Unwilling to wait
still more years for Congress to fix the tax treatment of health
insurance, state legislators are now learning that they can take
steps to create a new health insurance market in which individuals
and families own and control their own health insurance while
receiving the generous tax breaks previously available through
conventional employer-provided, defined benefits plans. The best
way to do this is to create a statewide health insurance exchange
(HIE), a new market where individuals and families can purchase
affordable and portable health insurance.[1]
In many respects,
the HIE concept is broadly similar to the popular and successful
Federal Employees Health Benefits Program (FEHBP), the
consumer-driven system that covers Members of Congress, federal
workers and retirees, and their families-altogether more than 8
million Americans. In key ways that concern governance, health
benefits, and consumer choice, however, the FEHBP differs in
crucial ways from the HIE concept.
Two
Systems
The health
insurance exchange is still primarily a concept, though a variant
of The Heritage Foundation's exchange proposal was enacted and is
now being implemented as part of Massachusetts' 2006 health reform
plan. Other states are considering replacing the complex rules that
govern their health insurance markets, which are often balkanized
and dysfunctional, with a statewide health insurance exchange.
The purpose of the
HIE is to provide private sector employees with the opportunity to
secure a portable health plan of their choice in a competitive
environment and to take advantage of the generous tax benefits of
employer-based health insurance. Personal ownership and portability
of private insurance would stabilize the market, enabling persons
to keep their health insurance from job to job without penalty. In
the absence of a congressional overhaul of the tax treatment of
health insurance, no one has yet devised a better mechanism to
accomplish that goal.
The FEHBP,
meanwhile, is an institutional reality: It is the largest group
health insurance system in the world. The purpose of the FEHBP,
established in 1960, was to provide federal employees and retirees
with a choice of competitive private health plans through their
place of work. It is part of the federal compensation package,
designed to attract and retain federal workers.
How Health
Insurance Exchanges Are Like the FEHBP
- Broad
Choice of Health Plans and Benefits. Under the FEHBP,
federal workers and retirees may choose from among a broad range of
private health plans, exercising a level of choice that is denied
to most other Americans. There is no standardization of health
benefits packages in the FEHBP; rather, there are a variety of
benefits packages, with different combinations of benefits,
payments, co-payments, and deductibles.
Among the choices are health plans offered by traditional
carriers, like Blue Cross and Blue Shield, and plans offered by
associations, unions, or employee organizations. The plans range
from PPOs and HMOs to indemnity plans and consumer-directed plans,
such as health savings accounts.[2] In addition to choosing from
a wide variety of private plans offering different benefits at
different price-points, FEHBP enrollees can pocket the savings from
picking and choosing lower cost health plans.
Similarly, in a statewide health insurance exchange, employers and
employees can choose from among an even wider array of plans,
including health plans sponsored by associations and trade and
professional organizations, as well as plans sponsored by unions,
employee organizations, and ethnic, fraternal, and religious or
faith-based organizations.
Consumer choice is evident in the first state HIE. Early in the
implementation of the Massachusetts "Connector" (that state's HIE),
six insurance carriers are already participating, and 42 health
benefits options are available to employees and their families,
with a variety of premiums, deductibles, and co-payments. Outside
of the FEHBP, this range of personal choice in health care is rare
in the U.S.
- Financing
Through Defined Contributions. With the FEHBP, the
government, acting as an employer, makes a defined contribution
toward the cost of an enrollee's health plan. Under the current
government formula, the government contribution is routinely 72
percent of the cost of a health plan; but it can be no more than 75
percent of the cost of any health plan, up to a fixed dollar
amount. The government contribution is annually calculated on the
weighted average cost of all of the health plans competing in the
program. FEHBP enrollees may choose health plans that are more
expensive than the capped amount, if they are willing to personally
pay the additional cost for a richer combination of benefits.
In a health insurance exchange, employers can make a defined
contribution to a health plan of an employee's choice. By
designating the exchange as the employer's health plan for purposes
of federal law, the defined contribution becomes tax-free to the
employer, and the value of the health benefits plan is also
tax-free to the employee. Taking advantage of the federal tax
treatment of employer-based health insurance through a defined
contribution arrangement improves the affordability of health
insurance premiums for employers and employees alike. But the key
advantage for employees is that they can choose health plans, own
their health policies just like they own other insurance policies,
and thus take their policies from job to job.
If an employer does not make a defined contribution, it can set up
a Section 125 flexible spending account that employees can use to
make tax-free payments for the plans of their choice. In
establishing a statewide health insurance exchange, state
legislators can make the establishment of a Section 125 account a
condition of joining the exchange. This makes the entire process
for employers voluntary, in compliance with the Employee Retirement
Income Security Act of 1974 (ERISA).
