New Purchasing Agencies (‘Connectors’) Lead to Higher Premiums

September 22, 2008

BCBSA Supports Reforms that Make Coverage More Affordable for Small Employers

Issue:  Some healthcare reform proposals would create new health insurance purchasing agencies called "connectors" or "exchanges" for individuals and small employers.  These government agencies would provide a variety of functions now generally performed by either employers or health plans (e.g., select health plans, collect premiums, enroll individuals, and administer subsidies). 

Individuals and employees of small businesses would select a health plan from the predetermined "connector" list.  Some proposals would give strong incentives (e.g., subsidies) to purchase through these agencies; others make the agencies the sole way to buy coverage.

Position:  BCBSA's five-point plan – The Pathway to Covering America – includes a number of initiatives to make coverage for individuals and small employers more affordable and accessible, including new subsidies for small employers with low-wage workers.  BCBSA believes that it is not necessary and could create unintended consequences if small employers are required to buy coverage through new purchasing agencies because they would:

• Actually increase premiums rather than reduce costs;
• Limit choice of health plans and providers;
• Constrain competition and increase government regulation; and
• Unnecessarily create costly, duplicate administrative structures.

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Actually increase premiums rather than reduce costs

• New purchasing agencies would not address the underlying reasons for rising health insurance costs – increased use of more expensive medical services and treatments.  Instead, these agencies primarily focus on rearranging how people purchase coverage.
• These entities would increase premiums by unnecessarily duplicating administrative functions, such as collecting premiums and marketing coverage.   For example, the Massachusetts connector adds a surcharge of 4 percent to cover the connector's administrative costs.
• experience with these types of purchasing agencies has shown either no cost savings or higher costs.  In fact, the most successful "connector," PacAdvantage in California, had premiums that were 6 percent higher than coverage available on the open market.

Limit choice of health plans and providers

• According to EBRI, consumers rank choice of provider as the most important type of choice (i.e., the ability to go to the doctor they want), which requires an open network plan, such as a PPO.  Past experience shows these types of agencies tend to offer primarily limited network plans – HMOs – that limit choice of providers.  A 1999 Mercer review of "connector" types of entities in eight states concluded that indemnity plans and PPOs had a very difficult time competing due to adverse selection, demonstrated by the fact that none of the entities studied offered these options.  Even after California's PacAdvantage implemented risk adjustment to attract PPOs, the PPOs that participated were forced to drop out due to continuing adverse selection.  While "connectors" may allow choice of multiple HMOs, they are unlikely to offer the choice of plans (e.g., PPOs) that consumers and small employers want. 
  
•  Under most proposals, the state agency board would decide what coverage could be offered, thus limiting the diversity of products available.  For example, the Massachusetts connector provides six insurer options, with three benefit levels (Gold, Silver, Bronze) compared with more than 20 insurers offering dozens of choices in the open market. 

Constrain competition and increase government regulation

• Under most proposals, the new agency, rather than the marketplace, would determine what insurance products will be offered to purchasers.  Early experience in Massachusetts indicates that the connector is turning into a super-regulator that is limiting product choice.  This approach will stifle competition and lead to a market that fails to provide the types of choices consumers want.

Unnecessarily create costly, duplicative administrative structures  

It is unnecessary to build a new infrastructure for purchasing coverage.  Virtually all of the new agencies' functions are either already performed by others or less complicated and less costly alternatives exist.    

• For example, some policymakers believe these agencies are needed to provide subsidies to small employers.  However, Oklahoma and other states have implemented successful subsidy programs without incurring the costs of creating a connector.

The Blue Cross and Blue Shield Association is a national federation of 39 independent, community-based and locally operated Blue Cross and Blue Shield companies that collectively provide healthcare coverage for more than 102 million individuals – nearly one-in-three of all Americans.  For more information on the Blue Cross and Blue Shield Association and its member companies, please visit www.BCBS.com.