When the next phase of the Affordable Care Act (ACA) kicks into gear January 1, 2014, each state will be required to offer its residents access to health care insurance through an online marketplace, often referred to as a “health insurance exchange.” These exchanges are now open for business on Oct. 1, 2013, allowing individuals to sign up online, by phone or in-person, with health insurance coverage starting next year.
Until now, buying health insurance has been a daunting task for most individuals and small businesses. But purchasing health insurance through exchanges will more closely resemble booking a vacation on Expedia or Orbitz. People using this vehicle to enroll will see lots of options, common features among the offerings, and greater transparency around price, quality and consumer ratings.
Similar to the implementation of Medicare, we should expect program design and operational issues at the outset. We already have seen some technological glitches, which will need adjustments and mid-course corrections as these systems are rolled out in each state. But despite the initial bumps in the road, the exchanges will serve as a catalyst to alter the way health insurance is purchased. In the longer term, they will transform the entire health care system.
1. Exchanges will transform how individuals purchase health insurance
Buying health insurance on the individual market has been confusing. Individuals could search the Internet and shop from multiple carriers and insurance plans. However, with so much variation in plan design and coverage benefits, comparison shopping has been nearly impossible.
Once shoppers found the insurance plan they liked, they were then required to submit extensive personal information and undergo medical underwriting. Insurers that spotted pre-existing conditions often denied the applicant’s request for coverage. And whenever people on an existing plan wanted to upgrade, they repeated the entire process and faced being denied expanded coverage.
The existing health insurance process might remind shoppers of booking a vacation through a travel agent. Shoppers are presented with few options, little transparency and higher costs (premiums) due to broker fees.
Further, insurance companies who sell policies on the individual market often compete by trying to avoid “high-risk” enrollees. Insurance executives understand that a small percentage of patients account for most of the total health care cost. Through their extensive underwriting practices, insurance companies have gotten good at identifying individuals who are likely to need frequent medical care in the future, especially those with chronic disease. By denying coverage to these patients, insurance companies limit their risk, reduce their claims costs and increase their profits. This has made their shareholders very happy.
The ACA, also called “Obamacare,” changes the rules of the game.
This legislation requires that insurance companies extend coverage to all Americans, regardless of health status. Furthermore, most individuals who buy coverage through the exchange will be able to select from a relatively common set of benefits and have more transparent access to cost and quality data.
These improvements will change what it takes for health insurers to “win” the game. Rather than focusing on risk avoidance, insurance companies will need to compete at the delivery-system level, where care is provided. If things play out as many hope, the exchanges will dramatically expand insurance coverage. Exchanges may also become the new battleground where care providers compete to offer the best quality, service and price.
2. Exchanges will transform how small-group health insurance is purchased
Small-business owners who choose to cover all of their employees have had to meet a variety of regulatory requirements. Because most small businesses have limited in-house expertise on health benefits, they typically depend on brokers to guide them through the process. The cost of the broker’s service can add 5 to 10 percent to the total cost of the premium. Providing multiple insurance plan options raises the costs even further. That’s why many employees at small businesses are often limited to one plan. Further, if the employer decides to shift coverage from one insurance carrier to another, the employees may not be aware of the changes in benefits until they require care. This can result in individuals having to change physicians based on the company’s available network.
The federally mandated small-business exchanges will eliminate many of these issues. Similar to the individual market, these small-business exchanges will offer employees of small businesses a choice. They’ll receive a relatively standardized set of plan options and greater transparency on quality and cost. Most significantly, employers will see an expanded choice of insurance carriers and lower transactional costs, resulting in reduced premiums.
3. Exchanges will be a “disruptive innovation”
Similar to what has already happened in travel, retail and finance, once online options are made available, health care will be disrupted. The transformation will happen in stages.
Initially, three groups will purchase coverage through the exchanges: those who are currently uninsured, those individuals whose current coverage is not compliant with the requirements of the ACA, and owners of small businesses wanting to streamline the process of providing insurance to their employees. But over time, the advantages of the exchanges as compared to current options will make progressively larger groups of purchasers more interested in using this approach — through either government-sponsored or private exchanges.
At first, some of the larger businesses may be reluctant to join. They may suspect the overall population insured through exchanges will be sicker than their current employees. They will worry that their rates will go up if they switch. But over time, the advantages of low transactional costs, more insurance options and relatively stable premiums will entice new companies to join. And once this happens, the risk pool will stabilize, rates will decrease and it will be only a matter of time until most Americans obtain their insurance coverage in this way.
4. Insurers will demand better performance from care providers
Health care providers — doctors, hospitals and integrated delivery systems — will be forced to compete at a higher level for their patients in the future. Why? Because patients will enjoy greater transparency — knowing which providers offer the best quality, service and price. And because insurers won’t be able to manipulate the risks involved with insuring more people, they’ll look to providers to improve performance.
In most communities today, regardless of the insurance products offered, the list of doctors and hospitals offered in each provider network is virtually the same. As a consequence, competition among insurance companies is less about medical care delivery and more about their own administrative expenses and customer service. Today, once the relative health risk among the different insurance companies is factored out, the difference in price and health outcomes is relatively small.
In the future, to stay competitive, insurers will need to increase value for their customers. They’ll do so by including in their networks only those physicians and hospitals that provide higher quality at a lower cost. This will require providers to improve the processes and outcomes of the care they deliver.
This shift in competition will begin a virtuous cycle. The lower cost, higher-quality insurance plans will attract more people. A growing membership base will give them greater leverage to demand increased efficiency, higher quality and superior outcomes from doctors and hospitals in their networks. This, in turn, will result in further market-share growth as more consumers see the value.
And over time insurers that offer the best value — rather than those who enroll the healthiest individuals — will dominate. And of course, the physicians who are both efficient and able to demonstrate better outcomes will gain the most contracts and attract more patients.
Don’t expect to see these changes unfold today or on Jan. 1.
Expect Jan. 1 to be only the beginning of industry-wide transformation. It will take time for every state to work through the operational and technical challenges associated with the exchanges. And it will take a few more years for the exchanges to drive the necessary systemwide improvements. But once in place, this Expedia-like service will be the preferred route for individuals and small businesses. And we can expect that — similar to travel, retail and finance — once Americans go down this path, they won’t want to go back.
Robert Pearl is a physician and CEO, The Permanente Medical Group. This article originally appeared on Forbes.com.