Vol.8 No.10, October 2010

Key Points

• Obamacare presumes that states will collaborate by establishing “exchanges” to limit people’s choice of health insurance.

• Some opponents of Obamacare believe that a consumer-friendly exchange like Utah’s can blunt the worst effects of Obamacare.

• While the Utah Health Exchange is vastly superior to Massachusetts’ Commonwealth Connector, it has not proved successful.

• Despite Obamacare’s claims that states will enjoy “flexibility,” the federal government will likely impose its will on exchanges, leaving states to bear high administrative costs – tens of millions of dollars annually.

• States should avoid Obamacare exchanges and focus on defeating this harmful law.

Last month’s Health Policy Prescription addressed Obamacare’s presumption that state-based “exchanges” would choose health insurance for their residents, and recommended that states decline to collaborate, in anticipation of repeal.¹ Another approach is making the rounds.

If a state designs an exchange that increases consumer choice, it might be able to blunt the most harmful impacts of Obamacare. According to this line of thought, federal agents will be so overwhelmed by events that they will tolerate states’ seizing such an opportunity.² Certainly, the Obamacrats’ recent behavior hints at growing panic.

Jay Angoff, in charge of regulating private health insurance, has recently decided to allow health plans to charge actuarially fair premiums for child-only policies, which is illegal under the legislation.³ Kathleen Sebelius, U.S. Secretary of Health and Human Services, has granted waivers allowing employers of an estimated one million (largely low-income) workers a one-year delay to comply with the new regulations.⁴

It appears that the Obamacrats have bitten off more than they can chew, and reasonable to conclude they would welcome any assistance they can get from the states. Further, the letter of the law prescribes states’ “flexibility” in structuring exchanges. Libertarian and conservative policy analysts have criticized Massachusetts’ bloated and intrusive Commonwealth Connector, the country’s first pre-Obamacare exchange. Some, however, have pointed to the Utah Health Exchange, re-launching next year, as a more consumer-friendly alternative.

These grounds for collaboration, unfortunately, do not survive careful scrutiny. In the pre-Obamacare world, exchanges were suggested as a way to get around the major government failure in American health care: Congress’ grant of monopoly control of our pre-tax health dollars to our employers.

The Utah Health Exchange allows spouses to aggregate defined contributions from different employers.  For example, suppose a husband’s employer contributes $300 per month to the exchange for health insurance.  His wife works for another employer which does the same.  The household has $600 to spend on a family policy that they, not their employers, choose.  The husband and wife can then decide to which of their employers they wish to affiliate, satisfying federal regulations for group coverage. However, this “premium aggregator” has not yet been tested. It will go into effect in January 2011, for members currently applying via open enrollment. ⁵

Enthusiasm for the Utah Health Exchange must be tempered. Although its supporters described the original version, launched in August 2009, as a “pilot,” reports from only a few months ago describe it as a disappointment. Although 20 businesses enrolled on the first day of operations, and 136 businesses in total signed up, only 13 remained enrolled by last December.⁶ The small number of firms participating explains why the “premium aggregator” was never tested: There were no reported couples where each worked at a different firm within the exchange.⁷

The Utah Health Exchange offers modified guaranteed-issue policies. This means that the exchange must accept all applicants, regardless of health status, while charging premiums that range within a “band” narrower than actuarially accurate premiums would be. Risk-rating rules dictate which premium within the band can be charged to each applicant. (In pure guaranteed issue, health plans must accept anyone who applies and charge each exactly the same premium.) The original exchange had different risk-rating rules than the traditional small-group market; so when businesses applied for coverage under the exchange, health plans figured that their employees were sicker than average. As a result, premiums within the exchange were 30 percent higher than standard. ⁸

The new version of the Utah Health Exchange has the same risk-rating rules as the small-group market does. However, the new version also shows a significant cost of such a system: Insurers and other interested parties invest an inordinate amount of time developing risk-rating and risk-sharing rules. The exchange needs a way to compensate insurers which attract a disproportionate number of sick people. This occurs by transferring a share of premiums from the insurers who attracted a disproportionate number of healthy people.⁹

Utah’s new statewide risk-adjuster is managed by a board of mostly insurance executives.¹⁰ If all the insurers participate in the board, it is likely that they will design a system that does a good job of adjusting for risk, because no one insurer will tolerate being a “patsy” for the others. However, as in Medicare Advantage, and in the Swiss system of social insurance, insurers as a group are clever enough to design a risk-adjustment system that leaves taxpayers bearing more of the costs than expected.¹¹ And this is precisely what is about to happen.

