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Matthew Nachreiner

Professor Konan

Economic Theory of Healthcare

13 December 2016

Public v. Private Health Exchange Models

Abstract

The research looks at the effectiveness and responses to the creation of public health

exchanges implemented as part of Affordable Care Act (ACA) to help control expenses and

make healthcare portable for individuals (not employer dependent). The Obama Administration

implemented ACA that allowed consumers to buy health insurance plans on a public health

exchange independent of their employer with government subsidies available for lower income

participants. In response some employers have moved to private health exchanges offered from

the private sector that operates on two platforms single carrier and multi-carrier. The goal of the

research is to show overall efficiency in terms of the consumer and producer for both types of

health exchanges. It has been concluded that the majority of public health exchange models are

inefficient for both the consumer and health insurance companies. There have been many

negative externalities due to Obamacare with only Cover California being the shining light. The

ACA needs serious reform and lawmakers should look at Cover California as a successful case

study for the public health exchange. The private health exchange has experienced significant

growth, but needs to provide information more efficiently and transparently to consumers in

order to meet and sustain growth rates. In addition, the private health exchange needs to aid

insurance companies to alter their business model to fit the exchange. It is important to note that

part of this research may be irrelevant in the upcoming years as Trump’s administration1 and

Republican dominated Congress has vowed to repeal or make major amends to ACA.

1 For example, Oscar Insurance Corp. built its business around on the ACA and finds itself expecting to fall short of

its 2017 projections due to the uncertainty of what the current administration (Trump and the Republicans) will do

for health reform. In 2014, 23 nonprofits cooperatives were tied to the ACA, now only 6 are offering plans in the

ACA marketplaces (Winkler and Mathews).

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Introduction

In 2012, the ACA was passed to address the following issues:

1. The Congressional Budget Office (CBO) estimated that 65 million Americans under the

age of 55 lacked health insurance (CBO)

2. Health care spending represented 17.9% of GDP – the highest in the industrialized world

(Folland 5).

3. The costs to families and employers doubled from 2001 to 2011 (Obamacare Facts).

4. The US ranks 24th in health outcomes among the 30 OECD countries despite the high

costs of care (National Research Council).

Public health exchanges were touted as a key component of the program by providing a

marketplace for all Americans to find affordable health insurance. At the time, many even

envisioned a point in the distant future where most insurance would move through a public

exchange.

Health exchanges emerged in the private sector in the 1980’s using computer networking

to integrate claims management, eligibility verification, and inter-carrier payments. They became

popular in some parts of the country with small and medium-sized companies because it allowed

them to offer more cost-effective insurance to their employees.

President Obama promoted the health insurance exchange concept as a key part of the

ACA. As part of the ACA, each state was required to develop a health exchange. If a state chose

not to develop an exchange, they would be required to use the federal exchange. For 2017, we

will have 16 state run exchanges and 34 exchanges run by the federal government or as a state-

federal government partnership (Obamacare Facts).

At the launch of the ACA, the CBO projected 21 million Americans would be using the

exchanges by 2016. For 2016, 13 million Americans will use the exchanges (“History and

Timeline of the Affordable Care Act (ACA)”). Also, three of the largest insurance carriers

Aetna, United Healthcare and Humana pulled out of the exchanges. ACA-supporters argue that

more people are employed than projected, and they are using private insurance plans. For those

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critical of ACA, they are arguing that the exchanges are ineffective. In addition, the costs on the

public exchange are expected to rise significantly in 2017 – a CNN report projected increases

between 16-25% after moderate increases of 2.5% in 2014 and 7.5% in 2015 (Jost).

Thesis:

In the Spring of 2010, President Obama mandated ACA (Affordable Healthcare Act) by

issuing Executive Order 13535 (The White House). As a result, the public health exchange was

created. To date, the public exchanges have primarily provided coverage to low income

Americans at a high cost, and private exchanges have emerged as a viable alternative. I believe

that we can build upon these developments and involve the insurance industry in the debate to

significantly improve the outcomes. The public health exchange needs to develop programs to

replicate Cover California throughout the country and continually improve the IT infrastructure.

