U.S. can learn from California’s health insurance experiment, say experts
The Obama administration wants to remake the health insurance market so millions now without health coverage can buy private policies through a proposed government-run insurance exchange.
California has gone down this road before - and stumbled.
The state's failed 13-year experiment with a health insurance exchange could be instructive, experts say, as Washington debates the direction it will take to revamp the country's health care system.
A national insurance exchange is the centerpiece of overhaul legislation that aims to provide the country's estimated 46 million uninsured - nearly 7 million in California - access to health coverage.
All three leading proposals currently include an insurance exchange, from which the uninsured and small businesses would be able to buy health coverage for themselves or their employees.
Insurers don't reject the concept of a government-run insurance marketplace but are far from willing to embrace it because all of the details aren't yet known.
From the start, California found its experiment with a health insurance exchange rough going.
The program folded in 2006, partly because health insurers, small businesses and consumers were never fully on board.
John Grgurina Jr., who headed the program known as Pac Advantage from 2001 until its demise, branded the program a failure and mostly irrelevant. "It went into a death spiral," he said.
The exchange could not get the volume and participation required to reduce insurers' risks and spur the market to lower premiums.
As a result, the program became a de facto high-risk pool that mostly insured those in poor health and cost insurers the most money.
When it folded, Pac Advantage was left with only three insurance carriers.
The state's failed exchange aimed to give small businesses the collective clout to demand better insurance rates. Because of their purchasing power, huge companies generally can negotiate lower rates on their own.
"If you could pull together all these small businesses, they could achieve better rate negotiations with the insurance carriers. If you could get those better rates, it would lead to more joining the program and less uninsured," Grgurina said.
In hindsight, the model was flawed, he said, primarily because it was voluntary. Insurers and companies did not have to participate.
Indeed, most didn't.
At its peak, Pac Advantage enrolled 150,000 Californians - barely making a dent on the woes the program was intended to fix when it launched in 1993.
In contrast, the federal model would be mandatory - a key difference, and one that experts say could make the difference between success and failure.
All the major congressional proposals would require Americans to carry health insurance - obtained either through work, current government health programs or the exchange. Two of the proposals would require insurers to take part in the exchange if they want to offer policies to individuals and small businesses.
A proposal by the Senate's health committee has a somewhat watered-down version of the exchange concept and refers to its marketplace as regional "gateways."
The leading versions would set minimum coverage standards to make it easier for consumers to shop for policies. The industry now offers a dizzying array of plans that critics say is difficult for consumers to understand because of the numerous differences in benefits, deductibles, co-payments and other out-of-pocket expenses.
As proposed, those taking part in the exchange could not be denied coverage because of pre-existing health conditions, and subsidies would help the poor afford coverage.
Initially, only the uninsured and small businesses would be eligible to participate in the exchange.
"It would bring order to chaos," said John Ramey, a former senior health policy adviser for Gov. Arnold Schwarzenegger and now the executive director of Local Health Plans of California.
"The chaos that now exists is that people who want to buy the product cannot because they have pre-existing conditions. And there are so many different products that it is hard for consumers to decipher which products are more advantageous to them, because there's really no apples-to-apples comparison," Ramey said.
Ramey was also executive director of the state's Managed Risk Medical Insurance Board when it established the Health Insurance Plan of California, the precursor to what became the privately managed Pac Advantage.
Schwarzenegger's failed attempt three years ago to overhaul the state's health care system included an exchange.
"There are astonishing similarities in what the governor proposed and what's being discussed on the national level," Ramey said.
What the governor's proposal did not include was a government-run insurance program - the so-called public option - which has been the subject of intense national debate and is opposed by the insurance industry.
The discussion of an exchange has been more muted, mainly because insurers have shown a willingness to explore the idea.
"It doesn't lend itself to the easy buzz words and criticisms that a public option does," Ramey said.
A national exchange "is far more critical to the success of health care reform than the public option will ever be," he said. "For true competition to thrive, it needs the kind of structure that an exchange could provide."
Patrick Johnston, president of the California Association of Health Plans, agrees that a well-structured exchange could benefit consumers, small businesses and his industry.
"We view an exchange as a potentially positive contribution to the goal of making the health care system work better for everyone," Johnston said.
But Johnston advocates state-by-state exchanges, suggesting that the federal government may not be adequately equipped to run such a mammoth program, particularly in an industry segmented by regional differences in market conditions.
Federal policymakers, mindful of the failures in California and other states experimenting with exchanges, are attempting to craft health legislation that avoids some of the pitfalls, said Elliot Wicks, a senior economist at Health Management Associates.
Massachusetts and Connecticut have found early success in their efforts, mainly because of the broad participation required among consumers and insurers.
For a federal exchange to work, it has to stimulate competition, lower prices and simplify the marketplace, Wicks said - none of which occurred in California.
"We need to be cautious from what we've learned from history," he said.
This summer, Wicks authored a policy brief for the California HealthCare Foundation that explained the failures of California's exchange.
For a successful federal effort, Wicks said, an exchange "has to reduce the complexity of the decisions people have to make."