Health insurers could be allowed to bypass some key reforms
Senate bills would include loopholes for proposed 'exchange'

By David S. Hilzenrath
Sunday, November 15, 2009

Nobody wants to spend a lot of time and energy -- and taxpayer money -- and end up where they started. But that's what could happen with one of the principal elements of health reform, the "exchange" or "gateway."

Legislators are designing this new insurance marketplace to protect consumers from many of the pitfalls and inequities in the current system. But even as they focus on the details of how the marketplace will work, senators have indicated that they would allow insurers to continue operating outside it, much as the health-insurance lobby has sought.

One Senate bill would preserve the possibility that insurers could tailor policies to draw healthy individuals out of the new markets, leaving coverage less affordable for those who stay behind.

"It's a leak in the system," said Karen L. Pollitz, a professor at Georgetown's Health Policy Institute. "It returns you to problems that we have today."

Senate bills guarantee that certain basic reforms -- such as requiring insurers to accept people regardless of preexisting medical conditions and banning annual and lifetime limits on coverage -- would apply both inside and outside the new markets for individuals and small businesses. But that would not be true for a host of other requirements intended to help consumers compare health plans on an apples-to-apples basis and force insurers to compete more directly on price.

For example, the bill written by the Senate health committee would not require insurers operating outside the marketplace to provide standardized disclosures about what they cover.

It would not prohibit health plans outside the exchanges from using marketing practices that discourage the seriously ill from enrolling, nor would it demand that they offer "a wide choice" of medical providers -- including "essential community providers . . . that serve predominantly low income, medically-underserved individuals," as the bill prescribes for insurers inside the exchanges.

Perhaps the sharpest dichotomy is that, under the health committee's proposal, certain standards governing the nature and extent of covered benefits would apply only to policies sold inside the exchanges.

All of those factors contribute to the possibility that insurers might offer cheaper, less comprehensive policies outside the exchanges and entice healthier people to leave the new markets. That would leave the exchanges responsible for sicker people who are more expensive to insure.

Similarly, outside the exchange, the bill drafted by the Senate Finance Committee would not regulate the marketing of individual coverage, nor would it require that health plans be rated based on quality and price.

The legislation is now in the hands of Senate Majority Leader Harry M. Reid (D-Nev.), who is merging the work of the finance and health committees into a single proposal that could be unveiled as early as next week.

Unlike the Senate bills, the one approved last weekend by the House says that all new policies for individuals would have to be sold within an exchange.

The Senate health committee would give plans operating outside the exchanges another break: Only those inside an exchange would have to pay a surcharge -- as much as 4 percent of premiums -- to defray the exchange's overhead costs. That could allow outside plans to undersell inside plans. In a written response to questions, the committee's Democratic staff said it would not work out that way because plans inside the exchanges would have to spend less on marketing.

Why would the health committee create an elaborate system of consumer protections and then allow insurers to operate outside it?

"Some people may not want to purchase insurance through a gateway. The bill is about creating and enhancing choice," the committee's Democratic staff said.

The main lobbying group for the health-insurance industry struck a similar theme in a July letter. Karen Ignagni, president of America's Health Insurance Plans, wrote that offering plans to individuals outside the exchange would "improve choices for individuals and employers."

In seeking to create a more standardized marketplace, lawmakers were taking aim at a fundamental problem: It is hard for individuals to comparison shop for health insurance, because policies contain myriad, complex variables. Many people fail to spot gaps in their policies until they become severely ill, Nancy Metcalf, an editor at Consumer Reports, said in June testimony to a Senate panel. Insurance companies "know exactly how to design and market plans whose gaping holes don't become apparent until it's much, much too late," Metcalf said.

The health committee bill would cut through some of the confusion by offering three tiers of coverage within exchanges. Plans competing within each tier would be required to have the same actuarial value, meaning that overall they cover the same percentage of anticipated expenses.

But under the health committee bill, insurance policies offered outside the exchanges would not have to conform to the three tiers, leaving consumers with the challenge of having to make apples-to-oranges comparisons.

The secretary of Health and Human Services would be required to establish an "essential health benefits" package, but it would not be essential that policies outside the exchange include those benefits.

Outside the exchanges, people could buy policies that do not provide the basic coverage required to satisfy the terms of the individual mandate (the requirement that everyone have insurance coverage), thus exposing themselves to penalties.

Even within the exchanges, there could be limits to consumer protections. The health committee bill would not explicitly guarantee consumers the right to an external appeal when a health plan refuses to pay for medical services. The right to an external appeal is a hallmark of the health-benefits program for federal employees, which has served as a model for the proposed exchanges.

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