The private health exchanges have become a solid platform that needs to transfer information

more efficiently and transparently to consumers in order to sustain and meet growth

expectations. Furthermore, I believe that the private health exchange needs to be more

accommodating to insurance companies to gain their commitment to the private exchanges. Also,

I recommend that federal subsidies be made available through private exchanges breaking the

subsidy monopoly of the public exchange. Finally, the insurance industry must be part of the

solution participating in exchanges and developing lower cost business models to serve this

market using examples from California insurance companies. Regardless of Trump’s

Administration impact, both health exchange models need to improve by learning from past

mistakes, involve insurers, while building upon their successes.

Public Health Exchange Model

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During the 2008 election, the general population was frustrated with soaring costs of

healthcare and stagnant wages leaving many uninsured or underinsured. Obama proposed a

mixed public-private group insurance to reform the infrastructure of the healthcare industry.

After winning the presidency, Obama passed the Affordable Care Act (ACA) as an Executive

Order in 2010 amidst controversy with Republicans. The ACA was aimed to cut down on the

costs of healthcare, increase the number of insured Americans, and quality of care. There were

many new important benefits, rights, and protections that were introduced within the ACA. The

creation of a public health exchange was offered as a centerpiece to the legislation to create an

avenue for coverage to more Americans and as a vehicle to lower costs with an intent to attract

employers and insurance carriers. The public exchange in each state was given a monopoly in

providing federally mandated insurance subsidies.

The Public Health Exchange Model has four potential different ways to operate, two on

federal and state level. The two state level public health exchange models serve as an active

purchaser and clearinghouse of policies. The active purchaser model is where the state “directly

negotiates with insurers over premiums, doctor networks, benefits and other aspects of plans sold

in the marketplace” (Kardish). The clearinghouse model “establishes basic criteria and allows

any plan that meets those benchmarks to be sold in the marketplace” (Kardish). The two federal

level public health exchange models are the federal partnership exchange and federally

facilitated exchange model. The federal partnership exchange model runs the web site where

individuals purchase insurance, but the state exercises some control over plan management or

consumer outreach. (Kardish). The federally facilitated exchange model “operates all major

functions of the exchange” (Kardish). Figure 1 displays the types of exchanges active in each

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state. In addition, the two different state level health exchange models are differentiated in the

figure.

Figure 1 (Kaiser Family Foundation: 2013)

Negative Externalities (Poorly Executed IT Infrastructure and Majority of Insurance

Companies Leaving Market Leaving Little to No Competitions)

The Obama Administration encouraged states to develop their own homegrown public

exchanges with the intent that each state would be able to offer solutions specific to their local

environment. Many states decided to not create their own public health exchanges because of

political spite or difficulties associated with building complex technical infrastructure of an

exchange. And this proved true as the Obama Administration spent over $150 million in costs to

fix the initial version of the federal public health exchange (Baker). The IT infrastructure wasn’t

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ready for the scale of site traffic, but it was quickly fixed. And for the states that built

homegrown public health exchanges provided mixed results. For instance, Oregon decided to

build their own public health exchange, Cover Oregon and enlisted Oracle as a provider. The

plan was to open on Oct 1, 2013 coinciding with open enrollment for the entire nation. However,

consumers were left disappointed and upset because the website failed to work due to technology

problems. This left Oregon and its citizens in a bind to find a solution. Thus, Oregon decided to

hire and train officials to help its citizens manually sign up under ACA. To comply with the law,

Oregon made the decision to move Cover Oregon under the federal run public health exchange at

an estimated cost of $4-6 million (Manning). This created a large scale inefficiency in the State

of Oregon as many eligible enrollees were unable to sign up. After a lengthy trial due to lawsuits

between the state of Oregon2 and Oracle, it was decided that Oracle would pay the state of

Oregon $100 million (Manning). Across the US, we saw states bearing excessive costs to set up

the exchanges and individuals unable to obtain subsidized health care.

The public health exchange faces problems in many states that utilize the two federal-run

models. Insurance companies are taking heavy losses as they are forced to provide insurance for

high cost, unhealthy consumers as well as losing premiums for individuals who would rather pay

a penalty than a premium. In other words, the risk pool is heavily out of balance biased towards

riskier consumers that are more expensive to insure. As a result, the insurance company, Aetna,

has sustained $430 million of losses in these exchanges as of August 15, 2016 (Luhby).

