were getting service-oriented model (such as the service-center model more value, when they may have actually been choosing to pay more for an equivalent product. To address this described in a companion paper) would not be as high problem, the Connector eventually moved to standardize of a priority. For example, a price-leader Exchange would around nine popular plan designs across three actuarial likely not offer a 24-hour support line, and its online tiers (plus catastrophic coverage for young adults), support tools would likely not include tools that would based on the plan designs that were selling well in the exchange. be offered under a service-center Exchange model, such as applications that would enable consumers to model their Price Leader: The California Health Benefit Exchange as a Driver of Low Premiums  |  3 out-of-pocket expenses in a range of different products perception. ACCESS reduced processing time from based upon their known health status. 45 minutes to 25 minutes per application, thus lowering processing costs. It also reduced error rates, which have a Because federal funding could be available to support the significant impact on the efficiency of processing as well development of the Exchange before it is required to be on how the public perceives the quality of the program.10 self-sufficient in 2015, the price-leader model would focus on front-loading customer service development costs to Automated enrollment would require online integration the greatest extent possible. with carriers including a web interface that would share data between carriers and the Exchange. In the price- It would be important for the self-service capabilities leader model, the considerable resources required for of a price-leader Exchange to allow consumers to developing these integrated systems would be mitigated make purchases directly. Broker fees have historically because CHBE’s selective contracting would focus represented a significant portion of premiums, comprising on a smaller set of carriers. In addition, to the degree as much as 20% of annual premiums for new individual- that Exchange enrollment represented a greater share purchased policies. More recently, broker fees have of carriers’ overall business, they could also experience been on a downward trend due to medical loss ratio economies of scale and operational savings. These factors requirements in ACA (ranging from 4 to 12% of could help lower carriers’ rates for Exchange products. premiums in 2011) but they still remain a significant portion of revenue.8, 9 The price-leader strategy would not A price-leader model would aim to minimize explicitly eliminate brokers, but would strive to minimize administrative layers involved in enrollment through the costs wherever possible throughout the distribution chain. Exchange, which could mean a diminished or changed role for intermediaries such as insurance brokers and Managing Eligibility and Enrollment community eligibility workers. It could be that the In its goal of providing quality service through the most Exchange would negotiate more exclusivity or different efficient means possible, a price-leader CHBE would compensation structures with brokers who achieve invest in automated and self-service tools to improve both performance objectives. Such efforts would bring access to coverage and overall system efficiency. Easy-to- significant controversy that would need to be worked understand information and educational tools such as through with the relevant constituents. web-based videos and tutorials would help customers be as autonomous as possible when navigating eligibility and Carrier Procurement Issues enrollment. A price-leader Exchange would also establish The price-leader strategy would differ most from other concise and integrated tools to maximize the efficiency of models in its approach to the procurement of carriers. phone and in-person support functions. Similar to other The board would establish threshold quality, service, potential Exchange models, and as required by federal technology, network, and other requirements that any law, eligibility for a price-leader Exchange would be carrier must meet in order to participate in the Exchange. integrated with other public programs. The Exchange would require participating carriers to demonstrate their performance against these standards in As an example, the ACCESS Internet portal, which is a transparent way through public reporting tools. Among used in Wisconsin to support eligibility and enrollment the many factors for the Exchange to consider when functions for a range of government programs, created selecting participating carriers (such as financial stability, efficiencies that resulted in reduced costs and better public 4  |  California HealthCare Foundation customer satisfaction, and network reliability), the most consider a contracting rule that precludes admitting new highly weighted criteria for selection would be price. carriers for a proscribed period. The board would define specific benefit design features, A price-leader CHBE could also encourage carriers such as a uniform cost-sharing structure at each actuarial to offer narrow-network options. Most health plans value level. The board would also need to provide now — especially commercial carriers — have very broad clarification wherever the federal definition of “essential networks that typically include almost all non-Kaiser health benefits” allows for some variation. Bidding providers, including some high-cost providers and carriers would supply bids specific to these benefit hospitals. The result is that consumers can typically