Krupa's Back Pages

Bryce Williams, CEO of Extend Health, a Psilos portfolio company, has written an interesting piece for SHRM (Society for Resource Management) that explains the primary benefit of a heath insurance Exchange, namely its ability to allow individual purchasers of health insurance to buy exactly what they want in a competitive market (buzz words to keep in mind: personalization, choice, competition, consumerism, to name a few).  Bryce’s company Extend Health demonstrates these benefits to its customers today, every day, and has been doing so for several years now, even before the enactment of healthcare reform, first in Massachusetts’ and now nationally, where in both cases the role of the Exchange takes prominence as a tool for expanding health insurance coverage.

So how does an Exchange work?

In the case of Extend Health, the users of its private Exchange are Medicare beneficiaries (aged at least 65 years) that receive supplemental health insurance from their former employers as a negotiated retiree benefit.   The Exchange enables these retirees to purchase an individual Medicare Advantage Plan (MA for short, which is similar to a HMO or PPO for Medicare) or Medicare Supplemental Insurance (Med Sup or MediGap for short, and it is what it sounds like, supplemental insurance that covers many of the coverage gaps in the standard Medicare package).  Today, both MA and Med Sup products are sold to individuals by most major national and regional health insurance carriers (United Healthcare, Blue Cross / Blue Shield, Aetna, et al).  Extend Health works with the former employers to establish individual accounts on behalf of each retiree, usually a Health Reimbursement Arrangement (HRA) or something similar.  The former employer funds the individual HRA(s) in lieu of purchasing a group health policy from one insurance carrier that covers all of the retirees (typically referred to as a Group Plan).  The retiree then uses the money funded into the HRA to purchase any MA or Med Sup policy offered on Extend Health’s Exchange (as of this writing Extend Health offers over 1900 policies from over 60 insurance carriers).

Operationally, and from a consumer’s perspective, Extend Health’s Exchange works the way most non-healthcare related consumer purchases work, which, oddly, makes it very unique in the healthcare world.   Retirees can access information about all available plans online at Extend Health’s website.  While the website is enabled for transactions, almost all of Extend Health’s customers make telephonic appointments with a licensed benefit advisor.  During these appointments, which usually last about 30-45 minutes, retirees review their budget and healthcare needs with the advisor and ultimately select and purchase health insurance coverage.

Today Extend Health has over 45 corporate customers (a/k/a the former employers) and has helped more than 250,000 retirees compare and choose a MA or Med Sup plan that meets their needs.  After this much experience the evidence is clear that the aggregate cost of individual insurance purchases is significantly less than the cost of a Group Plan, in some cases up to a 35% reduction in cost to the former employer and $500 per year for the individual retiree.

In his article Bryce sites the following as among the reasons for the savings:

1. Consumerism and Personalization:  Retirees purchase the precise insurance benefit that they want.  The money in the HRA is theirs to spend on healthcare and as such they naturally spend it wisely and avoid waste.
2. Geographical Efficiencies and Competition:  As an example, individuals living in Florida do not require primary provider networks in other states, and as such it is cheaper to buy local health insurance individually than through a national or multi-regional Group Plan.  Further, local competition for the individual business drives pricing rather than Group Plan underwriting by a national carrier.
3. Guaranteed-Issue:  With few exceptions, MA and Med Sup plans are “guaranteed-issue” coverage, which means that no one who is eligible for Medicare can be denied coverage, eliminating an economic advantage of the Group Plan, namely the underwriting of large groups to enable expansion of coverage to high-risk individuals.

Psilos’ investment in Extend Health demonstrates our belief in the economics of Exchanges and the power of a true consumer, and I expect that over time Exchanges will evolve into one of the primary ways people access health insurance in the US.  In the market for employer funded retiree health, the Group Plan no longer makes economic sense, and today the Exchange model is facilitated by the Guaranteed-Issue structure of the Medicare market.  As 2014 approaches and the insurance market for people under the age of 65 begins to trend toward a Guaranteed-Issue structure because of the deployment of risk-pools and the prohibition on denying coverage for “pre-existing conditions” (as outlined in PPACA), I expect Exchange models to offer a viable option for corporations to provide insurance to their active employees.

We know that the Exchange model empowers the consumer and drives greater competition.  As such, I expect it to serve as a force to inspire the innovation in healthcare delivery necessary to reduce healthcare inflation and promote greater service quality.  Over time, I believe its practical and effective economics will become irresistible to a society desperate to reduce the total cost of healthcare.