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Health insurance marketplace: Oregon Health Exchange must bargain to survive

The Oregonian
September 13, 2011By Janet Bauer

Now that Gov. John Kitzhaber has nominated a governing board for the newly established Oregon Health Insurance Exchange, we have a sense of the political interests that will influence this key component of the state's plan for achieving universal health coverage. But a crucial issue remains uncertain: Will the exchange, when it begins operations in 2014, negotiate for the lowest prices on health insurance plans on behalf of Oregonians?

The answer to that question could determine the exchange's very survival. For unless it can compete with plans sold outside the exchange in terms of price, the exchange risks collapsing.

The Oregon Health Insurance Exchange aims to create a marketplace where individuals and small businesses can find affordable, quality coverage. Right now, coverage can be painfully, even prohibitively, expensive.

The legislation creating the exchange does not explicitly direct it to negotiate with insurers over the cost or other terms of the plans that are offered. And although the Legislature's attorney issued an opinion stating that the legislation gives the exchange the authority to bargain with carriers, consumer advocates worry that the insurance industry -- not known for passivity -- will challenge that view.

If it's not clear that the exchange may negotiate with insurers, it's clear that the exchange ought to. If the exchange wasn't created to get the best possible deals for Oregonians and small businesses, who face escalating health insurance costs, what was the point of creating it?

Moreover, unless the exchange bargains for lower prices, it risks eventual collapse. Without competitively priced health plans, the exchange will have a hard time attracting healthy individuals, and enrolling sufficient numbers of healthy individuals is essential to having a viable health insurance marketplace.

Healthy individuals, who typically need little health care, serve to keep premium costs within an insurance pool down. If the healthiest leave an insurance pool, perhaps motivated by less expensive (and likely skimpier) plans offered elsewhere, premium prices inside that pool rise, making its plans less appealing.

For individuals in poorer health, however, premium cost is not the only concern. They are also interested in making sure that their health plan is comprehensive enough to cover their needs. So they are likely to find attractive the high-quality health plans that the Oregon exchange is required to offer.

The dynamic of healthy and less healthy individuals separating into different insurance pools is what insurance experts call "adverse selection."

As healthy individuals leave the exchange and the less healthy stay put, costs inside the marketplace rise further, causing even more relatively healthy individuals to abandon the exchange. Eventually, costs soar to the point that premiums become prohibitively expensive for the remaining enrollees and profit opportunities for insurers disappear. The exchange collapses.

The risk that adverse selection will lead to this sort of death spiral is not just a theoretical possibility. Health insurance exchanges set up elsewhere have collapsed because of this dynamic.

Thus, for its own survival, the Oregon exchange will need to attract healthy individuals with insurance products at competitive prices. And that requires that the exchange bargain for the best possible prices.

To protect the new marketplace they created, policymakers should make explicit the Oregon Health Insurance Exchange's power and duty to negotiate the best possible deals for all Oregonians.

Janet Bauer is a policy analyst with the Oregon Center for Public Policy.

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