The Future Health Insurance Ecosystem

The Patient Protection and Affordable Care Act (PPACA) signed into law this year will change the environment that we know of today where we buy and sell Health Insurance.  In the long-term, the buying and selling of Health Insurance will evolve from a Health Plan centric-model to a Health Insurance Exchange centric-model beyond the implementation of Health Care Reform.  This means that over time Health Insurance Exchanges will be the interface where most people will buy insurance and Health Plans will underwrite the insurance.

I put this diagram together to show the current ecosystem (black lines) and future ecosystem (green lines).

The drivers that will shift the future ecosystem (maybe 20 years from now) from a Health Plan centric-model to a Health Insurance Exchange centric-mode, is due in large part to the following factors:

1.  PPACA puts into law an "Individual Mandate" where every citizen must have Health Insurance.  Therefore, Individuals without the option to purchase affordable health insurance through their Employer will now come through the Exchange to purchase their insurance.  In addition, Members of Congress and Congressional Staff must also elect their insurance through the Exchange.

2.  PPACA creates "Small Business Health Options (SHOP) Exchanges" where small businesses can go to offer Health Insurance products to their employees.  In the Commonwealth of Massachusetts, where an Exchange is already established, the Individual and Small Business functions operate together in one Exchange, called the Health Connector.  Most, if not all, States will probably follow this same model to consolidate both functions into one Exchange for simplification.  Small businesses currently find it confusing to compare and choose health insurance plans and welcome the new SHOP Exchanges.

3.  This next one I call the "White Castle Effect".  White Castle recently said that the Health Reform would be very costly on their business, eating into much of their profit.  Health Reform says that employees must not have to spend more than 9.5 percent of their income on Health Insurance and anything in excess is just not "affordable".  However, due to the income level of the employees at the hamburger chain this percentage would be hard to meet for White Castle to still generate a reasonable profit.  It would be more cost effective for White Castle to take the penalty of not offering insurance than to comply with Health Reform.  We can see that other Employers will follow suit on this approach.  This will drive their employees (and employees of other employers like this) to the Exchange.

4.  "Medical Loss Ratio (MLR)" requires that Health Insurers spend at least 80-85% of premium dollars on medical cost.  This is a huge concern for Health Insurers right now because there are services that go into keeping patients healthly that are not categorized today in the "medical cost" umbrella.  It may be hard to keep in-line with the MLR target, depending on what is classified under medical cost and MLR.  An effect of this is that Insurers have already started to scale back the commissions that it pays to Brokers for bringing Individuals and Employer Groups to buy Insurance.  With lower commissions, Broker may exit the market and the Individuals and Employer Groups will move to the Exchange.

5. This last one is purely my speculation.  As Health Insurance Exchanges settle into the marketplace as a stable working option, Individuals will gravitate to the model.  Employers will see this as a win-win opportunity to ask the government to allow simplification of providing the group health insurance benefit.  Employers may find it easier to provide employees with an allowance to go directly to the Exchange to buy insurance and stay out of the enrollment, contract and health insurance management process.

This opinion assumes that PPACA will go into effect with no major changes.  However, how much of PPACA will be made into reality remains to be seen as things get ironed out.  20 States have filed a complaint with the State of Florida against health reform.  And today, the State of Virgina's lawsuit against the new health care reform law cleared its first legal hurdle to continue further hearings regarding the "constitutional issues" of the new law.  Also, the public-option that allows for a plan created by government and offered through the Exchange is back on the table with the proposal of H.R. 5808.