1. HIX: An assessment of the complexities and opportunities emanating
from the ACA’s public health insurance exchange concept.
Change is coming to the U.S. health insurance market and the road will be bumpy.
Nowhere is the change more apparent than the current debate surrounding the state-run
public health insurance exchanges. Our research underscores that the Affordable Care
Act of 2010 underestimated the cost and complexity of establishing public exchanges.
INDUSTRY PERSPECTIVES
uncommon
In spite of these issues, new and unforeseen opportunities are emerging relative to
clarity
health insurance distribution. The application of retail, product design and customer
service expertise could be transformational relative to the health insurance market for
Q2 2011
individuals.
ReseaRch
3. EXECUTIVE SUMMARY
As the Affordable Care Act (ACA) marks its first anniversary, a number of key questions remain. One of the largest revolves around the costs and benefits for the
federally mandated and state-run competitive marketplaces called Health Insurance Exchanges (HIX), where individuals will be able to shop for and purchase health
insurance. The public (state-run) HIX is one of the cornerstones of the health reform legislation, and for individuals without healthcare coverage today – an estimated 34
million people – the public HIXs are the intended mechanism by which individuals will acquire health insurance.
The ACA requires1 that each state build and operate a multi-channel (i.e. online, phone, and paper-based) marketplace where any qualified individual can shop for and buy
health insurance. The legislation provides some specifics as to what types of “essential health benefits” must be provided within the exchange, dictates guidelines and
mandates as to how the states must run the HIX, and defines specific features the exchanges must possess. These include:
• A choice of certified and approved health plans from different carriers.
• Simple plan comparison tools that allow consumers to research and select the best policy for their needs.
• Enrollment assistance for those purchasing private insurance, and eligibility information for those qualified to receive government subsidies or Medicaid enrollment.
• A process for recouping operational costs of the HIX through surcharges in order to make them self-sustaining.
For these exchange-based insurance policies, federal and state law will closely regulate the products and benefits offered and the prices insurance companies can charge
for their products. To keep the HIXs viable, insurance companies are forbidden from undercutting prices of products sold on a public exchange with competing products
in the open market. They will also be required to pool risks across exchange and non-exchange participants. Further, the U.S. Department of Health and Human Services
(HHS) will mandate a set of essential health benefits that must be provided under each policy, including coverage and deductible tiers for each plan offered.
While the public HIX concept seems simple and straight forward, TripleTree believes that implementation is fraught with costs, technical challenges, and sustainability
issues that are neither recognized nor acknowledged, much less understood. Thus far, much of the debate about HIXs has focused on constitutional questions - and
therefore political issues - related to the individual mandate which would compel citizens to purchase health insurance. As the states ramp their HIX implementation
efforts in order to meet the 2014 deadline, we anticipate that several new challenges will come to the forefront. They will need to be addressed and will propel further
change.
2
Healthcare reform and the resultant need for serving the individual market are propelling new approaches to capturing share in the insurance marketplace, and we
expect that a range of new market entrants are just around the corner. Recognizing that it is still early in the progression of these alternative, free-market approaches, this
report will review the concept of “private” insurance exchanges and reveal how they will likely serve a larger population than their public counterparts, and will provide
more compelling insurance options and opportunities.
1 Each state must setup a not-for-profit health insurance exchange (HIX or Health Benefits Exchange) or join with a group of states into a regional HIX. Exchanges must be operational by January 1, 2014 for qualified individuals and by 2017 states can
open the exchanges to businesses with 100 or more employees.
2 The individual market for health insurance is defined by consumers who buy insurance for themselves or their families directly from a health insurance company. The ACA allows the states flexibility to include “small groups” of under 100
members in the individual market by 2014.
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4. REVIEWING PROGRESS & ASSESSING RISKS
Following the passage of the ACA in 2010, states began early planning toward establishing their required exchanges.
Initial planning included identifying the appropriate governance structure and state agency to manage and operate the
exchange. HHS awarded each of 48 states and the District of Columbia $1 million in grants to fund the initial planning.
Two states, Alaska and Minnesota, abstained from accepting the grant (others are considering returning these funds).
While several states have sued the federal government to suspend implementation of the ACA, most states are moving
forward with their HIX implementation efforts while the constitutional questions are debated.
By late 2010, HHS began to publicly acknowledge the challenges and complexities of implementing the public
exchanges. To address some of these issues, HHS awarded $241 million to seven states (Kansas, Maryland, New York,
Oregon, Oklahoma, Wisconsin and a Massachusetts-led regional group) with “Early Innovator” grants. Under this grant
program, each state has been asked to develop a prototype HIX and share the architecture and lessons learned for the
benefit of other states.