-
Centralized Enrollment and Premium Payment. The
U.S. Office of Personnel Management (OPM) directly administers the
FEHBP. OPM handles enrollment and premium payment directly for
federal retirees, while federal agencies handle payroll deductions
and payments for the active federal workforce.
In this respect, an HIE fulfills much the same role as OPM. It can
enroll individuals and families in coverage, collect insurance
premiums from employers and employees, and administer any
government subsidies to eligible individuals. At the same time, the
exchange could contract with vendors, such as third-party
administrators, to perform specialized tasks.
- Provision
of Consumer Information. Both OPM and federal agencies,
operating as employers, assist federal workers and retirees in
making plan choices by offering unbiased information on various
plan offerings. This is supplemented by solid information from
private sector organizations, unions, and employee associations on
the best plans available in terms of value, quality, and price. For
example, Checkbook's Guide to Health Insurance Plans for Federal
Employees is an annual Washington bestseller. The National
Association of Retired Federal Employees (NARFE), a major
organization representing hundreds of thousands of retired
personnel, plays a valuable role in informing federal retirees of
the best plans for specialized medical services, treatments,
procedures, and benefits. As NARFE has repeatedly affirmed, there
are no "bad plans" in the FEHBP-only different plans serving
different needs.
In an HIE, exchange officials could prepare and disseminate
descriptions of the coverage available as well as comparative
information and enrollment forms. As in the FEHBP, private actors
would have the incentive to prepare information on competing plans
that aids individuals in choosing the coverage that best meets
their needs.
How Health
Insurance Exchanges Differ from the FEHBP
- The FEHBP
operates as a purchasing agent. The Office of Personnel
Management serves as the agent for federal workers and retirees and
negotiates directly with private carriers over rates and benefits.
In any given year, the health plans' benefits, premiums, and
coverage vary due to that negotiation. These changes depend upon
the OPM staff's negotiating skills.
With a Heritage-style health insurance exchange, there is no
reason to have the officials of the exchange act as an intermediary
between individuals and health insurance plans. Instead, premiums
and benefits would be determined by consumer demand in the
market.
- The FEHBP
regulates health insurance plans. OPM sets basic
administrative, benefit, and financial standards and underwriting
rules for health plans in the FEHBP.[3] In addition to a crude system
of community rating, OPM enforces rules requiring the "guaranteed
issue" of coverage and limiting exclusions for pre-existing
conditions. Outside of these underwriting rules, FEHBP regulation
has been light.[4] This regulatory authority, laid out in just
a few pages of statute and regulation, is focused almost
exclusively on issues related to consumer protection, marketing
practices (e.g., a plain English requirement), and the financial
solvency of health plans.[5] Within these rules, every health plan
determines its own contractual and payment relationships with
doctors and hospitals and other medical professionals and designs
its own benefits package.
A health insurance exchange is not a substitute for the state's
department of health insurance, nor should it duplicate the
responsibilities of the state's health insurance department. Thus,
there is no reason for officials of a health insurance exchange to
regulate health insurance by imposing benefit mandates or a
comprehensive standard benefits package.
- FEHBP
plans are not bound by state benefit mandates or state premium
taxes. National health plans in the FEHBP operate under
federal law and are thus exempt from state benefit mandates and
premium taxes.
With a health insurance exchange, the state legislature may or may
not agree to retain state mandates and premium taxes. It is
advisable to exempt plans in the exchange from benefit mandates. In
Massachusetts, however, the legislature insisted on retaining the
state's 43 benefit mandates. Nonetheless, the legislature did
institute a three-year moratorium on new benefit mandates and
provided for reduced-mandate insurance policies for people between
the ages of 19 and 26. In establishing a statewide HIE, state
legislators may wish to start with a clean slate and, thus, reduce
or eliminate many of the benefit mandates that undermine the
flexibility and affordability of insurance products.
- Congress
has empowered itself to restrict entry into the FEHBP
market. Fee-for-service health plans need legislative
approval to enter the FEHBP. State-based HMOs can compete if they
comply with OPM's light regulatory regime, which many already
do.
In a normally functioning market, however, participants should be
free to enter and exit without restriction, boosting opportunities
for consumer choice, innovation, and efficiency. With a health
insurance exchange, state officials should allow any willing health
plan to enter or exit the market without restriction. Moreover, any
certification required for health plans to enter the exchange
should be based only on whether the health plans are licensed to do
business in the state.
