Obamacare insurance exchanges: look to California

California has long been ahead of the game in many policy matters: taxes, religion, environment. Now add to that health-care reform and the complicated process of creating a marketplace for people to shop for health-care plans.

With the federal requirement that all states must have a so-called health-care exchange up and running by 2014, many states will be looking to the Golden State for lessons on how it has run its exchange since its inception in 2010.

According to health providers, insurance agents and state officials, here’s the takeaway: Start as early as you can, be ready for great excitement over the possibilities and great frustration in implementation, have an army of flexible tech geeks and have infinite energy.

Under the Affordable Care Act (ACA), which got the Supreme Court’s endorsement June 28, health-care exchanges must be established in each of the 50 states. Exchange operators will have to figure out how to make them understood to consumers, what sort coverage and benefits will be available and which insurance companies will be allowed to participate. States can join together to run multistate exchanges or choose not to run one at all, in which case the federal government will do so.

Already several states— New Jersey, South Carolina, Louisiana, among others— have announced they would refuse to set up the exchanges, leaving it in the hands of the federal government. Other states, like Mississippi, are moving ahead to design their own exchanges precisely because they don’t want the federal government to do it for them.

California was one of the first out of the gate to begin setting up an exchange in 2011 following passage of the Affordable Care Act in 2010. (Massachusetts had set up a similar exchange under its own state law passed in 2006). Part of the reason California was ahead of the game was that 18 years earlier it had set up the nation’s first exchange, at its peak enrolling about 150,000 people. It collapsed under financial strain in 2006.

“We are moving from a world where insurance companies once competed by avoiding sick people to one where they compete on service, cost, and quality,” says Anthony Wright, executive director for Health Access, a statewide consumer advocacy coalition.

Peter Lee, head of the California Health Exchange, says with a $39 million federal grant his agency has since hired 40 permanent staff and is on track to be open for the exchange for business in 2013. By January 2014, millions will enroll in insurance that wouldn’t otherwise have access, he says. Currently about one-fifth of Californians are uninsured.

Although the ACA mandates that everyone participate in exchanges, there are significant hurdles: insufficient penalties for not purchasing policies, language and cultural barriers, consumer confusion, and being able to access help from insurance agents, Internet links, and state or community organizations.

“California knows they will enroll those with immediate medical needs right off the bat, but the biggest challenge will be how to reach and enroll the rest of the population,” says Dierdre Kennedy-Simington, vice president of Polenzani Benefits in Pasadena and president-elect of the Los Angeles Association of Health Underwriters.

Ms. Kennedy-Simington says a key issue is ensuring an adequate number of healthy people buy health insurance to balance out the unhealthy people, whose medical costs tend to be higher. It’s a concept known as “adverse selection,” and it was a major part of the collapse of the Health Insurance Plan of California.

One example is insurance giant Cigna, which at one point had a small group plan with infertility benefits that exceeded that of their competitors. Insurance brokers directed clients with a need for fertility treatment to Cigna, greatly increasing infertility claims, putting pressure on Cigna’s finances and ultimately leading to a discontinuation of the policy.

“Benefits and pricing will have to attract a normal cross section of risk and be able to thrive by comparing favorably to the private market,” Kennedy-Simington says.

The bigger question, however, is affordability, especially for low-income individuals and families.  For example, the cost of insuring a family four can exceed $14,000 a year, according to the California Exchange. The ACA provides a sliding-scale tax credit to make it easier for families to purchase coverage.  A family making about $35,000 a year would get a federal credit of almost $13,000 – and pay only $1,400 per year, for example.

 “Just because you have guaranteed coverage doesn’t mean it will be affordable,” says Sima Reid, owner of Twenty Twenty Insurance Service an insurance brokerage in Lakewood, Calif., who works with small to very large employers. “You can’t just say everyone must have access and walk away. You’ve got to figure out how to make it work for the insurance companies so they can work in a prudent way that won’t implode the system.”

Ms. Reid's comment brings up another lesson. Insurance premiums are high because the cost of health care is high. Economies of scale are important to affordable coverage, but the lion’s share of premium increases are due to increased medical unit cost and more people making more use of medical services.

 “There is a perception that a bigger pool of insured people is less expensive – when in truth a healthier, large pool of insured people is what is less expensive,” Kennedy-Simington says.

Another lesson is to keep politics out of it, Mr. Lee says. He notes that the law setting up the exchange was passed by a Republican governor, Arnold Schwarzenegger, and a Democratic legislature. 

Mr. Wright says much of the early work has been to close the legal loopholes that insurers will use to avoid coverage. One good example is that in California, as in some other states, insurers balked at the provision that would ban coverage to children. “We passed a law that says if you don’t cover children, we won’t allow you to cover adults either for five years … and behold, that brought them all back,” Wright says.

Despite the refusal by many states to set up their own health exchanges, most will eventually come around, predicts Bryce Williams, chief executive officer of Extend Health, the industry’s largest private Medicare exchange.

“The California experience tells me that it will not be viable for these states … they won’t want some entity in Washington running this from afar and they will want to get moving on their own to have their own control over it,” Mr. Williams says. "It seems clear to me that the White House is not eager to run them either."

Carl Cudworth, director of benefits for publisher Houghton Mifflin Harcourt, says one of the benefits of the exchanges is being able to shop for carriers. He says he was able to transfer 700 retirees from a group plan they had into multiple other plans offered by more than 75 health insurance carriers through the Extend Health exchange. The end result was saving money and offering more options for coverage.

“Previously we were pretty much in a one-size-fits-all setup where everyone was straitjacketed in their coverage,” he says.

“Instead of paying the funds to the carriers, we gave it to the retirees [via the Extend Health exchange] and they can use it every year,” he says.