Official sources estimate that about half a trillion federal dollars will flow into Obamacare exchanges between 2014 and 2019,¹² and these likely underestimate the true costs of the subsidies. The Congressional Budget Office estimates that 24 million people will enter the exchanges in 2019, of which only 3 million will come from the 162 million who would have enjoyed employer-based benefits under the status quo ante.¹³ The actual number will be far greater. Independent analysis concludes that anyone who earns less than $80,000 annually will be dumped into an exchange.¹⁴

This fire hose of subsidies explains why it is far more likely that Obamacare will corrupt Utah than Utah will manage to redeem Obamacare. The rules are not made by those with the best intentions, but by those with the money. Secretary Sebelius has the money, and she will make the rules once the gusher flows. Every state that establishes an exchange will sap the political will of the rest to defeat Obamacare, and states should not be fooled.

President Obama and Secretary Sebelius want to eliminate private choice of health insurance in favor of a government monopoly.¹⁵ If advocates of repeal fail to succeed by January 2013, Secretary Sebelius will surely sweep away any “consumer-friendly” accommodations with a vengeance. Indeed, her next surge of waivers will likely be to states like California, which wish to impose “single-payer” health care.¹⁶

Those states establishing exchanges will soon find that they are very expensive to operate. The Utah Health Exchange only costs about half a million dollars annually, but it has just been a pilot with a dozen businesses participating.¹⁷ Massachusetts’ Commonwealth Connector spent more than $26.6 million on vendors and contractors in FY 2009, and $3.4 million on employee compensation. The total comprises fully 3.5 percent of the money that businesses and enrollees paid into the exchange.¹⁸

This explains why consultants and vendors of information technology (IT) are swarming the states, urging them to invest in IT to enable Obamacare exchanges. But state taxpayers will be on the hook for these costs. Secretary Sebelius has handed out checks of no more than one million dollars each to states to plan their exchanges. She has some discretion to give more but this power comes to an end on January 1, 2015.¹⁹ And it probably won’t even last that long.

Soon, the Congress is likely to be controlled by a majority committed to repealing Obamacare, which will take away Secretary Sebelius’ check-book. In anticipation of repeal, the new majority will likely seek to restore Obamacare’s half a trillion dollars of cuts to Medicare, or the punitive tax hikes on businesses and investors. They are most likely to find that money in the subsidies to the exchanges, thereby killing them in their cradle.

States establishing Obamacare exchanges are making a one-way, lose-lose bet. If Obamacare persists, exchanges will become bloated administrative nightmares. If Obamacare is defeated, states will have wasted time and energy that should have been directed towards that effort. Obamacare is President Obama’s problem. Don’t make it your state’s problem.

Endnotes

1 John R. Graham, “ObamaCare Will Dramatically Reduce Choice in Private Insurance,” Health Policy Prescription, vol. 8, no. 9 (September 2010).

2 See, e.g., Scott Gottlieb & Thomas P. Miller, “How to Reform ObamaCare Starting Now,” Wall Street Journal, October 14, 2010. Available at http://tinyurl.com/2bd5udf.

3 Robert Pear, “U.S. To Let Insurers Raise Fees for Sick Children,” New York Times, October 13, 2010. Available at http://tinyurl.com/26n6n9k.

4 Drew Armstrong, “U.S. Waives Health Insurance Minimums for 1 Million,” Bloomberg.com, October 5, 2010. Available at http://tinyurl.com/2923aad.

