Health Care Market Exchanges: A Correlation of Economics and Health Care Written by: Kevin Cook

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1 Health Care Market Exchanges: A Correlation of Economics and Health Care Written by: Kevin Cook Introduction The Health Insurance Exchange is a new market frontier that will enable consumers to choose their health insurance and provide them the tools to make informative decisions. The exchange will work to some extent like buying products online through Amazon or other similar on-line retailers where consumers are given a myriad of choices and can choose the insurance that best suits their needs at the best possible price. The exchange will enable for an organized and competitive market for buying health insurance and will offer several choices for health plans and provide information to aid consumers to better understand their options. However, to better understand how the insurance exchanges will work it is imperative to first have a basic understanding of the economics of healthcare. Health Care Economics Economics is the study of the allocation of finite resources to produce various commodities and how those commodities are distributed amongst individuals in a society whom, mostly speaking, having infinite wants/desires/needs. The principle concern of Health Care Economics pertains to issues related to efficiency, effectiveness and the behavior in the production and consumption of health and health care and to study the functions of health care systems and health affecting behaviors. In other words, health care, which is tied to health, can be broken down into an economic model and correlations can be made about the effectiveness of health care and can uncover potential inefficiencies of health care markets. 1 Several factors cause inefficiencies in health care including but not limited to; uncertainty, asymmetric information and externalities. Uncertainty in this sense implies a lack of certainty due to limited knowledge and the impossibility to exactly describe future outcomes unless you re a time traveler. Exempli gratia, it would be impossible to predict an accident that causes an individual severe head trauma which would result in financial burden and costly therapy. Asymmetric information is when one party has more knowledge than the other party. There is a knowledge gap between physicians and patients which produces a distinct advantage for the physician. Externalities occur when a choice that is made has an outcome, either positive or negative and not reflected in prices, to other parties/groups that were not involved in the transaction/choice. Exempli gratia, pollution from automobiles, which are used for easy transportation, causes the surrounding air to be filled with particulates that can cause lung disease in individuals who live near congested roads. Various hypotheses have been formed to answer questions that pertain to health care and its benefits compared to its cost. The most famous example was the RAND Health Insurance Experiment which sought to answer how free health insurance benefited individuals who could not afford health insurance and the impact, if any, it had on their overall health. 1

2 RAND Health Insurance Experiment (RAND HIE): The RAND HIE sought to explain the effects of health care cost, the utilization received and its respective outcome from 1974 to The experiment concluded that cost sharing reduced (i.e., inappropriate or unnecessary) medical care (overutilization) but also reduced (appropriate or needed) medical care. The experiment asked the question, Does free medical care lead to better health than insurance plans that require the patient to shoulder part of the cost? 2 To put it broadly, free health insurance only provided a small benefit to those who could not afford it. Perhaps because the insurance was free, people did not experience the value that came with health insurance. Having to pay for health insurance, on the other hand, perhaps provided individuals with the sense that they need to take advantage of what they are paying for (i.e. if you pay a premium every year for insurance and it covers several check-ups, you might feel obligated to have a check-up whether you feel you need one or not simply because you have already paid for it). And, consequently, check-ups can prevent health related problems before they become serious. The project randomly assigned a sample of families to a variety of different insurance plans; one group received all medical care free of charge whereas the other groups paid some percentage of their health bills up to a stipulated maximum. The results of the experiment showed that the average person (i.e., average health, no smoking, no elevated risk, weight, et cetera) enrolled in the experiment that free care relative to cost-sharing had had positive effects of: (1) improved corrected far vision and (2) lower diastolic blood pressure. The following three principle conclusions were drawn from the experiment: 1. Free care did not affect the major health habits associated with cardiovascular diseases and many types of cancer, even though those habits (especially smoking) were at levels where substantial health benefit from behavior change was possible, 2. Free care has at most a small effect on any of five general health measures (physical health, role functioning, mental health, social contacts and general health ratings) for the average enrollee and 3. People having specific conditions with wellestablished diagnostic and therapeutic procedures (myopia, hypertension) benefited from free care and these improvements appeared to be greater among the poor. 2 Now that you have a basic understanding of economics and how it can pertain to health, let us dive into health care reform. Health Insurance Exchanges and a New Market Frontier 2014 Now that President Obama has been reelected, health care reform is virtually guaranteed and states have been gearing up to play. There are three paths that can be taken in order to set up an exchange. The three paths are as follows: 1. States can control their own market place and decide how to run their exchange 2. States can opt out of running their own exchange. In this case, the federal government (i.e. The Department of Health and Human Services (HHS)) will step in and run the exchange or, 3. States can choose to have a partnership exchange which, as the name implies, is set up by states with the help of the HHS. States that are operating the exchange on their own will perform all exchange-related activities. These activities include contracting with health plans, providing consumer outreach and assistance and building the necessary information technology (IT) infrastructure to assess eligibility and enroll individuals into coverage. All statebased exchanges will be required to establish legal authority for their exchanges (i.e. proper 2