While compelling on the surface, a review of the status of these Early Innovator grants is cause for concern, based on a
few key observations:
• Organizational: States have not resolved the issues needed in resourcing each exchange.
• Politics: The state of affairs for participation in the HIX program has not been resolved; Oklahoma returned their
Early Innovator grant money and projects in Kansas, Oregon, and Wisconsin are at risk.
• Technology: States must modernize adjacent systems including their Medicaid Management Information Systems
(MMIS), tax and income reporting systems, and a host of other connected systems before they can support the HIX
as mandated.
• Complexity: States are either underestimating the technical intricacies of establishing an HIX or are acknowledging
after further study the tremendous amount of heavy lifting needed to implement the HIX.
• Funding: States are concerned with supporting the cost burdens for establishing the HIX beyond what federal
grants will provide.
• Timing: Current schedules for bringing the Early Innovator HIXs online will make it nearly impossible for other
states to adopt the reference models in order to meet the 2014 deadline.
Setting aside the political and policy issues relating to the exchange; the fundamental risks which range from technical
complexity and cost to operational sustainability taken alone could result in the public exchanges falling short of their
goal to create an efficient marketplace for health insurance acquisition.
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5. H I X C O M P L E X I T Y : I N T E N S I F I E D BY A M I S A L I G N M E N T O F V I S I O N A N D R E A L I T Y
Setting aside the political and When the ACA legislation was being debated, proponents argued that the exchanges will be straight forward to
setup and simple to operate. Lost on the architects of the ACA, however, was the inherent complexity of configuring
policy issues relating to the insurance products around variables such as plan design, specific benefits, exclusions, and deductibles.
exchange; the fundamental The HIX was conceived on the vision of a comparison engine and shopping portal for health insurance. Parallels
risks which range from were drawn with popular web-based travel sites like Expedia. The public exchange supporters contended that, just as
online travel shopping disaggregated the travel agent (broker) model and created new levels of market competition and
technical complexity and cost shopping efficiency, public insurance exchanges would do the same for healthcare.
to operational sustainability Exchanges are not drop-in products. Massive, and yet undetermined, effort will be required to make them function as
intended. The interdependencies and required checks for income, qualification for alternate assistance programs (i.e.
taken alone could result in the Children’s Health Insurance Program/CHIP), citizenship verification, subsidy calculation, and other complexities are
the public exchanges falling integral components of HIXs. It does not take long to realize that the technology requirements alone call for far more
than “typical” off-the-shelf software deployments.
short of their goal to create
To help illustrate the complexity, a typical state HIX would require the following technical considerations and functions
an efficient marketplace for in order to fulfill the needs mandated by the ACA (a partial list of solution providers is also included).
health insurance acquisition.
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6. PUBLIC HIX FUNCTIONAL REQUIREMENTS
CONSUMER
ENGAGEMENT / CRM/ SYSTEM OF BENEFITS PAY M E N T
DECISION SUPPORT RECORD CALL CENTER A G G R E G AT I O N I N T E G R AT I O N A D M I N I S T R AT I O N
Consumer ecommerce front- Master customer/ subscriber Support for insourced or Automated checks for eligibility, Systems, data, workflow Individual market: Direct
FUNCTIONAL end: Supports self-service, catalog (name/record matching) outsourced call center with subsidy, and verification integration to interconnect billing or support for carrier
product configuration wizard and product catalog (with ties healthcare/ insurance specific (income, citizenship, etc.) and systems (CMS, States, billing. Group billing (individual
REQUIREMENTS
and multi-carrier price to multiple carriers). Sales and workflow; multi-channel determination if other programs Medicaid, Carriers, Employers), breakout but bill aggregation),
quoting, plan comparison, service oriented capabilities interaction (web, call, and (i.e. Medicaid, CHIP) are insurance catalogs, collection, reconciliation,
documentation creation, multi- paper-based) appropriate underwriting, and various premium consolidation, and
channel support state/fed repositories commissions
Large vendors have portal tools Potential scalability issues Health insurance vendors No out-of-the-box support Third-party professional No group has built a
SERVICE but not purpose built healthcare with smaller vendors, limited support either an insourced among competitive landscape. services prevalent but with productized solution for public
commerce platforms. healthcare specific functionality model or generic horizontal call Heavy integrator involvement limited healthcare domain HIX and multiple requirements
PROVIDER
Specialized vendors may be for larger platforms, with center capabilities required expertise remain unanswered. Vendors
LANDSCAPE more relevant specialized solutions offering represented here may have
limited CRM integration some of the capabilities
required
Source: TripleTree
In reviewing the chart, it is worth noting that no vendor offers a “turnkey” solution for a complete public HIX. Creating a fully functional HIX, at least today,
would require stitching together a collection of bits and pieces to form a comprehensive solution. States will have to rely on multiple vendors to provide
functionality in assembling their respective exchanges, a much larger effort than is being planned for by some of the Early Innovator grantees. Also, the chart
reveals that there are functional requirements where no solution, or even partial solution, exists today. These gaps can be met, but they will be difficult to
develop and integrate. We believe that many states and HHS are underestimating the complexities of assembling the exchange as mandated in the ACA, and
this poses a tremendous risk – both economic and operational.
