State Health Care Reform: Key Questions and Answers

Studies | Health

No. 311
Monday, April 21, 2008
by Linda Gorman and R. Allan Jensen


Is a Massachusetts-Style Connector Part of the Answer?

A good deal has been written about connectors, also known as health insurance exchanges, since Massachusetts incorporated the concept into its reform measures.  A recent academic analysis by John E. Schneider and others, published by the Health Economics Consulting Group, says that the “connector” concept, as a proposed mechanism to move the commercial health insurance market away from an employer-sponsored environment to one that is individually based environment, holds certain “intuitive appeal.”37 However, they note that there are numerous trade-offs and consequences that prevent such programs from accomplishing their goals.

The centralization of information envisioned by these programs is an unnecessary and costly addition to the administrative costs of health care coverage.  In fact, well-developed mechanisms already exist to offer consumers the opportunity to search for and compare various health coverages.  The Internet, coupled with the consumer-directed health insurance revolution, has simplified comparing, pricing and purchasing a health insurance policy.  Various Internet and insurance carrier Web sites provide complete coverage descriptions and allow coverage comparisons.  As is the case in other markets selling complex financial products, agents provide significant amounts of consumer education, act as ombudsmen to intervene with insurers on behalf of clients, and provide a check on insurer quality by refusing to market plans that treat customers poorly.

Other problems with connectors include:

  • Displacement of existing coverage, which may stress remaining risk pools;
  • Legal issues;38
  • Loss of product innovation and choice;
  • Disproportionate risk and premium cost increases due to adverse selection — whether risk pools are voluntary or mandatory;
  • Fairness in the allocation of risk and financial burden.

One of the major drawbacks of connectors is that they devolve into government-run managed competition schemes.  The two best-known connector plans, the Federal Employee Health Benefits Program and the Massachusetts Commonwealth Connector Authority, put bureaucratic intermediaries and price controls between consumers and the health insurance they purchase.

"Insurance connectors give health plans incentives to attract the healthy and avoid the sick."

Companies in the Federal Employees Health Benefit Program (FEHBP) survive by attracting healthy employees.  Federal employees pay the same price regardless of their health status.  If an insurer attracts employees in poor health, the company will have higher claims and will raise its premiums.  Higher premiums will induce the relatively healthy to move to other plans.  With only the unhealthy left, premiums will rise again.  In the long run, the insurance offered in the federal system has evolved to provide less consumer choice — in some areas people may have a choice of only one plan — and less flexibility.  The Massachusetts Connector Authority is also moving to reduce choice for its voluntary plans.  It estimated that its expenses would rise from $24 million in 2007 to $36 million in 2009.39 Facing higher expenses, it is moving to offer fewer plans with less choice in an effort to control premium costs.

In important respects, connectors suffer from operating deficits identical to those that plague the FEHBP.  After some government empowers an authority to run a connector, the connector’s job is to match firms and individuals with private sector health insurers. As in the FEHBP, the government manages the competition between private health insurers. Under most connector plans this management takes the form of a requirement that every person of the same age be charged the same premium regardless of expected health care spending.

Blocked from competing on their ability to price and manage risk, insurers compete on their ability to reduce costs and attract only healthy people.  Plan quality suffers and choices are inexorably reduced.40

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