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Obamacare insurance exchanges: look to California

Well before last month's Supreme Court ruling, California already had a jump on setting up the health-care marketplaces known as insurance exchanges. Now as the 2014 deadline approaches, many states will be looking to the Golden State for lessons on what to do.    

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One example is insurance giant Cigna, which at one point had a small group plan with infertility benefits that exceeded that of their competitors. Insurance brokers directed clients with a need for fertility treatment to Cigna, greatly increasing infertility claims, putting pressure on Cigna’s finances and ultimately leading to a discontinuation of the policy.

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“Benefits and pricing will have to attract a normal cross section of risk and be able to thrive by comparing favorably to the private market,” Kennedy-Simington says.

The bigger question, however, is affordability, especially for low-income individuals and families.  For example, the cost of insuring a family four can exceed $14,000 a year, according to the California Exchange. The ACA provides a sliding-scale tax credit to make it easier for families to purchase coverage.  A family making about $35,000 a year would get a federal credit of almost $13,000 – and pay only $1,400 per year, for example.

 “Just because you have guaranteed coverage doesn’t mean it will be affordable,” says Sima Reid, owner of Twenty Twenty Insurance Service an insurance brokerage in Lakewood, Calif., who works with small to very large employers. “You can’t just say everyone must have access and walk away. You’ve got to figure out how to make it work for the insurance companies so they can work in a prudent way that won’t implode the system.”

Ms. Reid's comment brings up another lesson. Insurance premiums are high because the cost of health care is high. Economies of scale are important to affordable coverage, but the lion’s share of premium increases are due to increased medical unit cost and more people making more use of medical services.

 “There is a perception that a bigger pool of insured people is less expensive – when in truth a healthier, large pool of insured people is what is less expensive,” Kennedy-Simington says.

Another lesson is to keep politics out of it, Mr. Lee says. He notes that the law setting up the exchange was passed by a Republican governor, Arnold Schwarzenegger, and a Democratic legislature. 

Mr. Wright says much of the early work has been to close the legal loopholes that insurers will use to avoid coverage. One good example is that in California, as in some other states, insurers balked at the provision that would ban coverage to children. “We passed a law that says if you don’t cover children, we won’t allow you to cover adults either for five years … and behold, that brought them all back,” Wright says.

Despite the refusal by many states to set up their own health exchanges, most will eventually come around, predicts Bryce Williams, chief executive officer of Extend Health, the industry’s largest private Medicare exchange.

“The California experience tells me that it will not be viable for these states … they won’t want some entity in Washington running this from afar and they will want to get moving on their own to have their own control over it,” Mr. Williams says. "It seems clear to me that the White House is not eager to run them either."

Carl Cudworth, director of benefits for publisher Houghton Mifflin Harcourt, says one of the benefits of the exchanges is being able to shop for carriers. He says he was able to transfer 700 retirees from a group plan they had into multiple other plans offered by more than 75 health insurance carriers through the Extend Health exchange. The end result was saving money and offering more options for coverage.

“Previously we were pretty much in a one-size-fits-all setup where everyone was straitjacketed in their coverage,” he says.

“Instead of paying the funds to the carriers, we gave it to the retirees [via the Extend Health exchange] and they can use it every year,” he says.

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