Will There Be Health Benefits Exchanges by 2014?

June 2, 2011
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Despite advice from most free-market analysis, some Republican governors are executing the Patient Protection and Affordable Care Act (PPACA) by establishing Health Benefits Exchanges. These governors dislike PPACA, but they believe that exchanges can be vehicles for more choice than the federal law anticipates.

Despite advice from most free-market analysis, some Republican governors are executing the Patient Protection and Affordable Care Act (PPACA) by establishing Health Benefits Exchanges. These governors dislike PPACA, but they believe that exchanges can be vehicles for more choice than the federal law anticipates.

But I think that the real news is how much difficulty states that want to implement PPACA as fast as possible are having. Take California: “We want to be the lead car,” California Health & Human Services Secretary Diana Dooley told POLITICO in January, shortly after the state became the first in the nation to pass legislation allowing it to set up a health exchange. POLITICO reporter Sarah Kliff visited the Golden State four months later and found a stalled and discouraged effort. According to Kliff, governor Jerry Brown is more focused on filling a $25 billion hole in California’s budget than setting up the health reform’s new programs: “The Health Exchange Board only held its first meeting in April, and sweeping cuts to Medicaid threaten to undermine the public insurance program meant to serve as the foundation of the federal reform law.” Kliff quotes Peter Long, CEO of the Blue Shield of California Foundation, complaining that: “You can’t be the lead car when you take three months off.”

Preparing for a forthcoming speech, I researched pro-PPACA states such as Colorado, Oregon, and Rhode Island. None have managed to get exchange-enabling legislation signed by their governors (as of writing).

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Furthermore, folks who estimate the costs of Health Benefits Exchanges are concluding that they will be more expensive than advertised. In an article that ran on April 26 in POLITICO Pro (which is by subscription), Kliff wrote:

Utah Exchange: Low-Cost Model Or Loss Leader?

Utah likes to tout the leanness of its health exchange, a free-market establishment that the state says runs on the shoestring budget of $500,000 — a particularly remarkable number compared to the $40 million budget of the Massachusetts exchange. But Utah’s feat is less impressive when you consider this: the main Utah health exchange vendor has operated at a loss on the contract. “We’re not that far away from this being profitable,” says Rich Gallun, CEO of health technology vendor bswift, which has the largest contract with the Utah exchange. “As long as the state of Utah was committed, that opportunity in itself would make the investment worthwhile. Beyond that, if we can help make Utah a success, we’re confident that other states will follow”

So, there you go: Mr. Gallun appears to be using Utah as a “loss leader” (in Ms. Kliff’s words) and hoping that profits will come from state exchanges that will become future clients. Another pro-exchange management consultant estimated that 15 percent of employers enrolled in exchanges were previously not offering health benefits. The flipside is that 85 percent of them were offering benefits. This is what we call “crowding out” and its remarkable that it happened in the Utah exchange, which has no subsidies!

Triple Tree, a mergers & acquisitions boutique specializing in health-care deals, has written a research note concluding that it will cost about $6 billion to establish exchanges, and $2 billion in annual operating costs thereafter. “TripleTree believes that implementation is fraught with costs, technical challenges, and sustainability issues that are neither recognized nor acknowledged, much less understood.” And these are dealmakers who do business with enterprises who hope to profit from exchanges!

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If I were a betting man, I would not expect very many Health Benefits Exchanges to be up and running by January 2014, even if PPACA survives its challenges.