Additionally, Aetna traditional products that target employers who focus on choice and demand

aren’t successful for this set of consumers in the public health exchange. Furthermore, only 15%

2 I worked for a free clinic that provided basic healthcare and gave referrals to the uninsured, gap-coverage,

underinsured, homeless, and undocumented workers in the summer of 2014 and 2015. I witnessed first-hand the

problems that the patients were encountering and saw that the website couldn’t handle a lot of traffic. To help our

patients get on Cover Oregon, we had to refer them to an official that would manually enroll them in the program.

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of insurance companies ran profitable individual division in 2015 according to McKinsey’s

Center for Health Reform (Luhby). These companies face a dilemma to either leave the market,

restrict their coverage to consumers leading to potential lawsuits, or raise their rates. Several of

the largest insurance companies such as United Health, Humana and Aetna have exited the

public exchanges. As a result, the market has significantly less competition which has led to

large increases in 2017 quoted rates on the public exchanges, and, in some cases, no insurance

options for some small counties. For example, Arizona represents the most extreme example,

where Pinal County has no insurance company selling on the exchange. This leaves the

consumer to switch insurance multiple times to attain any coverage, devote time to the searching

process, and choose from a limited pool of plans.

Model to Fix Problems

The most successful model for a public health exchange has been the active purchase

model. California’s public health exchange, Cover California, serves as a case study. Cover

California is unique in that it requires all health plans to be standardized, which means that all

plans must have the same benefits. The only difference between plans are premiums, drug

formularies (covered drug lists), and provider networks. Insurance carriers who fail to comply to

Cover California’s requirements are not allowed to engage in the exchange. Aggressive

negotiations between Cover California and carriers has led to a competitive market. In addition,

Cover California has implemented policies that quell the insurer concerns about profitability and

insuree concerns about limited care. For example, monthly prescription costs force the insuree to

reach their maximum out of pocket exposure quickly and insurer’s requests for rate increases are

approved by the state to avoid losses by the insurers. This causes significant inefficiency and

volatility in the market. Thus, Cover California has capped monthly prescription costs for plans

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that are in and out of the exchange to increase and stabilize the market. This helps quell both the

insuree and insurer’s concerns. Cover California’s strategy has led to 1.42 million enrollees in

2016 and projected 13.2% increase in enrollment for 2017 (Luhby).

In addition to a successful public exchange example, Molina Insurance (based in

California) illustrates how insurance providers can be profitable in the public exchange model.

By offering narrow networks of doctors, hospitals and providers and implementing rigorous

administrative cost controls, Molina is able to profitably provide low cost care while also

providing high service levels through case workers who proactively work with individuals on

prevention strategies. For example, Molina doesn’t allow its policy holders access to a

prestigious Los Angeles Hospital (Cedars-Sinai Medical Center) to help keep rates low (Luhby).

Molina is successful on the cases provided by the public exchange as it is closely related to their

core Medicaid business. Ironically, the decision by the large insurance providers to exit the

public exchanges will place an increasing burden on players like Molina as they are forced to

handle more high risk cases. Molina is preparing for the challenge and has raised rates to offset

the impact. Although margins are low, Molina remains confident that it will continue to be

profitable and grow through their low cost model (Luhby).

Private Health Exchange Model

Traditionally, employers delivered health benefits to its employees via defined benefits

model. Through this model, the employer would control the type of coverage that the employee

would receive. Thus, the majority of the financial burden and healthcare costs fell on the

employer. In addition, it was time consuming and an additional administration expense in finding

the cheapest, most effective benefit plan to offer to their employees.

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The ever-rising health expenditures have increased the costs incurred to the employers,

where it has altered their behavior. In order to minimize their costs, employers have opted to

delivering health benefits to is employees via defined contribution model. This model allows the

employer to “make cash contributions to savings accounts that employees use to purchase

insurance products of their choice. This model allows the company to cap its healthcare cost at a

desired threshold, improving control of current expenses and future liabilities” (Kapur). Figure 2

demonstrates the different agents involved in the private health exchange. The private health

exchange platforms serve as an online marketplace for employees to browse through the

different health insurance plans. There are two type of private health exchange platforms: Single

Carrier and Multi-Carrier.

Figure 2 (Source: Kapur:2012)

Strategy & research surveyed 500 employers and 300 individuals concerning private exchanges.

