Washington Plan Goes Far Beyond Federal Idea – Allows Volunteer Board to Dictate to Entire Health Insurance Market, Restrict Competition

Johnathan Seib of the governor's office outlines a Goldilocks approach: Some people think the bill goes too far, and others not far enough, so he says it might be just right.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Jan. 19.—State officials say they want their new “health exchange” to be a big success when it kicks off in 2014, and they have a plan to make sure of that – by severely limiting competition from private insurance companies.

            That’s the gist of the debate right now in the Legislature’s health care committees, where business groups, regulators and health reform advocates are engulfed in the biggest battle so far in this state’s effort to implement federal health care reform. It is perhaps the most complicated and technical policy question before the Legislature this year. But no matter how much groaning lawmakers might do, it’s one they can’t duck. There isn’t much time left – that’s part of it. But also the future of an industry is at stake.

            Normally you might think competition is a good thing, but where health insurance is concerned, state officials say that’s just not true. They’re proposing a measure that in a roundabout fashion would give sweeping powers to the state’s new health exchange, the entity that will sell subsidized health insurance in this state. Among other things, its board would be able to sharply restrict the ability of private insurance companies to sell policies that might take customers away from the state program.

            The proposal goes far beyond the minimum standards envisioned by the federal law, and business groups and insurers say it doesn’t seem to leave private insurers much room to breathe, much less operate. So they’re gearing up for a fight. “It goes back on the promise the president made when he launched this thing,” says Patrick Connor of the National Federation of Independent Business. “That if you have a plan you like, you’re going to be able to keep it. We are going to try to make sure that promise is kept, at least here in Washington state.”

            Competition Deadly, Regulators Say

            The exchange is the centerpiece of the federal health-reform scheme, and you have to know a little about it to understand what the fuss is all about.

The idea is that the exchanges will give people a place to buy standardized policies offered by private insurance companies for the individual and small group markets. They’re supposed to give people an easy way to compare policies and make judgments based on price and quality. Some people will have to buy their insurance there – the people who take advantage of subsidies and tax credits, which will be offered to those earn between 138 percent and 400 percent of the federal poverty level. In this state, that’s about 400,000 people. But the exchange won’t be limited to that group – anyone can buy insurance there.

            The thing is, there’s supposed to be a parallel market outside of the exchange. The way the law works right now, private insurance companies are supposed to be able to offer insurance policies to that market as well. And that’s where things get tricky.

            Washington was one of 10 states last year that passed legislation to create their own exchanges, rather than leaving the job to the federal government. That gives it the ability to write rules that go beyond the federal requirements. 

            And regulators here are saying that the way the law stands, private insurance companies may well sell policies in the open market that siphon away the healthiest customers and leave the exchange with the sickest ones. They’ll sell cheap policies with high deductibles and skimpy benefits – the kind that appeal to the young. Rates will go up for those who are left on the exchange. People will flee. “We get a death spiral,” Barb Flye of the insurance commissioner’s office told the Senate Health and Long-Term Care Committee on Monday.

The solution? A law that basically says private insurance companies can’t sell anything radically different on the open market. If they sell policies there, they have to make those same types of policies available on the exchange as well – in some cases, exactly the same policies. Meanwhile, existing rules will allow the state to regulate rates and ensure there isn’t a price difference.

            Choice a Problem

The proposal from the state Health Care Authority, backed by the governor’s office and the Office of the Insurance Commissioner, filed as Senate Bill 6178 and House Bill 2319, is filled with details about those standardized insurance policies. It’s easy to get lost in the weeds. But there are two key elements that regulators say will even things out. The first is that it sets “market rules” requiring insurers to offer their policies both within the exchange and outside of it. The second is that it allows the exchange board, in conjunction with the insurance commissioner’s office, to establish rules for “qualified plans” sold on the exchange.

In an indirect way, that gives the exchange board the ability to dictate the size and shape of insurance policies that are sold in both markets, inside and outside the exchange.  About the only areas left for competition in the marketplace would be between insurance companies, on quality of service and the ability to keep costs down.

