By Leesa Tori
Published in Health Affairs Blog
You’ve got mail…
It turns out that was really a bad thing, at least the type of mail that I received on my first day at my new job. I had been hired as part of a leadership team working to get the Pac Advantage small business health insurance exchange back on track. The letter was from a national health insurance carrier announcing it had decided to exit from the exchange; they were giving their 180 day contractually obligated notice.
In 2001, PacAdvantage, the largest non-profit health insurance exchange in the country, was peaking, with enrolled membership reaching nearly 150,000. At the same time our suppliers — insurance carriers — were starting to squirm. The exchange offered guaranteed-issue health insurance plans to qualified small businesses in California. But with the carriers balking at participating over concerns about adverse selection, we increasingly had fewer options to offer our small business customers.
The next five years were some of the busiest, most intense of my professional life, but I did learn some valuable lessons about what should have been done differently to keep the plans participating and the exchange solvent. Those lessons were learned too late to save PacAdvantage, which closed its doors in 2006. However, they are timely now as states begin to design the new small business health insurance exchanges created under health care reform, which are set to launch in 2014. With so much current discussion focused on what consumers want and need from the exchange, it is critical to also consider what plans want and need to participate.
For me, this is not simply a hypothesis or academic guess; these lessons were a drinking-from-a-fire-hose-never-forget professional experience. So I will attempt to briefly summarize them in my own words here; they are also discussed in a newly released paper by the Pacific Business Group on Health, which administered Pac Advantage from 1996 until 2006. The working assumption is that the state has a goal to create a sustainable marketplace and improve value to small employers and consumers through healthy competition among carriers. One means to that end is to make sure that dysfunctional market practices are not allowed to undercut the exchanges.
1. The small business insurance market is highly elastic – even small pricing changes trigger big changes in demand. In simplified terms, unless you were a lower priced plan in the pool you were going to be the recipient of the enrollees who had some reason to care about what health plan they chose (perhaps they were already receiving services, were planning on having a baby, or were ready to have that elective procedure they had been putting off). If you were on the other end of price, the high end, you were asking for trouble. In an employee choice model where employees can chose between a variety of carriers and benefit designs, the distribution of those choices is directly related to health plan cost.
2. To remain solvent and sustainable, a small business exchange must remain in synch with outside market practices, especially when enforcing eligibility rules and monitoring enrollment. The plans believed that Pac Advantage, through a variety of marketing approaches and operational practices, was attracting bad business to start with. Some perceived Pac Advantage as a dumping ground for bad risk. Once word hit the street that it was easy to get a policy at Pac Advantage if you could not get insurance elsewhere, the adverse selection problem got worse.
3. Price can’t fix everything if there is adverse selection. In simple economic theory, raising the premium price suppliers charge is the most likely first attempt to fix the problem, but in health insurance, equilibrium is a tricky calculation and one that underwriters will tell you is more of an art than a science. If an exchange gets on the wrong side of price, it’s a fast and nearly-impossible-to-stop spiral to the bottom. In those cases, pricing can’t be raised high enough to cover expenses and still keep membership.
As prices are raised, employers and consumers drop coverage. Then, the overall numbers drop and the pool shrinks, and – crucially — the insured who are most likely to stay are more than likely the ones who need it the most. The pool becomes increasing higher risk and eventually unsustainable.
To say it’s complicated is an understatement. Understanding the economics of supply and demand will be critical to truly developing an exchange that adds real value to the market. Here are some do’s and don’ts on avoiding adverse selection and the downstream supply problems outlined above:
Do – Innovate new ways of providing coverage and access in the market. Challenge current thinking and “the way we always do it” mantras.
Don’t – Go to the market without a sound risk mitigation plan. Engage chief actuaries, sales leadership, and operations teams at partner health plans before going to market with new innovations.
Do – Refresh approaches and strategies with new information from a multitude of stakeholders. Understand what advocacy leaders are asking for and balance requests with trends in the market. Identify areas of common ground with the health plans, such as a focus on keeping chronically ill consumers stable enough to be in less intensive treatment settings whenever possible. Watch carefully for and identify early opportunities to keep prevention and wellness as a top priority.
Don’t – Assume others will follow suit. Even good ideas can fall flat if the proper implementation plan has not been developed and executed. If it becomes obvious that the “great” new ideas you are trying to implement are not being adopted by the market, do not be afraid to retrench, retool and try again.
Do – Stay in close contact with health plan partners at multiple levels and within various departments. Keep an open dialogue about “word on the street” talk and probe about new concepts and changes to existing portfolios that are being considered. Do your best to be at the table when the health plans are planning future cycles and understand that this planning takes place 12-24 months ahead. Upcoming pricing cycles should be discussed prior to final rate setting.
Don’t – Limit communications to quarterly meetings with large groups. Take a “no surprises” attitude to the partnerships. Learn when key decisions are being made and be certain to have a stated opinion on the decisions that matter most to the exchange.
In June 2005 we received more mail – again, not the type we wanted. This time it meant the end for Pac Advantage. It was no real surprise and our team was proud of the years we had kept the exchange active, but it also spelled the end of policies for some 100,000 Californians and the termination of approximately 100 PacAdvantage jobs.
We began the difficult and depressing task of closing down the country’s largest non-profit health insurance exchange after 12 years of trying to provide the best for California small businesses and their workers and families.
I hope the California Exchange Board and those from other states can learn from our disheartening experience, and do better for the people of California this second time around.