access designs, simplifying comparison of prices and scoring of virtually the same network through different carrier competitive proposals. options. Encouraging carriers to offer limited network plans that exclude access to some higher-cost facilities Because some lower-priced carriers in California are could realize significant premium savings. While the smaller plans, and many, such as Managed Medi-Cal savings associated with narrow networks vary depending plans, have not historically offered individual products, upon how the network change is implemented, plans the Exchange could take steps to assist low-priced plans have been able to offer price reduction as high as 25% expand to new lines of business or new geographic areas. by offering HMOs with limited networks.11 CHBE This could mean that the Exchange would perform could also encourage carriers to rely on low-cost regional particular operational functions that smaller carriers may provider networks where this tactic could generate notable not have developed, or that may be inefficient for these premium savings. carriers to offer due to limited scale. The Exchange could also provide assistance to carriers that wish to expand It should be noted, however, that limited networks can services into individual and/or small group lines of also come with some additional risk. Limited networks business in order to participate in the Exchange. are smaller and consequently could have less capacity in certain regions. For instance, a limited network product Carriers will be concerned about risk selection, especially with one hospital could have less inpatient capacity during the first few years of the Exchange when the than a network that includes six hospitals. Depending market is turbulent and new risk adjustment approaches upon the size and structure of these limited networks, are untested. For instance, carriers may be concerned CHBE could be required to contract with more of them that the first enrollees in the Exchange will be previously to provide sufficient access. Limited networks can also uninsured people with pent-up demand — especially create confusion for consumers who are used to a more individuals with pre-existing conditions who were unable open-network model. And finally, limited networks could to purchase health insurance before the requirement represent obstacles to continuity of care as members of guaranteed issue. CHBE could mitigate carrier risk migrate among Medi-Cal, Exchange qualified health selection fears in a number of ways. For instance, offering plans, and other commercial products on the Exchange the potential of greater volume by limiting the number that all have distinct networks with little overlap. of carriers should provide participating carriers with a more balanced risk pool. The Exchange could also California law requires CHBE to provide coverage negotiate multi-year contracts, which could spread risk statewide. However, the law does not require carriers over time. To defend against opportunistic carriers that to service any given geography. It can be difficult to might choose to wait out initial turbulence, CHBE could arrange for coverage, particularly managed care in sparsely Price Leader: The California Health Benefit Exchange as a Driver of Low Premiums  |  5 populated, rural areas. In these regions, there may be where they are especially profitable — although the limited carrier and provider competition, and thus less strategy would probably add some premium cost to the ability to negotiate prices. The ACA requires the federal lowest-cost, most competitive regions of the state. government to contract with two national carriers who would provide insurance in multiple states, and within Integration with Public Programs every region of the state. These options could provide Both federal and state laws related to the Exchange Exchange-based coverage in areas where the Exchange acknowledge the likelihood that people may move would otherwise struggle to attract carriers. CHBE may between subsidized coverage through the Exchange also want to consider requiring carriers to participate in and the Medicaid/Healthy Families programs when the Exchange in all counties for which they are licensed. their family income changes. The goal to provide some This could provide additional coverage options by state- continuity in insurance coverage and provider access wide carriers in difficult-to-cover areas, and could also during these changes has implications for both eligibility prevent these plans from participating only in regions policy and carrier contracting strategies. Providing continuity of coverage for those moving California Agency Experience in Carrier between the Exchange’s products and other public Selection programs is a worthy goal. To support this goal, a price- Other California state agencies have experience in leader Exchange would be especially interested in working negotiating with health insurers, focusing on premium reduction and other goals. These experiences reflect with managed Medi-Cal plans to the extent that those both successes and failures in the ability to control plans could offer lower-cost options in the individual premiums, which can be valuable history for the and small group marketplaces on the Exchange. The Exchange to draw upon when establishing its own added benefits in terms of continuity of care would be a contracting strategy. Consulting with these and other purchasers, each representing different perspectives welcome outcome. However, the price-leader Exchange on procurement, could provide CHBE valuable insights, might be willing to accept some limitations in provider context, and background as it prepares to negotiate with continuity for those migrating between coverage options health insurers. if that were necessary in order to realize significant cost The state Managed Risk Medical Insurance Board savings through a strategy of contracting with narrow (MRMIB) selects and negotiates premiums with network plans. The price-leader CHBE might seek managed care carriers for its Healthy Families Program. MRMIB also operated an unsubsidized exchange for to coordinate with Medi-Cal to develop strategies to small employers (50 or fewer employees) during the minimize the impact of this disruption. 