Common
Lessons
- The
market principles of consumer choice and competition control
costs. Surprisingly, the FEHBP is not an ideal insurance
pool, one in which a large number of younger, healthier workers
cross-subsidize a much smaller group of older workers and retirees.
The federal workforce is significantly older than the private
sector workforce. Moreover, the ratio of retirees to active workers
has steadily increased over the past several years, and today the
average age of an FEHBP enrollee is 60.
Meanwhile, the health benefits available to federal workers and
retirees have been growing progressively richer and more varied.
Nonetheless, the FEHBP has demonstrated remarkable historical
success in controlling costs.[6] For 2007, the average premium
increase in FEHBP turned out to be 1.8 percent, far less than for
conventional insurance markets. Even with its relatively
unfavorable mix of employees and retirees, this unusual system of
consumer choice and competition performs better than its actuarial
profile.
In a health insurance exchange, where insurance carriers compete
directly for the dollars of younger workers, states should see
similar performance in cost control. In the first year of its
health care reform plan implementation, Massachusetts has already
registered a significant decline in the average premium available
to single individuals through its HIE. The average uninsured
Massachusetts resident can buy a health plan for $175 per month, or
$109 per month on a pre-tax basis.[7] This is a dramatic decline
from the average monthly premium of $350 per month for a single
individual buying in the small group market in 2005.
- A defined
contribution is superior to a defined benefits program, especially
for a highly mobile workforce. Today, the federal
government makes a contribution to the cost of each private plan
chosen by federal workers and retirees. The maximum dollar amount
of this contribution is set by a formula.
Likewise, a health insurance exchange operates on the principle of
defined contributions. Establishing a new system of defined
employer contributions would give workers and their families the
opportunity to take full advantage of changes in a potentially far
more dynamic market for health insurance, leading to potentially
hundreds of dollars of savings per family annually. In contrast, in
a defined-benefit arrangement, workers cannot take advantage of
such changes. This sacrifices cost savings and prevents workers
from enjoying the fruits of their smart shopping, such as receiving
a better mix of benefits, higher wages, or tax-free account
contributions.
Moving from a defined-benefit to a defined-contribution system
makes sense for employers and employees. Employees should be able
to secure the full economic benefit of choosing less expensive
insurance coverage, if they wish to do so, in return for higher
wages or other compensation. A free market rewards rational choices
and lets consumers get the best value for their money.
-
Regulation should be light. One of the oddest
features of the FEHBP is that, despite its millions of enrollees
and the fact that it is a government program, it is managed by a
staff of less than 200 employees and governed by light and rational
government regulation. OPM's own administrative cost is small,
comprising less than 1 percent of the "aggregate cost" of health
plan premiums.
Building on this lesson, a health insurance exchange is not and
should not be a regulatory agency or a substitute for a state's
department of insurance. It is nothing more than an administrative
agency for facilitating access and choice for employers and
employees. And, in fact, it is preferable for many of its functions
to be simply contracted out to private parties or entities.
In this respect, the function of an exchange is twofold: to enable
individuals to purchase portable health insurance without
abandoning the advantages of the federal tax code and to facilitate
the premium payments and related transactions of employees and
employers-especially small employers, who are in desperate need of
a simpler system.
Recent controversies over the implementation of the Massachusetts
plan have been rooted not in the inability or unwillingness of
private sector players to respond, but in the Connector board's
role in setting benefits, determining the standard for "minimal
creditable coverage," and granting a seal of approval (in addition
to other state certifications) for participation.[8] As Massachusetts'
experience suggests, these functions are not well suited to a
health insurance exchange.
Conclusion
The FEHBP is the
only large group insurance system in the nation in which
individuals can choose the plans and benefits that they want at
prices they wish to pay. While the FEHBP is not perfect, it has a
solid record of performance in expanded consumer choice, cost
control, and patient satisfaction.[9] This year's premium increase
of 1.8 percent is another milestone in the program's long record of
cost control coupled with high levels of consumer satisfaction.
As state officials
work to reform their health insurance markets, they should take the
best features of the FEHBP and apply them to their own markets:
broad choice, competition among plans, defined-contribution
financing, and the provision of solid consumer information. A
health insurance exchange, properly designed, accomplishes
this.
But transforming a
health insurance exchange into a regulatory agency, another
bureaucracy for setting benefits, or a purchasing agency on behalf
of individuals and families, undermines the goals of market-based
reform. Instead, state officials crafting reform plans should rely
on consumer choice and competition to take care of the details. If
they do, they can control costs, improve value, and boost their
constituents' satisfaction with their health coverage.
Robert E. Moffit, Ph.D.,
is Director of the Center for Health Policy Studies at The Heritage
Foundation.