The Fallacy of the ObamaCare Exchange System (California)

“The law is indeed a train wreck with no relief in sight”—House Small Business Committee Chairman Sam Graves (R-MO)

The ObamaCare Exchanges, the online marketplaces for health care in the states, are set to begin enrolling customers on October 1, 2013, yet the finish line appears to be nowhere in sight.  Given the choice of whether to cooperate with ObamaCare or leave it to the feds, only 17 states opted to create their own exchanges, and they are finding implementation to be far more difficult than they anticipated.  The rationale behind the exchanges is that they will supposedly create competition among insurers.  The Department of Health and Human Services, via Healthcare.gov, released a statement saying that “exchanges will make it easier for consumers to compare plans on the basis of price, quality, and benefits.  This gives insurance companies incentives to offer products at lower prices than their competitors.”  However, in reality, like most attempts to regulate the market, the Exchanges will restrict, not facilitate, competition—if they can even get off the ground.

Across the board there are questions about the various state exchange programs being ready by October 1st.  A recent Government Accountability Office (GAO) report confirms that the Obama Administration is unprepared to implement the federally facilitated health insurance plan and the exchange program created under the Patient Protection and Affordable Care Act (ObamaCare).  House Energy and Commerce Committee Chairman Fred Upton (R-MI) hit the nail on the head when he said that “the non-partisan GAO reports underscore the sad reality that the administration is still woefully unprepared for implementation despite the law being signed over three years ago.”  True to his point, even many of the states which volunteered to implement the exchanges are having difficulty establishing core functions of ObamaCare.  

California has arguably put the most effort into crafting its state exchange system, Covered California, receiving federal funding since September 2010 totaling over $910 million.  But don’t take this as a sign of success.  Within the last month, three of the nation’s leading health insurance providers, UnitedHealth, Aetna, and Cigna, have decided not to participate in Covered California for its first year because they, as a UnitedHealth spokesman explained, “are simply taking the time to carefully evaluate and better understand how the exchanges will work to ensure we are best prepared to participate meaningfully in their development.”  While these providers accounted for only 7% of the California individual health insurance market in 2011, the entire purpose of the exchange was to persuade less-involved providers to enter the market, increasing competition and lowering prices.  Instead, Covered California has given the three largest providers—Kaiser Permanente, Anthem Blue Cross, and Blue Shield—an even tighter grip on the market.  And, as history has shown, a lack of competition—as is becoming more and more the case in California—inhibits innovation and customer service, while increasing prices.  

The lack of enthusiasm by smaller insurance providers should surprise no one who understands basic economics.  Insurance providers are going to participate in activities that guarantee them the highest certainty of success: a system that maximizes profits while making as few changes to existing products as possible.  The CBO estimates that 7 million people will sign up for coverage next year through exchanges—many of which are expected to be older and sicker than the average person.   Insurance costs are based on risk assessments, but it is no secret that some people are more at-risk than others.  So why are people surprised when insurance providers refuse to play a game that ignores the fact that “life doesn’t distribute risk evenly”?  

The executive director of Covered California, Peter Lee, posited that “there will be plenty of price competition for California Consumers.”  However, it appears Mr. Lee spoke too soon.  The incentives within the Exchange encourage, even require, insurance providers to increase their prices, so that even if the exchange is ready on time, California residents will certainly be unprepared for the price of their insurance. And who suffers as a result of these increased prices?  According to data released by California state officials, the middle class, whose premiums may increase by 30%, and young adults, who will also experience significantly more expensive premiums.

Moreover, while Glenn Melnick, a health policy professor at USC, admits that having Kaiser, Anthem Blue Cross, and Blue Shield acquire more business through the Exchange could give them bargaining leverage with doctors and hospitals, he also states that whether “the market is competitive enough that those companies will pass along those savings” is debatable.

It is glaringly obvious that the exchange in California is not working.  However, it is also clear that having Covered California fail is not the worst thing in the world, for if it is successfully implemented, it’s going to impose a significant financial burden on many.