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In the Nation's Interest

Prescription for a Health Insurance Compromise

Congressional leaders and President Obama must now forge a compromise on national health insurance reform that passes both the House and Senate, and actually reduces costs.

So far, Congress's committees have focused on creating a new institution -- either a "public option" or cooperatives -- to achieve consensus and discipline costs.

The Misguided Pursuit of a New Institution

It is now almost certain, however, that a "public option" won't fly in Congress. Not enough Senators are willing to vote for it. Moreover, there's scant evidence that a son-of-Medicare "public option" will control costs, since in many parts of the country Medicare itself fails to do so.

Thus, cooperatives -- specifically, a coast-to-coast network of federally subsidized but privately run co-ops -- have emerged in the Senate Finance Committee as a substitute institution. But the House may be unwilling to vote for cooperatives, and the Senate itself may lack the votes for this new institution.

And even if the votes were there, there's no evidence that merely creating co-ops everywhere will actually hold down insurance premiums. Indeed, there is evidence that co-ops often fail to constrain premiums.

The largest employer in Wisconsin, the state itself, uses cooperatives to provide its employees with health insurance in two regions of the state: Dane County, home to the state's capital and site of the University of Wisconsin's main campus, and Eau Claire County in the northwest. In 2009, in Dane County, the Group Health Cooperative of South Central Wisconsin has a family premium of $15,613 per year. It's one of the state's lowest family premiums. But the Group Health Cooperative of Eau Claire has a family premium over $4,000 higher at $20,719 per year. It's one of the state's highest family premiums. The huge price difference between the two co-ops means that there's nothing inherent in the co-op structure that lowers health insurance premiums.

Further, within a region, cooperatives don't necessarily hold down costs any better than the non-co-op alternatives. The family premiums offered by the Eau Claire co-op are generally higher than those bid by the other Eau Claire insurance options, and the Eau Claire co-op's rate of increase has exceeded that of its non-cooperative competitors.

Bottom line: creating new institutions -- cooperatives or otherwise -- will itself do nothing to control health insurance costs.

It's the Rules of the Exchange, Stupid

The solution lies in fixing the exchanges.

Health insurance exchanges, widely supported in Congress, are the proposed federally sponsored marketplaces that would pool the uninsured and participating employees and let them choose among competing private insurance companies.

The compromise that's needed -- one that could both muster broad support in Congress and hold down premium growth -- is to rewrite the rules that govern exchanges, thus fundamentally changing the way we purchase health insurance.

As currently written, the proposed exchanges will fail to pressure private insurers to hold down premiums. They will attract too many high-risk participants, have too small a participant pool and deploy weak incentives (by subsidizing participants who select high-priced insurance plans).

But if Congress rewrites the law to give the exchanges a pool of participants that's average in risk, large in size and driven by the proper incentives (by forcing participants to pay the extra cost if they choose a high-priced insurance plan), then -- even if there's no "public option" or no co-op -- the competitive forces they'll unleash will drive private insurers to hold down premiums while improving the quality of health care.

The importance of getting the rules right is not theory. It's based on the 25-year experience of how the Wisconsin State Employee Health Plan has operated one of the nation's largest exchanges in Dane County.

The Dane County Exchange Model: Bending the Cost Curve

The Dane County Exchange Model follows three simple rules to control premiums:

  • First, a pool of participants that's average in risk. That's because the Dane County Exchange includes all state employees who reside in the county. If exchanges end up with a participant pool that is disproportionately sick or old, the resulting "adverse selection" would scare off health insurance companies and result in either lousy premium bids or none at all.
  • Second, a large number of participants. The Dane County Exchange includes at least 20 percent of the region's population not covered by Medicaid or Medicare. At this size, pools, if they have average risk, are simply too big for HMOs and other insurance companies to ignore, and therefore attract good premium bids. But if exchanges have pools that are too small, even if they have average risk, insurers will have far less interest, bid high or not bid to begin with.
  • Third, a strong incentive for pool participants to select the lowest-bidding insurer. All benefit packages offered through an exchange should be excellent. Enrollees should be free to buy coverage from any bidding insurer. But if participants choose a more expensive insurer, they alone -- not employers, and not the government -- must pay the extra cost, preferably with after-tax dollars. Unless participants have this clear economic incentive to choose the lowest-cost plan, HMOs and other private insurers will in turn have no incentive to hold down their premiums.

By obeying these rules, the Dane County Exchange Model has held down health insurance premiums far below the prices that Wisconsin pays for its employees in the state's other 71 counties, where one essential rule -- a large pool, exceeding 20 percent of the non-Medicaid, non-Medicare population -- cannot be followed. The Dane County Exchange Model has annual HMO premiums in 2009 that average nearly $1,200 less for singles and nearly $3,000 less for families than the HMO average for the state's other counties.

But the truly exciting news is that the inflation rate for the Dane County Exchange Model has been substantially less than the inflation rate for the exchanges in the other 71 counties. Between 2004 and 2009, Dane's HMO premiums increased 35 percent for singles and 37 percent for families. In the other 71 counties, the growth rate averaged 42 percent for singles and 45 percent for families -- an increase at least 18 percent greater.

The Dane County Exchange Model has also done well compared to the premium growth rate for U.S. employers in general. In recent years, American firms have steadily shifted substantial costs to their workers in an effort to hold down premiums. The most recent Kaiser/HRET survey of employer-sponsored health benefits, for instance, reports that since 2006 the average family deductible for PPOs has jumped by 44 percent, while the average HMO deductible has shot up 103 percent. Yet despite this huge cost shift to employees-a cost shift that has not occurred in the Dane County Exchange Model-U.S. employers as a whole have only managed to hold down their premium growth rates to slightly below those that the Dane model has experienced between 2004 and 2009 (31 percent for singles and 34 percent for families).

The Lesson for Congress and the President

As Congress and the President struggle to formulate a compromise on health insurance reform, they should focus on the exchange rules followed by the Dane County Exchange Model as the best mechanism for imposing a stern and lasting discipline on private insurance premiums.

Rewiring the exchanges along these lines offers liberal Democrats what they most want: excellent benefits, a wide choice of health insurers and providers, and slower growth in health care costs.

Conservative Democrats and Republicans get a proven way to contain costs without a government-run insurance company, because the Dane model deploys market forces -- competition, choice and incentives -- to discipline private insurers' premiums.

There is no other potential compromise that has the power to attract majorities -- potentially bipartisan majorities -- in Congress and the capacity to actually lower health insurance premium growth.

David R. Riemer is director of the Community Advocates Public Policy Institute in Milwaukee. The views expressed in this commentary are the author's and do not necessarily represent policy views of CED.