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7. COSTS: S TAT E S T H AT O V E R L O O K S E T- U P A N D O P E R AT I N G C O S T S
D O S O AT T H E I R P E R I L
The aggregate economics of
a public HIX are troubling. HHS is committed to funding the exchanges regardless of cost, and based on our assessment of several state HIX
plans, these will be significant. One year after the passage of the ACA, and $300 million later, little HIX progress has
At the high end of the range, been made on any front (organizational, planning, implementation), and the ongoing costs of operating and maintaining
an HIX are far from known.
federally funded start-up and
One example is Oregon, which has estimated its two year cost of building its exchange at $100 million. Other states
first year operating costs are have put forth larger and smaller estimates. Extrapolating this out over 50 states could push the pricing for just setting
likely to exceed $6 billion, up the exchanges at $3 to 5 billion or more. This is an investment level never considered in the accounting figures of
the ACA.
and our research shows that
Compounding this cost is the reality that each state-run HIX will need to add a surcharge for every individual buying a
another $2 billion or more of policy through the exchange in order to be “self-sustaining” by 2015. While information is somewhat limited as to how
large this charge will be, some states are speculating the surcharge could run into the hundreds of dollars per policy
annual premium surcharge per year. Unfortunately, a meaningful data point for anticipating this cost is unknown, the number of people who will
will be needed to support actually use a public HIX. That key data point will undergo significant scrutiny in the next several quarters, and likely
be made even more uncertain as political debate shifts cost equations and value measurements.
annual operations.
The aggregate economics of a public HIX are troubling. At the high end of the range, federally funded start-up and first
year operating costs are likely to exceed $6 billion, and our research shows that another $2 billion or more of annual
premium surcharge will be needed to support annual operations. This is on top of approximately $100 billion subsidies
that will be pushed through the exchanges. These unpredictable figures will challenge the value proposition of the
entire initiative and the concept of enhancing the affordability of healthcare in America. Economic expenditure as a
driving force in healthcare is not a new concept in this country (often the hoped for “solution” somehow lies within the
strategy of throwing money at the problem) and in this instance, we may very well be pursuing an initiative for the effort
itself, rather than because of any fundamental goal it realizes.
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8. S U S TA I N A B I L I T Y I S S U E S A R E C O M P L I C AT E D BY P R I C I N G , R I S K , & P O L I T I C S
If one were to assume that the technology and cost issues are successfully addressed, the long term viability of each
state’s HIX will be subject to numerous market pressures that threaten their sustainability. These include:
• Alternative approaches to the public HIX, which could attract more individuals seeking insurance and thus lower
volumes needed to support the process.
• The ability to attract a cross section of consumers critical to having a viable health insurance risk pool in a
competitive marketplace where multiple options for procuring health coverage exist.
• Ongoing political and legal challenges that will be disruptive and inturn costly.
The state-run HIXs will be the only marketplace where federal subsidies will be provided to make insurance affordable
to low-income individuals – those between 125% and 400% of the Federal Poverty Level (FPL). The Congressional
Budget Office (CBO) estimates this population is approximately 19 million3 individuals. While 19 million seems to be a
large number, this population is not evenly distributed across states. As a result, the smaller states could experience
relatively limited HIX usage which may adversely impact the costs and efficiency surrounding the HIX.
Competition:
Depending on how creative the pricing, packaging, partnerships and customer service options from the insurance
companies become, competition could cause state exchanges to fall short of operating membership projections and
result in an inadequate member base to support annual operating costs. As noted earlier, the ACA legislation mandates
that the health insurance companies cannot undercut public HIX pricing with comparable plans in the open market.
While it is reasonable to expect state regulators to use their authority in enforcing this provision, it is not difficult to
envision commercial insurers aggressively promoting a compelling suite of insurance alternatives.