5 Personal communication with Catherine Dupont, Attorney, Health and Human Services Interim Committee, Office of Legislative Research and General Counsel, Utah State Legislature, Salt Lake City, UT, October 21, 2010.

6 James Thalman, “State Launches Health-Exchange Website,” Deseret Morning News, August 20, 2009. Available at www.deseretnews.com; James Thalman, “Insurance Exchange Not Faring Well,” Deseret Morning News, December 15, 2009. Available at www.deseretnews.com.

7 Personal communication with Don Garlitz, FirstWest Benefit Solutions, Salt Lake City, UT, October 21, 2010.

8 Kirsten Stewart, “Utah Health Exchange: Plan for Statewide Adjuster Draws Stern Opposition,” Salt Lake Tribune, February 22, 2010. Available at www.sltrib.com.

9 For a detailed explanation of risk-adjustment in the Utah Health Exchange, see Edmund F. Haislmaier, State Health Care Reform: An Update on Utah’s Reform, Backgrounder No. 2399 (Washington, DC: The Heritage Foundation, April 9, 2010).

10 Kirsten Stewart, “Utah Health Exchange: Plan for Statewide Adjuster Draws Stern Opposition,” Salt Lake Tribune, February 22, 2010. Available at www.sltrib.com.

11 John R. Graham, Medicare Advantage or Medicare Monopoly: Protecting Seniors’ Choices and Taxpayers’ Wallets in the Federal Government’s Largest Entitlement Program (San Francisco: Pacific Research Institute, January 2010), pp. 33-36.

12 The Chief Actuary of the Centers for Medicare & Medicaid Services estimated $507 billion: Richard S. Foster, Estimated Financial Effects of the “Patient Protection and Affordable Care Act”, As Amended (Baltimore, MD: Centers for Medicare & Medicaid Services, Office of the Actuary, April 22, 2010), p. 5. The Congressional Budget Office estimated $464 billion: Congressional Budget Office, Estimate of the Direct Spending and Revenue Effects of an Amendment in the Nature of a Substitute to H.R. 4872, the Reconciliation Act of 2010, letter to the Honorable Nancy Pelosi (Washington, DC: Congressional Budget Office, March 20, 2010), table 4, p. 2.

13 Congressional Budget Office, Estimate of the Direct Spending and Revenue Effects of an Amendment in the Nature of a Substitute to H.R. 4872, the Reconciliation Act of 2010, letter to the Honorable Nancy Pelosi (Washington, DC: Congressional Budget Office, March 20, 2010), table 4, p. 1.

14 John C. Goodman, “Goodbye, Employer-Sponsored Insurance,” Wall Street Journal, May 21, 2010. Available at http://tinyurl.com/288lvq8.

15 For evidence, see the videos at http://www.youtube.com/watch?v=fpAyan1fXCE and http://www.youtube.com/watch?v=ZOyNCnN3NRg.

16 Such a waiver would be legal. See: Jennifer Staman, Legal Analysis of Section 1311(e)(1)(B) of the Patient Protection and Affordable Care Act and State-Sponsored Public Health Plans, memorandum to U.S. Senator John Cornyn (Washington, DC: Congressional Research Service, September 24, 2010).

17 John Reichardt, “Utah Officials Working With Hatch on Bill to Change Insurance Exchange Requirements,” Congressional Quarterly HealthBeat (October 12, 2010).

18 KPMG, LLP, Commonwealth Insurance Connector Authority (A Component Unit of the Commonwealth of Massachusetts) Financial Statements and Required Supplementary Information June 30, 2009 and 2008 (With Independent Auditors’ Report Thereon) (Boston, MA: KPMG, LLP, November 4, 2009), p. 11.

19 U.S. Department of Health and Human Services, Exchange State Planning & Establishment Grants Frequently Asked Questions (Washington, DC: U.S. Department of Health and Human Services, June 29, 2010). Available at http://www.hhs.gov/ociio/initiative/exchange_grants_faq.html as of October 21, 2010; Public Law 111.148 § 1311(a)(1), and PL 111.148 § 1311(d)(5)(A).