By: David Jones
July 23, 2012 09:25 PM EDT
Texas Gov. Rick Perry has pledged he won’t create a state health insurance exchange or implement the optional Medicaid expansion — both components of the recently upheld Affordable Care Act. So far, only 16 states have begun creating insurance exchanges. Eighteen are considering it, four have pledged not to and 13 have yet to announce their intentions.
This is a shame, because health insurance exchanges are a great idea. As a venture capitalist focused on health care information technology, I’m always looking for ways to create efficiencies and cut costs in our health system — and exchanges are a promising way to do this.
Exchanges create a transparent, easy-to-shop place for consumers to purchase health insurance from competing plans. Exchange rules standardize the “models” that participating plans can offer, calling for bronze, silver, gold and platinum levels that correspond to price and benefit levels. This allows for apples-to-apples comparisons between insurance offerings, instead of the murky confusion that plan selection involves today.
Increasing transparency and choice for consumers is likely to make exchanges popular. More important, exchanges will most likely save money by driving inefficient, antiquated practices that have nothing to do with medical care out of the health insurance industry.
This is because distribution of health insurance to individuals and employees of small companies remains extremely expensive. Insurance carriers spend $25 billion per year solely on sales and distribution — that is, getting health insurance plans into the hands of consumers before a single medical claim is filed.
This is far more than in other financial sectors, on a relative percent of premium basis. Commissions for sales agents range from 8 percent to 12 percent of the premium in the individual and small group markets — for which exchanges are designed.
Expensive, inefficient distribution persists because IT innovations that have revolutionized markets for everything from stock trading to car buying to taking out a home mortgage loan haven’t yet transformed health insurance. Only 5 percent of consumers, according to PricewaterhouseCoopers, have bought health insurance online, compared with 17 percent for car insurance and 45 percent for airline tickets.
The reason change hasn’t come to this market is clear, if complex. Before the health care act — which limits how much carriers can spend on sales and administration and outlaws medical underwriting starting in 2014 — insurers faced a “prisoner’s dilemma.” Any carrier that aggressively cut commissions could expect not just a reduction in sales but an increase in the percentage of new high-risk (and thus, high-cost) members steered by independent agents. It’s easy to see why no health insurer has established itself as the “low commission” leader.
Though health insurance carriers still make money off of this antiquated process, its value is beginning to fade. First, the market for individual and small group health insurance has shrunk, as rising costs push more customers from the ranks of the insured to the uninsured.
Second, communicating with customers through an old-fashioned, paper-based intermediary inhibits the sale of health insurers’ most innovative, and potentially cost-saving, products. These include wellness solutions, chronic-care-management programs and behavior-change-incentive programs — all of which require carriers to know their customers more closely than today’s distribution model allows.
In the end, all these distribution inefficiencies — intermediation by brokers, complicated products and low technology adoption — filter down to the customer in the form of higher costs. A system of well-constructed state exchanges can radically streamline this process and, more important, generate significant savings across the industry.
An example of just such an exchange already exists on the Medicare.gov website, where millions of seniors each year select the prescription drug plan that best fits their needs from dozens of competing offers. Costs have come in far below estimates of both Congress and the executive branch at the time (2003) prescription drug coverage was added to Medicare.
Given the fiscal pressure created by ever-increasing health care costs, it is imperative to find ways to reduce costs throughout the system. Simplifying product complexity and reducing industry sales expenses is an easier way to decrease national expenditures than restructuring the U.S. medical delivery system — something we must ultimately do but which will take far longer.
The economic case for exchanges is clear and relatively free of ethical and moral ambiguities. We should get these exchanges online, tweak them as necessary and move on to the harder issues that are worthy of our passions.
The technology is here and ready. Finally, the health care system has the opportunity to rise to the occasion.
David Jones is chairman and managing director of Chrysalis, a venture capital firm that invests in health care IT companies. He sits on the board of Humana Inc. and served as its chairman from 2005 to 2010.