H.R. 3962 – The Health Insurance Exchange and Public Option

By Mitch Gurney

November 8, 2009

I have been reviewing H.R. 3962 (PDF), which passed over the weekend, plus a couple of other reports to better understand the roles and functions of the Health Insurance Exchange and the public option as outlined in the bill. In addition to the bill itself, the two other reports I utilized for this commentary were the HR 3962 Summary Analysis (PDF) and the Congressional Budget Office (CBO) Oct 29^th analysis (PDF) of HR 3962.

The purpose of the bill and overall objectives are explained in the first opening pages as follows:

PURPOSE: (1) IN GENERAL -The purpose of this division [Health Choices Administration] is to provide affordable, quality health care for all Americans and reduce the growth in health care spending. BUILDING ON CURRENT SYSTEM – This division achieves this purpose by building on what works in today’s health care system, while repairing the aspects that are broken.

Some of the provisions in H.R. 3962 are designed to increase the number of legal U.S. residents that have health insurance. With that objective in mind it authorizes the government to establish a Health Insurance Exchange to facilitate the offering of health insurance choices available to individuals and employers and would subsidize the purchase of health insurance through the exchange for qualified individuals and families with income between 150 percent and 400 percent of the federal poverty level (FPL). (FPL currently is $16,200 for an individual and $33,100 for a family of 4). The Health Choices Commissioner would obtain bids, negotiate and enter into contracts with qualified plan providers plus define and standardize three different levels of benefits; basic, enhanced, and premium to be offered on the exchange. (See Title III- Subtitle A – Health Insurance Exchange Sec. 301 – 311, pgs 155- 210). There is a fourth tier called premium-plus and these packages can offer extra benefits like dental or vision.

Both individuals and employers will be permitted to participate in the exchange selecting the benefit plan that best fit their budgets and health needs. In the first year individuals not enrolled in other acceptable coverage as well as small employers with 25 or fewer employers will be permitted into the exchange. Access to participate in the exchange will be expanded to include employers with 100 and fewer employees by year 3 following enactment of the legislation with the eventual goal of allowing all employers access to the exchange. Companies may elect to participate in the exchange or continue coverage through currently established methods. Individuals may chose plans offered through their employers or decline them and may instead enter the exchange choosing plans it offers or may purchase insurance plans directly from insurance providers outside the exchange.    

Setting aside for a moment any debates or phobias one might have with government involvement and evaluating this concept from a purely economic perspective it is possible that based on the potential size of the collective pool of premium paying participants on a national level that premiums for these various plans could be less costly to individuals and small employers who otherwise pay higher premiums. It is extremely difficult for individuals to plan and budget for the unpredictable high cost of major illness. We have all heard the saying “there is strength in numbers.” The basic premise of insurance is to take care of these high cost by averaging them in with all cost thereby everyone could be protected against large losses by paying a premium related to these averaged cost. Obviously the larger the pool is of premium payers the more these costs can be averaged out thus lowering the premiums for each participant. Currently and based on this theory that is how an employer with 5000 employees is able to garner lower premiums for their employees versus an employer with 200 employees. If we extrapolate this cost sharing out on a national level the concept behind the federal governments exchange is to eliminate this disparity plus lower the cost of medical expenses in general by averaging these costs out over a much larger population and participation as compared to how it is done today. The aspiration being that if premiums are lower for everyone, more people can afford them and be covered.          

The bill contains a number to consumer protections, like a ban on pre-existing conditions. The Congressional Budget Office (CBO) in its Oct 29^th analysis (PDF) of HR 3962 explains:

Policies purchased through the exchanges (or directly from insurers) would have to meet several requirements: In particular, insurers would have to accept all applicants, could not limit coverage for preexisting medical conditions, and could not vary premiums to reflect differences in enrollees’ health. The options available in the insurance exchange would include private health insurance plans as well as a public plan that would be administered by the Secretary of Health and Human Services (HHS).

The public option in HR 3962 will not achieve universal coverage that a single payer option would but as outlined in the act authorizes the government to begin offering public health insurance plans beginning in 2013 as an alternative choice within the exchange thus competing with plans offered by participating private insurance companies in the exchange. (See Subtitle B – Public Health Insurance Option, Sec. 322-331, pgs 211 – 225). The public option would be required to participate on a level playing field with those of the private choices offered on the exchange and like the private plans it must offer the same benefits and abide by the same insurance market reforms. The public option will not be government funded but will be entirely financed by individual premiums, like private plans. Rather than use Medicare’s reimbursement rates plus 5 percent the Commissioner will negotiate rates with health care providers just like private insurance companies do. In Title III-Subtitle A – Health Insurance Exchange Sec. 308 authorizes states to offer their own insurance exchanges or join a group of states to create their own exchanges in lieu of the federal exchange.        