Risk Pools:
The fiscal assumptions of reform and the economics of the HIX are based on risk pools unencumbered by adverse
selection and include healthy individuals (with lower medical expenses) entering the system along with those who have
known illness or higher risks. An unbalanced ratio of sick-to-healthy individuals invariably leads to adverse economic
results. This can also occur if a disproportionate population of healthy individuals opts out of mandatory coverage and
simply choose to pay fines as dictated by the ACA provisions. The cost burden of covering the less healthy population
within a HIX, subject to such adverse selection could doom the public exchanges or, at the very best demand greater
financial support than originally envisioned.
3 CBO estimates that the exchanges will service between 24-30 million individuals by 2019 but only 19 million will be eligible for a subsidy.
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9. 4
The Kaiser Family Foundation (KFF) published an analysis in March 2011 which indicates the risk of adverse selection
is a very real threat to the viability of the HIXs. Kaiser concluded that individuals entering the exchange will be in poorer
Presently, over half of the physical and mental health and it can be implied that they may potentially have more chronic conditions than the general
population. This implies greater need for medical services, and produces a different risk profile. If the Kaiser analysis
states in the U.S. object to the is directionally true, it may be impossible to avoid adverse selection within the public HIX, thus creating tremendous
concerns regarding their sustainability.
ACA’s exchange requirement.
The Politics of Healthcare:
Presently, over half of the states in the U.S. object to the ACA’s exchange requirement. Governors and state Attorneys
General have sued to stop the federal requirement to establish health insurance exchanges, arguing that the exchanges
create unfunded liabilities, are far too burdensome in their regulation, and that the individual mandate exceeds the
Constitutional authority of the federal government. A range of legal arguments and appeal processes will ultimately be
brought before the Supreme Court, meaning a final decision on the constitutionality of healthcare reform will remain
unsettled at least through 2012.
Cost, complexity, and sustainability questions may be overcome by the 2014 deadline, but a year into the legislation
more questions and uncertainty than ever before exists as to whether the states will in fact implement the mandated
public health insurance exchanges. At present, it is very difficult to handicap the probability of success for the state
HIX. There certainly is a large market need and a tremendous opportunity for vendors to fill state capability gaps in
building the exchanges, but by 2014 the true question will relate to the survivability of the exchanges – a system forced
upon the states by federal dictat.
4 A Profile of Health Insurance Enrollees http://www.kff.org/health reform/8168.cfm
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10. A LT E R N AT I V E S T O P U B L I C E X C H A N G E S E M E R G E
Even if the states are able to overcome the challenges previously identified and successfully launch their respective
exchanges, direct competition to the public HIX is emerging. An estimated 45-60 million individuals will purchase
insurance either directly from an insurance company, though a broker, or through other channels by 2019.
The CBO estimate of public HIX participation (24 million individuals by 2019) is dissected by the previously mentioned
Kaiser Family Foundation (KFF) study into two groups:
• 18 million who will be net new users of a HIX. These are currently uninsured individuals.
• 6 million who will migrate into a HIX from alternative channels. These individuals either purchase directly from an
insurance carrier today or will enter the public exchange when their employer discontinues company coverage.
Assuming the CBO and KFF estimates are reasonably accurate, we estimate that there could be up to 36 million
individuals who will purchase the mandated health insurance from sources other than the public HIX. For those 36
million, options for purchasing health insurance will abound. Several insurance carriers are now looking at how they
can establish their own exchange (either singularly or through competitive consortia), or how they can work with
partners to create multiple private health insurance exchanges. Most carriers realize that they lack a strong direct-to-
consumer presence and it’s generally acknowledged they lack world-class customer service skills. Partnerships with
retailers and financial institutions for other service oriented industry partners could help address their skills gap.
In this vein, retailers like Walgreens and Wal-Mart, and trusted employer organizations (including some unions and
trade groups), are considering establishing themselves as leaders in a new category of private insurance exchanges.
Using uniquely branded online sites, retailers are likely to begin selling insurance products in their own multi-carrier
marketplace. Their benefits would obviously include a new array of products for customer up-sell and cross-sell,
discounts, and new opportunities to build customer loyalty and long-term relationships. For health insurers, the unique
opportunity for strategic retail-oriented partnerships and new distribution channels are similarly very compelling.
Because the ACA prohibits insurers selling products to individuals in a public HIX from undercutting prices of like-for-
like products in the private marketplace, the private exchanges will need to excel in competitive areas including product
innovation, brand awareness, trust, customer service and ancillary offerings.
The private exchanges will have a time-to-market advantage in building their member bases because the public
exchanges won’t come online until 2014. Also, they aren’t burdened by the same coverage mandates or technical
complexities inherent in the state-based systems, nor will they be required to integrate with state Medicaid
Management Information Systems infrastructure, provide a complex system of eligibility verification (i.e. income and
citizenship), calculate subsidies, build multi-lingual portals, or adhere to all the compliance mandates within the ACA
legislation.