3 legislation has to be passed in each state authorizing the establishment of a health insurance exchange). This legislation will determine how the exchange is structured and governed and will discussed in greater detail momentarily. 3 States unwilling to establish their own exchange (i.e. choosing to Opt Out ) will operate under a federally-facilitated exchange where HHS will be responsible for operating the exchange market. States operating under the supervision of HHS will coordinate on multiple levels including plan certification and oversight functions, consumer assistance and outreach and on streamlining eligibility determinations for the exchange and Medicaid. 3 This type of operation will allow states too eventually, if applicable, transition into a partnership or state-based model. A state partnership market exchange is an option for states that found it difficult to constitute a fully state based exchange before the beginning of This type of exchange allows for the combined management of exchange functions (i.e. management plans, certain consumer assistance functions or both) and for a more stream-lined transition to a fully state-based exchange in the future. A partnership state can elect to conduct Medicaid and Children s Health Insurance Program (CHIP) eligibility determinations or allow HHS to bring about the de facto requirements. HHS will perform the remaining exchange functions and ensure the exchange meets Affordable Care Act (ACA) standards. 3 Through November 2012, roughly two-billion dollars was distributed to states through federal exchange Planning grants (promotes the design of each states respective exchange), Establishment grants (conducive to a number of different activities including but not limited to; conducting research, performing oversight, ensuring program integrity and funding the first year of operations) and Early Innovator grants (support the design and implement the IT infrastructure needed to run the Health Exchange). Much of the funding is being allocated to the ladder to construct the IT infrastructure necessary to support exchange functions. 3 Employer Mandate: Get Your Full Time On The Exchange, in its infancy, is meant to make purchasing insurance easier for small businesses and uninsured individuals starting January 1, However, large businesses (i.e. those having 51 or more full-time employees) will not be able to participate in the exchange until 2017 hence, a caveat or known as The Employer Mandate. The Employer Mandate is a proposed rule which will subject employers with 51 or more full time employees or full-time time equivalents to potential penalties unless they offer 95% of their full-time employees health coverage that is affordable and provides minimum value. Affordable implies that the cost of coverage for any employee must be less than 9.5% of the employees W-2 wages with the employer and the ladder implies that the plan pays at least 60% of all covered expenses. 4 Penalties are as follows: *$2,000 per full-time employee if a single fulltime employee receives federal premium assistance for Exchange Coverage **$3,000 for each employee who receives the federal premium tax credit * If coverage is not offered to 95% of employees, $2,000 will be administered for employee minus the first 30 employees is only a single full-time employee receives federal premium assistance for coverage purchased on an exchange ** Of the remaining 5% of employees, if they are not offered coverage but receive the federal premium assistance the employer may receive a penalty. 4 Four Levels of Coverage Under the Patient Protection and Affordable Care Act ( PPACA ), most people will be required to have health insurance coverage beginning in If individuals purchase health insurance via the 3

4 exchanges, they will be offered four levels of coverage intrinsically depicted by four elements: Bronze, Silver, Gold and Platinum. Each level of coverage is based on actuarial value, that is, a value measure of the level of protection a health insurance policy offers and indicates the percentage of health cost that would be covered by the health plan. 5 In general, from least to greatest, a bronze plan would cover 60% of the cost for an individual who is of average health and that individual would cover the remaining 40%. A silver plan would be in the ratio of 70/30, a gold plan would be 80/20 and the platinum plan would cover 90% while the enrollee would pay 10% out of pocket. As you might of expected, the bronze plan is the least costly plan (i.e. lower premiums) while the platinum plan is the most costly (i.e. higher premiums). A caveat to the levels of protection: Individuals with cancer or other costly health conditions could end up paying significantly more than an individual who is of average health. In theory, these provisions, laws and new ways of doing business are all intended to reduce the cost of health care and to improve the quality of life. Some argue the Health Care Reform law will bankrupt our country while others see it as a solution to exponential rise in health care cost. At the current time, The United States spends roughly 17% of its GDP on health care and much of it is bogged down by wasteful spending. The possibility of Medicaid expanding will enroll an estimated 21 million more people and affordable health insurance will be provided to an estimated 44 million uninsured Americans. 7 With the pool of insured Americans vastly growing in 2014, hospitals and physicians will be bombarded with a myriad of new patients who can now afford care thereby possibly securing more income for physicians. However, with the onslaught of newly insured patients, more physicians will be required to handle the load and more pieces of the pie will be distributed amongst the group of physicians (radiologist in this case). What This All Means: Finding a Signal in the Noise The purpose of expanding health care is to bring down the price of care that patients received. The rapid increase in the price of health care is attributed to the fact that health care cost has far outstripped the rate of inflation (i.e. the increase in wages have not kept up with the increase in health care (see figure 1)). One reason for this galvanizing statistic is because providers were paid based on the quantity of care as opposed to the quality of care. To combat this way of doing business, the Affordable Care Act introduces steps to improve the quality of health care which will lower cost by avoiding costly mistakes and readmissions to hospitals (e.g. a patient gets sent home only to be readmitted within a few weeks because a preventable problem was not prevented in the first visit), educating patients on how to stay healthy and/or dissuade unhealthy activities and rewarding quality. 6 4

5 Figure 1: Growth of Health Insurance Premiums 8 5