1990s that had more than 147,000 enrollees when it was transitioned to administration by a private non-profit Metrics for Success entity, the Pacific Business Group on Health. MRMIB The success of a price-leader Exchange would be has chosen to contract with numerous carriers, both commercial and MediCal, and has maintained this wide measured by its ability to offer plans with lower premiums choice over time. and lower annual premium increases when benchmarked CalPERS selects and negotiates premium prices with against national and state standards. (Because carriers managed care carriers for over 1.3 million enrollees. participating in the Exchange are required by federal CalPERS contracts exclusively with commercial carriers law to price identical products at the same level inside (including one carrier that administers CalPERS’ and outside of the Exchange, the Exchange cannot self-insured plans) and has elected to reduce the number over time in an effort to address rate and quality issues. expect to offer lower prices than plans offered by carriers that participate in the broader individual and small 6  |  California HealthCare Foundation group markets. However, some carriers may choose that establish a very low subsidy level when matched to participate and offer lower priced plans only in the against California’s commercial market plans. This Exchange.) could result in fewer plan choices or in additional costs for those who qualify for subsidies. Further, because A price-leader Exchange would also be judged by managed Medi-Cal plans often use networks that include metrics that are common to all models such as customer community clinics and other providers that primarily enrollment, retention rates, the ability to meet service and serve low-income populations, the public might perceive quality standards, and customer satisfaction levels.12 CHBE as positioned outside of mainstream health care and coverage. This could bring with it the stigma of being To maintain the focus on keeping premium prices low, a government charity program. CHBE could establish standardized public reporting of premiums for participating plans. By comparing prices Furthermore, health care system costs are less driven and price increases against state and federal benchmarks, by carrier costs and more by the costs of the providers the Exchange’s progress toward its primary goal would be themselves. Relying solely on a strategy that puts pressure concrete and visible. on health carriers rather than a strategy that directly addresses the costs of health care may be insufficient Risks and Unintended Consequences to accomplish lower price targets over the long term. If the price-leader Exchange is implemented and succeeds, Purchasers in California’s self-insured and large group it has the potential to have a meaningful, market-wide markets have increasingly turned to strategies that focus impact on making health care coverage more affordable on these provider interventions (for example, the Pay and accessible. In addition, by offering viable alternatives for Performance initiative, and efforts to encourage to customers, it could drive more acceptance of limited accountable care-type organizations) as a means to control networks by customers, potentially driving down overall costs. market costs. However, there are a number of risks and unintended consequences that could result from Even if CHBE succeeds in controlling premiums through prioritizing premium price over all other variables. its procurement approach, providers and carriers could attempt to achieve a lower price point by shifting costs It will be difficult for the Exchange to anticipate all of to other purchasers, including self-insured large and the consumer behaviors and carrier practices that could mid-sized group purchasers. While this tactic may be impact risk selection. Carriers not chosen to participate in favorable to the Exchange, it may not not have a positive the Exchange could seek to undermine the Exchange in impact on the California marketplace as a whole. As an attempt to preserve and optimize their own business. such, CHBE should take steps to ensure that lower costs Despite many policy levers in federal and state law are not short-term attempts to purchase market share or intended to protect the Exchange from adverse selection, cost-shifting to other purchasers, but reflect true product- CHBE may be unable to assure a fair balance of risk line costs. inside and outside of the Exchange. While CHBE may conclude that it can best achieve Another potential issue is that focusing exclusively on its goals by selecting a few long-term partners, it could carrier costs could lead to preference toward Medi-Cal discover that carriers that have agreed to participate in managed care plans. At least in some geographic areas, good faith would find that doing so is not sustainable, or such a preference could result in low-premium plans that contract provisions they have agreed to are not viable Price Leader: