It’s not sexy, but the new ‘insurance exchange’ could be the key to good health reform

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By Consumers Union on Thursday, January 7th, 2010

It’s not sexy, but the new ‘insurance exchange’ could be the key to good health reform

You probably haven’t heard much about the proposed ‘insurance exchange’ in the health reform bills. It doesn’t make sexy fodder for political talk shows, but it very well could be one of the most important things Congress does to get health reform right. The Senate and House bills take different approaches to the exchange. How they’re combined in the final bill could make all the difference to reform’s success.

Simply put, the exchange would be an organized insurance mall where you could easily shop and compare policies based on their benefits and cost. If you’ve tried to buy insurance before, you know it’s a hit-or-miss venture at best, as we describe in our analysis here, and there is no way to easily figure out the best deal. That’s because coverage—as defined by the small print—can vary a lot, as can the price. And in some places, there just aren’t that many options to begin with, especially if you are buying coverage for employees of your small business.

By putting all your options in one place and giving you the ability to shop effectively, the exchange creates real competition and that has larger benefits—lower prices and better service. How would that work?

The exchange itself: Having all insurance companies offer their products in one place – with transparent pricing – will pressure them to compete with each other and ultimately get all of us a better deal. Marketing and overhead costs should decrease since every policy will be offered in one spot, and ultimately our costs should go down since insurance companies will have to spend the majority of our premiums on healthcare, not marketing.

Competition: To be eligible for the tax credits to help buy insurance, coverage must be purchased through the exchange, so a lot of people will be shopping there. That means companies will want their offerings presented. To be able to sell there, policies offered through the exchange must meet some minimum standards and companies can’t impose unjustified rate increases. From that baseline, people will shop for the coverage they want at the price they can afford, and their buying decisions will help drive down rates and improve those coverage options.

Accountability: Anyone selling insurance in the exchange would have to follow rules — policies must be complete and cover what they claim; sales tactics and marketing tactics would have to be fair; all customers would have a clear process to complain and appeal denied claims; and no company could charge excessive premiums. Companies that don’t play by the rules get ousted from the Exchange and can lose a lot of customers at once. The exchange gives us all the kind of leverage that only the largest employers have today.

So we know the exchange is vital to reform. The question now is what approach the final reform bill will take – the House version, which would create a national exchange with big bargaining clout to keep premiums in check, yet still allow states to impose tougher rules and set up their own exchanges if they meet federal standards.

Or the Senate version, which would let the 50 state governors (open to the political winds of the moment) set up their own individual exchanges with fewer people, different rules and higher administrative costs. The Senate bill also allows insurance companies to sell different policies outside of the exchange – which means they’ll quickly be “cherry-picking” the healthiest customers once again.

(Note: the Senate bill does a better job than the House version at helping consumers shop for coverage by requiring policies be compared on cost and quality, and requiring scenarios of how well each policy will cover common conditions).

We just finished a great analysis on what would make the most effective exchange, which you can read here. Our conclusion:

The bottom line is that the final, merged bill should contain the best elements from both bills: (1) retain strong transparency provisions from the Senate proposal; (2) eliminate the option to sell non-group coverage outside the exchange, as is done in the House bill; and (3) enact the exchange at the national level, with an option for state-operated exchanges for states with the interest and capacity to do so..

Forty percent of the country lives in just six states. For people living in the rest of the states, individual state exchanges would be too small to achieve lower prices and better service through better competition. Administrative costs would be duplicated, to the detriment of the consumer.

In addition, insurance companies will take the new competitive environment seriously if it is very clear that they can’t sell policies outside the Exchange to anyone eligible for discounts. We also need the kind of buying information laid out in the Senate version. For more detail on our call for the best possible exchange and for our other priorities in these final weeks, read our complete discussion of the best possible reform.

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