The insurance commissioner’s office notes that current catastrophic policies will be “grandfathered” – so people who obtain policies before 2014 can keep them, as long as their insurance companies keep offering them.

But the big thing is this, Flye explained – you just can’t allow too much choice or the program won’t work. “If we want choice in the marketplace, adverse selection will take place,” she said. “Wherever there is choice, people will make a choice based on what they see before them. [Companies] will offer [policies] based on what they are trying to attract, so choice will result in adverse selection. It is just a fact of life that we are trying to deal with. Carriers and consumers will act in their own self-interest if the rules of the game allow them to. So this is a very simple concept. If a carrier is allowed to cherry-pick the healthiest risk, that is what they are going to do. It just makes sense. It is in their own self-interest.”

Thus the proposal restricts alternatives.

Said Johnathan Seib, policy adviser for the governor’s office, “We are aware that some think this bill goes too far and some think this bill does not go far enough. Again, this suggests that we have hit just the right spot.”

            Big Transfer of Power

The proposal is backed by many of the same interests that have been pushing health reform all along on the state and federal level – none of them fans of insurance companies, and many of which would have preferred some sort of government-managed single-payer system in the first place. Among those testifying in favor of the bill at House and Senate hearings this week was Teresa Mosqueda, lobbyist for the Washington State Labor Council, chairwoman of the Healthy Washington Coalition, and the only representative of any of the interest groups that has been appointed to the Washington exchange board.

Fewer choices make it easier for people to choose, she explained. “The simplest way to avoid adverse selection is to make it easier for consumers to choose among the plans and by making sure that… we avoid loopholes and exceptions to uniformity inside and outside of the exchange.”

But business groups and insurers are aghast. They see it as an enormous power grab that takes responsibility from the Legislature and hands it to an unelected board and the insurance commissioner. And restricting competition? Not enhancing it? That just goes against the grain.

            Other Fixes Available

Donna Steward of the Association of Washington Business notes that there are several other features of the federal law that are designed to combat adverse selection, and questions whether the state’s big fix is really needed. Until health reform takes effect, there’s no reason to think that the customers using the exchange will be so much sicker than the general population that there will be a problem. There still will be a huge incentive to purchase on the exchange, because of the subsidies and tax credits.

“The bill gives the board unprecedented power basically to determine which insurers may provide coverage in the exchange, which will, if the bill stays written as it is, effectively determine which carriers will come in and out of the state,” she said. “If granted, this authority would transfer decisions regarding statewide health insurance policy from the Legislature to the exchange board, and board members are unelected and unaccountable to the citizens of the state. These decisions belong with the Legislature.”

And as might be expected, the state’s three biggest carriers – Group Health, Regence Blue Shield, and Premera Blue Cross – aren’t exactly leading cheers for the bill. The idea that there’s going to be a problem is all guesswork, said Chris Bendoli of Regence.  “This has never been tried before, nothing like this has ever been tried before, so basing assumptions about additional layers of regulation that we should put on the market, such as the market rules contained in this bill, is really basing it on a lack of actual evidence of what might happen.”

Len Sorrin of Premera said the sweeping new powers for the exchange board “will have significant impacts on the entire marketplace in Washington state, inside and outside the exchange, dramatically impacting the landscape and in effect determining who can and cannot sell commercial coverage in the state of Washington. Those provisions also run a substantial risk of limiting competition and lowering the likelihood that new entrants will come into the Washington market. These are precisely the sorts of market-wide policy decisions that have always been the purview of the Legislature and should remain so.”

            And a Final Irony

There’s an irony in the arguments being deployed against the bill. Seasoned lobbyists say they fear what might happen when the all-volunteer exchange board starts getting pressure from lobbyists. Though certainly they may be the ones who know best.

Said Connor, “We want to make sure that the exchange they develop is workable and it is something that serves consumers, not something that just builds a bigger bureaucracy, requires more tax money to fill it, or can be subverted by the whims of certain special interest groups and other players that have suddenly taken an interest in the issue.”