Insurance Exchanges Foster Competition, Consumers Stand to Benefit

Jul 18, 2013, 12:52 PM, Posted by Susan Dentzer

Head Shot of Susan Dentzer Susan Dentzer, RWJF Senior Health Policy Adviser
  • Health insurance for many individuals that is cheaper and better than what’s available now.
  • More competition among health insurers than ever before.
  • Partnerships between health plans and providers to deliver care at affordable cost.

These developments sound like the dreams of health reformers that fueled passage of the Affordable Care Act. But they’re proving to be reality now in many states—particularly in the 17 jurisdictions (including the District of Columbia) that are creating state-based health insurance exchanges, or “marketplaces.”

That’s the conclusion that emerges from analyses of the states participating in the Robert Wood Johnson Foundation’s State Reform Assistance Network. Housed at Princeton University’s Woodrow Wilson School, the program provides technical assistance to 11 states implementing coverage expansions under the health reform law.

Seven of the states in the network, including Colorado, Maryland, New York and Rhode Island, are setting up state-based exchanges. Others, such as Alabama, Illinois, and Virginia, will have federally-facilitated exchanges, in which operational and regulatory functions will be handled by the federal government.  

The longstanding premise behind health reform was that insurance exchanges would bring both new buyers and sellers, thanks to the law’s various provisions. Now, in states in which the health insurance market is already somewhat competitive—in that no one health plan has a dominant market share—the creation of exchanges appears to be fostering more health plan competition than ever.

A report by the Wakely Consulting Group for the State Reform Network examined 10 states that will have state-based exchanges, and concluded that six of them will see more insurers operating on the individual exchange compared to the number of “significant” competitors pre-reform. Across the 10 states, the total number of carriers that will offer health insurance in the individual market will rise from 52 to 70, or by 35 percent.

As the federal reform efforts build on Massachusetts’  earlier reforms, for example, that state will now have seven more carriers participating in its individual insurance market. Four states expect no change, including Vermont, a state where only two insurers today serve a private insurance market that covers about 250,000 people—and that may grow by just 50,000 when the state’s exchange comes online.

Low premiums: One effect of this stepped-up competition is “surprisingly low premiums from several carriers,” concludes a report supported by the foundation and conducted by John Holahan and fellow researchers at the Urban Institute. Based on carriers’ initial filings, a previously uninsured 40 year-old nonsmoker in Colorado could purchase “silver”-level coverage for as low as $245 a month, or $2940 annually. A similarly situated person in Oregon could do even better, obtaining coverage for $221 a month, or $2652 annually. There is a range of bids, to be sure, with some carriers offering higher rates. But the lowest ones are typically well below what is available to many individuals in those states currently.

The Urban Institute researchers note that premiums do vary based on age, and that younger individuals will tend to pay more, albeit for more generous coverage than many were able to purchase pre-reform. What’s more, many premium rates are in flux. If anything, there may be pressure to ratchet them even lower in coming weeks as insurers compare each others’ offerings and state and federal regulators carry out their rate reviews. In the longer run, once health plans sort out the complexities of new regulations and the health status of new enrollees, “pricing is likely to become more aggressive” and to result in potentially even lower premiums in 2015 and beyond, the Urban Institute report says.

New partnerships: A key reason that premiums appear reasonable in many states is that health plans have negotiated discounted payments with narrow networks of doctors, hospitals, and other health care providers. The Urban Institute report notes that “the overall expectation is that the competition in exchanges will lead to provider payment rates somewhere between commercial and Medicaid rates”—a huge change, since Medicaid rates are typically 25 percent or more below commercial rates for hospitals, and up to 50 percent or more below commercial rates for physicians. The exceptions are in states like Rhode Island, with dominant hospital or health systems that face little pressure to negotiate on rates.

So once again, competition matters. In states without dominant health insurers or health systems, increased competition appears to be a key factor in forcing premiums down. And what the late industrialist Henry J. Kaiser once described as “the relish to be found in competition” should now prove appetizing for many American consumers as health reform unfolds.