The research is summarized below:

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80% of employers would prefer to purchase from a private exchange vs. a public

exchange due to design flexibility, customer service, and a wariness of government.

More than 50% would prefer a multi-carrier exchange

Employers favored a defined contribution plan yet less than 20% plan on moving to that

type of plan

Lower-income individuals gravitate towards the public exchanges to take advantage of

subsidies

Individuals want a “guided purchase experience” with plan and product recommendations

based on needs

Individuals expressed a strong desire for real-time administrative support which is not

available on public exchanges

Individuals did not have brand preferences for particular insurance providers (Kapur)

Single Carrier

The single carrier private health exchange platform is operated by an insurance carrier

that allows employees/employers to work with that one insurance carrier. For example, Blue

Cross/Blue Shield, most likely creates a group product for an employer. The single carrier model

is very similar to the current practice of employers providing coverage and administrative

support. With the single carrier model, the administrative burden is shifted to the insurance

provider. With a single carrier model, the employees are limited to the choices provided by the

single carrier (Kapur).

Multi-Carrier

The multi-carrier private health exchange platform is operated by a 3rd party that allows

employees/employers to browse through insurance products from many different insurance

carriers. Most of the products are individual and allows for personalization. For example, AON

Hewitt, essentially works as a middle man. They create the infrastructure for the exchange,

obtain insurance plans from many different carriers, and then work with employers to modify the

exchange to their employees. This model allows the employer to be passive in their involvement

and have relatively low administrative burden due to outsourcing their work to a 3rd party. As a

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result, the employers avoid devoting time to develop relationships with insurance companies and

analyzing the health plans. This helps streamline their operations (Kapur).

Relative Uncertainty for Consumers and Insurance Companies

Many employers prefer the private health exchange compared to the public health

exchange, but remain hesitant to engage in either the single or multiple carrier channels for a

multitude of reasons. As the private exchanges are relatively a new business model, employers

remain cautious because there is limited data regarding the efficiency and quality of the

exchanges. Furthermore, the different channels (single and multi-carrier) need to educate

employers on the operations and benefits of the private health exchange. As a result, the

employers have not fully embraced private exchanges due to concerns over competitiveness and

longevity. Finally, many employers are concerned about the future of health reform and prefer to

stay with status quo.

As with employers, insurance companies are still trying to come to terms with how the

private health exchange operates and how they fit into the model. The different channels have

forced these insurance companies to become business to consumer models as opposed to their

current business to business models. The insurance providers are especially nervous about the

multi-carrier exchanges as the insurance companies are trying to understand how outsourcing

their plans to a 3rd party platform will alter their profit margins. Furthermore, the multi-carrier

channel typically does not allow the insurance companies to have a direct relationship with

consumers and effectively limits their ability to cross-sell, up-sell, and retain customers. As a

result, the 3rd party will have the ability to control the sales and marketing process. For the single

carrier exchanges, insurance companies are coming to terms with increasing their customer

support to help consumers pick coverages/products. Due to increasing demand, the private health

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exchanges will force these insurance companies to engage in the exchange sooner or later. Figure

3 shows a decision making framework for insurance companies on how to enter the private

health exchange.

Figure 3 (Source Kapur:2012).

Summary and Conclusion

The public health exchanges were created when Affordable Care was mandated by

Executive Order in the Spring of 2010. Although the public exchanges have not realized initial

projections, they have provided more healthcare for lower income Americans and sparked

changes in the insurance industry that will bring more choices to consumers. As a positive

example, California has led the country. Cover California stands out as a clear best practice in

creating solutions for low cost healthcare and running public health exchanges. Another

important development is that private health exchanges have become increasingly popular and

bring important competition to the marketplace. To thrive, the private health exchanges will need

to develop marketing communication to educate employers and consumers on the benefits of the

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exchanges. The private health exchanges will also need to partner with insurance providers to

gain their participation. Finally, I am recommending that we bring the insurance industry into the

debate to help provide solutions. In particular, the insurance companies need to develop business

to consumer models and fully engage in the exchanges. In addition, ACA funds need to be set

aside to assist insurance carriers who have created viable low cost options that make quality

healthcare available to low income consumers and Medicaid participants.

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