Lessons to be learned from failed California Health Insurance Exchanges
03 08 09 - 12:00
California Offers Lessons on Insurance Exchanges
By MICHAEL SANSERINO - The Wall Street Journal
As Congress debates creating insurance "exchanges" as part of a health-care overhaul, the failure of a similar effort in California may offer important insights, former participants in the program say.
From 1993 to 2006, small businesses in California could buy health insurance through an exchange run initially by the government, and later by a nonprofit group.
The plan was undermined when some businesses with relatively healthy workers bought policies more cheaply directly from insurers, bypassing the exchange.
That left the exchange with a shrinking pool of less-healthy workers, forcing rates higher and prompting many insurers to withdraw. Managers chose to shut the program in 2006 when one of three remaining insurers withdrew.
"There are definite lessons to be learned," said John Ramey, who as former head of the Managed Risk Medical Insurance Board helped implement California's exchange. "We learned them the hard way out here."
Among those lessons, he and others said: Employers and individuals who qualify must be required to obtain health insurance through the exchange. Failing that, John Grgurina, who ran California's exchange from 2002 until it ended, said government must impose rules governing rates and eligibility to protect the exchange from attracting a disproportionate share of high-risk people.
An exchange aims to get better prices for coverage by banding together businesses and individuals. Insurers would have an incentive to join an exchange because they would gain access to more potential customers. Individuals and employees of businesses that participate in an exchange would be able to chose from the available plans and pay the same rate.
Exchanges, either on a regional basis or a single national one, are likely to be a part of any final health-care legislation. Late Friday, the House Energy and Commerce Committee approved its health-care bill, though a full House vote won't come until the fall.
President Barack Obama on Saturday praised the House committee's action and urged lawmakers to "build upon the historic consensus."
The compromise proposal agreed to in the House Friday exempted more businesses from the mandate to provide coverage to their employees and offered subsidies to fewer individuals to buy insurance through an exchange, which would shrink the number of potential participants.
Each of the three major bills -- one in the House and two in the Senate -- would create one or more exchanges. The specifics vary, but most of the proposals would impose more regulations than the failed California program, which analysts say would help the exchanges compete.
Despite California's struggles, insurance exchanges are still the most effective way to expand coverage, said Elliot Wicks, a health-care consultant who wrote a report on the California program. The report, released last month, was commissioned by the California HealthCare Foundation, a private independent nonprofit.
Veterans of the California effort said the ultimate effectiveness of any exchange would rest on details that have yet to be worked out. They said the pool of people in an exchange should be as broad as possible, to spread both risk and administrative costs.
Other states have tried health exchanges, with mixed results. Exchanges in Texas, Florida and North Carolina each failed because, like California, they were left with too many high-risk participants, said Rick Curtis, president of the Institute for Health Policy Solutions, a consulting firm on health-insurance issues.
Massachusetts and Connecticut have had more success. Massachusetts created an exchange as part of its universal-health-care effort; the exchange has helped expand coverage, although some business owners have balked at the costs, and state officials have worried about the impact on the state budget.
In Connecticut, a for-profit subsidiary of a nonprofit organization administers a small-business exchange founded in 1995 that now covers roughly 88,000 people at 5,000 businesses. Participants said the system worked because of rules governing how insurers set rates.
California's exchange, by contrast, never really caught on with employers. At its peak, it covered 150,000 people, about 2% of the small-group market. Employers were never required to provide health insurance to workers; those with healthy workers found they could get lower rates outside the exchange. The low enrollment figures also meant the plan never realized hoped-for administrative savings.
Phil Lebherz, chief executive of LISI Inc., a San Mateo, Calif., insurance consultant, said the plan was mismanaged from the beginning. For example, he said, government officials who initially ran the program tried to circumvent brokers, but later returned and asked brokers to participate.
Write to Michael Sanserino at michael.sanserino@wsj.com