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11. Private exchanges will cause The private exchanges won’t have “essential benefits” mandates that HHS will impose on the public exchanges, and so the
private exchanges will have much more flexibility in aligning coverage, deductibles, and costs with the market need.
employers to reevaluate their
Finally, if a private exchange is aligned alongside a strong consumer brand, built-in consumer loyalty could help them
need to offer group benefit integrate ancillary products like wealth planning, retail discount cards, or bundled insurance packages including life,
property and auto. Further, the products in the private exchange might be better aligned with individual’s needs.
policies. Estimating the size of the private exchange “marketplace” opportunity is difficult, but as offered earlier and as illustrated
below, the business opportunity for private exchanges could be significantly larger than that for the public HIXs in terms of
insurable populations and revenues.
It is premature to know if and how the private exchanges will compete for subsidy-eligible individuals, but many commercial
enterprises understand that the public HIX will condition consumers to change how they shop for insurance; it will also
likely cause employers to re-evaluate their need to offer group benefit policies. These changes could open up a huge
opportunity for competitive, open-market insurance shopping. Commercial interests are accordingly now working to align
their capabilities with market needs.
45-60M INDIVIDUALS
BY 20 1 9
OPTIONS
ACCESS
PRIVATE / COMMERCIAL PUBLIC / STATE
CARRIER DIRECT BROKER NETWORK
EXCHANGE EXCHANGE
Traditional direct sales model Licensed brokers/agencies or newer Retailers, employee groups, and ACA requires all states (and DC) to
supported by either inbound or web-based brokers that specialize in financial services companies are establish exchanges for the individual
outbound marketing programs. health insurance products. partnering with carriers to offer market (2014) and the small group
DESCRIPTION
insurance distribution marketplace market (2016). Channel for federal
Heavy emphasis on seniors market May represent multiple carriers. private exchanges. subsidies.
but expanding to multiple market
segments. Each exchange must offer a minimum
set of benefits and policy choice of at
least 2 carriers.
• Strong brand awareness • Carrier relationships • Favorable consumer-oriented • Advanced marketplace
brand e-commerce architecture
REQUIREMENTS
• More ways to engage • Connectivity to automate
• Robust distribution systems • Easy way for carriers to
consumer using consumer- information exchange
NEEDS
to support specialized sales offer plans and enroll new
friendly tools
• Ability to manage new realities • Customer services expertise customers
of MLR commissions • Heavy compliance mandates
27-36M INDIVIDUALS 18-24M INDIVIDUALS
Source: TripleTree
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12. LOOKING AHEAD
As a strategic advisor and investment The Affordable Care Act (ACA) was drafted and passed to facilitate market competition by forcing insurers to sell within
a highly regulated, controlled state-run health insurance exchange. It was envisioned that heavy subsidies would
bank for emerging and global
enable the millions of uninsured Americans to afford health insurance, while a centralized marketplace would help
companies, TripleTree remains break dependency and portability issues that individuals have on employers to provide an insurance benefit.
committed to continuing our assessment While HHS and the states are working to establish the mandated public health insurance exchanges, multiple
roadblocks around cost, technology, and sustainability must be overcome. In fact, it’s questionable whether all of the
of these factors and welcome your states can successfully establish a HIX in the manner envisioned by health reform legislation. The realities are that the
costs and risks associated with establishing a HIX in each state are profound, and they will likely serve a much smaller
feedback and reactions.
population than intended.
Paradoxically, the recent health reform legislation, even if it fails in its goals of creating public exchanges, may succeed
in its goal of creating an environment that benefits the consumer. As the 2014 deadline approaches, commercial
interests are working in earnest to build consumer-friendly options for purchasing affordable health insurance. The
potential of health insurers aligning with partners who understand consumer retailing, pricing and online marketing will
benefit the goals of the ACA. The marketplace and the commercial exchanges may ultimately be responsible for making
health insurance a better value.
Regardless of which type of insurance exchange (public or private) is ultimately deemed successful, the ACA
legislation will be viewed as the catalyst that drove the health insurance industry to change how insurance products are
distributed and how the consumers can be better served.
Financial and governmental pressures on the health insurance market are profound, and have brought the importance
of consumerism to the forefront of discussions around insurance product design, marketing, distribution and customer
service. It is yet another example of where the economics and healthcare delivery and supply chains will be disrupted
– and where innovation is needed. The effort is underway and a variety of stresses, challenges, and responses will
shape the ultimate outcome and the hope for a more efficient and affordable healthcare system.
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