Can Health Insurance Exchanges Bend the Cost Curve?


On the surface, health insurance exchanges seem like a good idea: an open marketplace where insurers compete with each other to be more efficient and cost-effective in offering standardized products.  After all, that’s the essence of a free market.  Isn’t that exactly what many of us have argued that health care needs?

Well, actually it isn’t exactly.  Insurers costs only account, at the upper limit under the Affordable Care Act, for 15% (for large group market) to 20% (for the small group market) of the health care spend.  Even if they can realize some improved efficiencies, we’re not getting to the root of the problem.  We are still wasting 25% to 50% of the 80-85% of premium we spend on the delivery side of healthcare. So getting insurers to be more competitive in a retail market is NOT where the opportunity lies to bend the healthcare cost curve.  The opportunity is unambiguously with the providers in general and with the hospitals and health systems in particular.  That’s who should be competing in a retail market.

To be clear, exchanges can and do save money.  But early indications are that they do so only in the first year when shoppers simply buy down coverage to save money.  In other words, while cost goes down so does the benefit to the consumer – typically through significantly increased deductibles.  In fact, according to the Kaiser Family Foundation, while employee salary increases went up a meager 9% over the past five years, deductibles increased an eye-popping 67%. Insurance exchanges only make the problem worse.  Rather than actually saving money in the long run, they likely will actually increase costs through creating incentives to defer care until it’s much more acutely needed – and therefore, more expensive.

Where should employers look for a longer term, more sustainable solution?  To bundled pricing and pricing transparency.  Employers should ask their health plans to demand that providers package complex procedures like joint replacements or cardiac procedures into a “bundle” with a published price as well as a warrantee and uniform quality indicators.  They should provide enrollees with incentives – either through benefit designs or reference-based pricing – to shop around for diagnostic and therapeutic services.  They should force health systems to compete in a retail market where incentives exist to be more efficient and effective.

Such competitive markets – essential to bending the cost curve over time – do not currently exist in health care and will not unless employers insist on change.  It is clear that if they are to exist, it is employers who must create them by proactively purchasing, not just paying, for health care.