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Health Insurance Exchanges and Free Choice

Harry Reid and Senate committee chairs

With all the excitement surrounding Harry Reid’s announcement that a public option would be in the final Senate bill, we thought that now would be a good time to take a closer look at the public option.  But in order to really understand the public option, first you need to understand what the health insurance exchanges are all about.

What are the health insurance exchanges?
Basically, they’re a way to regulate the individual market for insurance.  Ezra Klein, who calls the insurance exchanges the most important, most undernoticed part of health care reform, explains:

Imagine that you decided you didn’t like your current health insurance and you wanted to change it. Your employer very likely doesn’t offer any alternatives. If you do have a choice, it’s almost certainly not between more than three different plans.

Your options today: You could, of course, spit at your employer’s offerings and go buy insurance on your own. But the individual insurance market is a scary place. You’re on your own, so you have no bargaining power with insurers. Providers can simply refuse to sell you health insurance, or they can jack up your prices because of past illness. They can sell you a plan that’s isn’t enough for your needs and that’s thick with loopholes and technicalities. A favored trick, for instance, is to sell plans that don’t cover any preexisting conditions: If you go to a doctor complaining of back pain, but it turns out you’ve felt back pain before, they don’t have to cover any costs relating to the ailment.

The Health Insurance Exchange gives you another option: Unlike your employer, it will have a wide number of competing providers offering different plans with varying benefit levels, options and price tags. Unlike the individual market, insurers won’t be able to discriminate based on your health history or your future risk. Plans will have to be certified as meeting a minimum level of coverage. Plans that routinely screw over members will lose customers to insurers with better plans.

How would it work?
Right now, if you’re not covered by an employer and want to buy your own insurance, you’re on your own.  You call a few insurance companies or insurance agents, find out that every plan is more expensive than you thought, and then pray that the indecipherable contract you sign actually covers you when you get sick.

In a health insurance exchange, all of the insurance plans offered in your area would be sold in one place.  You’d go onto the exchange’s website or call their number to compare plans from different companies and choose the one that’s best for you.  In order for plans to qualify for the exchange, they’d have to meet certain conditions– they’d all have to offer certain minimum benefits, they couldn’t deny coverage because of preexisting conditions, and couldn’t take away your coverage if you got sick.  And if you were unhappy with your insurance, you’d be able to switch easily to another plan.

Massachusetts already has a health insurance exchange, called the Massachusetts Health Connector.  If you want to get a better idea of what a health exchange would look like, check out their website.

Who would be eligible?
At first, only individuals and small businesses would be eligible to buy insurance through the exchange.  Larger businesses with a bunch of employees would have to provide insurance or pay a tax- this is called the employer mandate.

[Side note: The Finance Committee version doesn’t have a mandate- instead employers that didn’t provide insurance would only pay a penalty for workers who qualified for government subsidy to help pay for their insurance- this is called the free rider proposal.  We’ve talked before about why this is a terrible, terrible idea– it gives employers an incentive to hire people who don’t need insurance because they’re already covered through someone else- but unfortunately it looks like this proposal will make it into the final Senate version.]

Eventually the exchange might be opened to everyone.  Limiting the exchange at first makes it more likely that:

  • If you have insurance that you like through your employer, you’ll be able to keep it- they won’t be able to buy through the exchange, so they’d probably end up sticking with the same coverage.
  • Unfortunately, that also means that if you have insurance through your employer that sucks, you’re stuck with it.

You and millions of other Americans:
Graph of who's eligible for exchanges

But Senator Ron Wyden (D-OR) has another idea…

Wyden’s Free Choice Proposal
This was an amendment to the Senate Finance Committee bill- it didn’t pass (actually, thanks to chairman Max Baucus it wasn’t even voted on), but there’s a chance it might come up again when the bill goes to the floor.  Wyden’s amendment would open the health exchanges to everyone within five years.  Not only that, but let’s say you decided that your employer’s coverage sucks and you’d rather buy insurance through the exchange. Your employer would have to take the money they would have paid to enroll you in their crappy plan, and put it towards the plan you choose in the exchange.

If this amendment gets anywhere, it will be an uphill battle, since it’s run into opposition from all sides.  Johnathan Cohn explains:

Employers don’t like it, benefits managers don’t like it, unions don’t like it–in each case, because it means these groups have less control over, or stand to derive less loyalty from, workers over health care decision-making[…]

Baucus said something about how if labor and business think the idea has problems, then it must have problems. Not true. But labor and business together have the clout to make their views prevail.

When Baucus disallowed the vote on the Free Choice proposal, he said it was because it hadn’t been scored by the CBO.  But:

That was not true, and Wyden has the documents to prove it. A Sept. 22 report to him from the CBO says “the amendment as modeled would reduce the net impact on federal deficits by about $1 billion over 10 years.”

In other words, it would save a bit of money while giving choice to millions of consumers. That in turn would force insurers to compete harder for customers, driving down premiums.

Most policy experts think that the free choice proposal is a great idea, and that businesses and labor groups are being incredibly short-sighted in opposing it.  You’d be hard pressed to find a more pro-business piece of paper than the editorial section of the Wall Street Journal, and even they ran an editorial saying:

Big business thinks that giving employees this choice would be a calamity. To which one can only ask: Have these business lobbies lost their minds?

When the post-mortems on the health-care reform debate are written, the biggest mystery will be why big business fought so hard to stay in the health-care business even as soaring health costs surpassed corporate profits and diverted executive time better devoted to actually running companies.

How does the public option fit into all of this?
The public option is just an insurance plan that would be run by the government and offered on the health insurance exchange, just like all the other private plans.  That’s all it is, despite the massive freakout by the insurance companies over it.  We’ll talk about why they’re so scared- and why that’s probably a good thing- next time.

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