Government and Health Care

The health insurance exchange middlemen

November 3, 2014
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The recently created Michigan health insurance marketplace allows people to purchase health insurance online.

And if incomes are low enough (below 140 percent of the federal poverty level), subsidies are available through the marketplace’s website. For example, if a wage earner has a family of four and makes less than $33,390 in 2014, a subsidy is available through the government’s marketplace. The concept is simple: insurance companies vie for business by listing their products on the marketplace, and if their products and rates are attractive enough, people will sign up for them. Attracting your business is intended to generate competition among the insurers to keep rates relatively low. If people sign up, they get insurance coverage, and the insurers get business. It simply depends on the insurance plans that are offered and their price.

Nationally, the early results of the marketplace have been promising. More people have signed up than were expected. More insurers are listing their products on the marketplace, and the increases in their premiums have been kept relatively in check. We need to remember that one year does not make a trend, however.

Lately, private parties have been forming private exchanges to operate in a similar way. They operate in addition to the state’s official marketplace. Aetna, Cigna, United Healthcare, Mercer and Willis operate exchanges that Michigan employers can use. Blue Cross Blue Shield of Michigan created glidepath as another exchange to let their employees shop for coverage. Also, iSelect operates one. The Michigan Chamber of Commerce announced the creation of yet another exchange. How many of these middlemen are needed? What is their motivation?

Private exchanges enable more middlemen to make money. In some cases, the exchanges are a way for insurers to create their own means to protecting their market share. Insurers can pay listing fees and possibly offer kickbacks for the ability to sell their products. Employers can pay fees to a private exchange for the privilege of allowing their employees to shop. The exchange middleman makes money – but at whose expense? Where does it come from? Remember, the high cost of insurance led to many of the cost problems that created Obamacare in the first place. If there are more middlemen, there are naturally going to be higher than necessary costs. Also, if the middlemen are successful in getting business, the amount of signups on the state’s exchange is less than possible, and the forces of competition are reduced.

Employers increasingly want to get out of the business of buying health insurance benefits for their employees. Health insurance costs are a major cost of doing business. If a company can offer specific defined contributions toward an employee’s insurance coverage, it has the ability to budget and control its operating expenses. Similarly, if it opts to pay a tax penalty for not offering insurance, it limits its costs. Employees simply can pick up the difference. Yet what if the rapid rises in health insurance costs are not checked? What if the desired competition among insurers does not produce the desired lower rates?

Who wins and who loses? Do we need more of these middlemen?

There is one resource that many have overlooked in our discussions. Local insurance brokers and agents have provided advice and guidance for years. Many represent several insurance companies and are able to direct employers and individuals to the products they need and can afford. In fact, they might have served the function of the marketplace and exchanges without having to create elaborate new organizations today if they could have had clear and easy way to help sign people up for needed subsidies. But then, that might have been too simple.

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