The California Health Benefit Exchange as a Driver of Low Premiums  |  7 from a business perspective. It will be challenging for it would have to transition enrollees to other providers carriers to perfectly assess long-term business interests in when it loses a carrier in a service area. Being forced the new market environment of 2014. Despite all the best to change providers can erode consumer satisfaction intentions, it is possible that carriers would need to alter and therefore result in gaps in care that could impact their relationship with the Exchange, which could result consumer health. in market disruption. Finally, any cost-reduction strategy that redefines By excluding carriers from the Exchange marketplace, the relationship with brokers carries significant risk. the Exchange itself could be more vulnerable to the Brokers who believe the Exchange to be a threat to their risk-segmentation strategies of carriers operating solely livelihood could actively work against the Exchange outside of its boundaries. External carriers will have to sell by, for example, communicating doubts about CHBE products with essential benefits, and pool risks across all performance to consumers or by referring higher-risk their individual-market enrollees (and, separately, across consumers to the Exchange. all their small-group market enrollees), as required by federal law. Nevertheless, they will still be able to develop Conclusion products that vary considerably with respect to cost Given the uncertainties about the new insurance market sharing and provider networks, thus creating different that will come into existence in 2014, use of the selective products aimed at consumers with higher or lower health contracting approach associated with the price-leader care needs. Exchange as described in this paper is not without risk. However, it is an approach that could be implemented Given the safeguards provided by the insurance rule relatively quickly and, by emphasizing affordability, it changes of federal law, this is not as serious a concern offers a realistic prospect of making insurance coverage as it would be in the absence of those changes, but more accessible to Californians. Establishing a new vigilance would still be required. CHBE could mitigate business entity that could immediately serve millions this dynamic somewhat by using its state-law authority of people is a tall order for the Exchange. Maintaining to standardize some or all cost-sharing configurations a narrow focus with a specific goal that is most closely within the Exchange — a decision that would trigger a aligned with the immediate needs of the public could give related state-law requirement for carriers operating outside CHBE a good chance of success. the Exchange to sell at least one standardized product at each benefit level. CHBE would also want to participate vigorously in the development and monitoring of the risk adjustment process. Another risk associated with the price-leader Exchange’s approach is that excluding higher-cost carriers may make it more difficult for CHBE to ensure continuity of coverage for enrollees. Commercial carriers — other than the closed network Kaiser Health Plan — tend to have considerable overlap in provider networks. If, in order to maximize cost-efficiency, CHBE chooses to contract only where there is not a high degree of carrier overlap, 8  |  California HealthCare Foundation P r o j e c t C o n t r i b u to r s Endnotes CHCF Project Lead 1.Kaiser Family Foundation, Health Tracking Poll, conducted Marian Mulkey March 8–13, 2011, www.kff.org. Primary Contributors 2.“Individual Health Insurance Market Failing Consumers,” Lori Chelius The Commonwealth Fund, July 2009, Lesley Cummings www.commonwealthfund.org. Rick Curtis 3.Sheryl Gay Stolberg and Robert Pear, “Obama Signs Health Patrick Holland Care Overhaul Bill, With a Flourish,” The New York Emma Hoo Times, March 23, 2010, www.nytimes.com. Ann Hwang, MD Jon Kingsdale 4.Details on enrollment estimates provided in the companion Ed Neuschler overview paper, “Setting the Stage: Visions for the Chris Perrone California Health Benefit Exchange.” Sandra Shewry 5.Katharine B. Wilson, “California’s Individual and Small Nancy Wise Group Markets on the Eve of Reform,” April 2011, Lucien Wulsin California HealthCare Foundation. 6.GC §100504(c) per AB 1602 §8. About the F o u n d at i o n 7.Sabrina Corlette, Joan Alker, Joe Touschner, and JoAnn The California HealthCare Foundation works as a catalyst to Volk, “The Massachusetts and Utah Health Insurance fulfill the promise of better health care for all Californians. Exchanges: Lessons Learned,” Georgetown University We support ideas and innovations that improve quality, Health Policy Institute, March 3, 2011, increase efficiency, and lower the costs of care. For more ccf.georgetown.edu. information, visit us online at www.chcf.org. 8.“Health Plan Brokers Cry Foul,” Sacramento Business Journal, January 21, 2011. 9.Arthur D. Postal, “NAIFA Finds Deep Health Commission Cuts,” Life and Health Insurance Underwriter, May 3, 2011. 1 0.“Optimizing Medicaid Enrollment, Spotlight on Technology: Wisconsin’s ACCESS Internet Portal,” The Kaiser Commission on Medicaid and the Uninsured, October 2010, www.kff.org. 1 1.Duke Helfand, “A Shift Toward Smaller Health Insurance Networks,” Los Angeles Times, April 3, 2011, www.latimes.com. 1 2.See companion paper on operations, “Competing Demands: Operational Imperatives for the California Health Benefit Exchange” for a description of the suggested standard set of metrics. Price Leader: The California Health Benefit Exchange as a Driver of Low Premiums  |  9