According to the CBO report:

The public plan would negotiate payment rates with all providers and suppliers of health care goods and services; providers would not be required to participate in the public plan in order to participate in Medicare. The public plan would have to charge premiums that covered its costs, including the costs of paying back start-up funding that the government would provide.

This approach is considered by some to be a less competitive threat to private insurance companies who participate in the exchange or in the open market and may put to rest some of the concerns of a government take over of the heath insurance industry. The CBO report notes:

…a public [option] plan paying negotiated rates would attract a broad network of providers but would typically have premiums that are somewhat higher than the average premiums for the private plans in the exchanges. The rates the public plan pays to providers would, on average, probably be comparable to the rates paid by private insurers participating in the exchanges. The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and attract a less healthy pool of enrollees. (The effects of those “adverse selection” on the public plan’s premiums would be only partially offset by the “risk adjustment” procedures that would apply to all plans operating in the exchanges.)

OpenCongress.org had observed in their October 31 commentary “Is a Public Option with Negotiated Rates Worthless:”

Making insurance more affordable for sick people is, of course, a good thing, but it’s not really what the public option was meant to do in the greater health care reform picture. It’s supposed to offer cheaper insurance and encourage the private companies to find ways to lower their own prices in order to stay competitive. CBO has previously estimated (PDF) that [a more]…“robust” public option plan would [have been]…able to offer premiums …about 10 percent cheaper than what private companies charge currently. But this new public option with negotiated rates is going [to] mean that the health care bill, with its individual mandate, will be forcing healthy people that are currently choosing not to pay hundreds of dollars a month for insurance, to buy insurance without making any cheaper options available to them.

Now that The House has passed their bill this process is only half over. Now all eyes will be on the Senate as they debate their bill in the next few weeks. But if enacted everyone would be mandated to get insurance or face being taxed a proposed 2.5% tax on individual’s adjusted gross income. The bill authorizes however for the Department of Treasury and the Exchange to establish hardship exemption from the additional individual tax. Employers may elect to provide coverage to their employees and for those that elect not to provide coverage the bill establishes a payroll tax of 8% that phases in for small employers with annual payroll from $500,000 through $750,000. Employers with an annual payroll less than $500,000 will be exempt from the tax. For individuals who decline their employer’s coverage offering, the act requires the employer to contribute a proposed 8 percent contribution of the average salary for the employer to the exchange.

OpenCongress.org  points out:

The Senate is still weeks away from beginning debate on their own health care bill. The final details of their bill are still being negotiated, but whatever bill comes out of the Senate will be more conservative than the House’s bill in several ways. It is not clear that the Senate bill will end up containing a public option, and if it does, unlike the House bill it will allow individual states to opt out of offering it to their residents. The Senate’s bill will also provide fewer subsidies to help low and middle-income people buy insurance, and it will not include a surtax on the rich to offset its new spending.

If these reforms are enacted as outlined in HR 3962, by 2019, CBO estimates:

…the number of nonelderly people who are uninsured would be reduced by about 36 million, leaving about 18 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under H.R. 3962, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 96 percent. Roughly 21 million people would purchase their own coverage through the new insurance exchanges, and there would be roughly 15 million more enrollees in Medicaid than the total number projected for Medicaid and CHIP combined under current law. (Under the bill, CHIP would no longer exist in 2019.) Relative to currently projected levels, the number of people purchasing individual coverage outside of the exchanges would decrease by about 6 million, and the number obtaining coverage through employers would increase by about 6 million.

If enacted, CBO estimates the impact these reforms could have on the federal budget:

According to CBO and JCT’s assessment, enacting H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the 2010– 2019 period (see Table 1). In the subsequent decade, the collective effect of its provisions would probably be slight reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty. The estimate includes a projected net cost of $894 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $1,055 billion in subsidies provided through the exchanges (and related spending), increased net outlays for Medicaid and the

Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $167 billion in collections of penalties paid by individuals and employers. On balance, other effects on revenues and outlays associated with the coverage provisions add $6 billion to their total cost. Over the 2010–2019 period, the net cost of the coverage expansions would be more than offset by the combination of other spending changes, which CBO estimates would save $426 billion, and receipts resulting from the income tax surcharge on high-income individuals and other provisions, which JCT and CBO estimate would increase federal revenues by $572 billion over that period.

Mitch Gurney

House Passes Historic Health Care Bill