Philadelphia Reflections

Electronic Insurance Exchanges

Forty-some months after Obamacare passage, its initial computer program was a huge and public flop. Since Obamacare contains four hundred fifty other sections, the future seemed ominous for what follows. At its worst, it even seemed possible the whole nation might be without a way to pay its medical bills for an indefinite time. It was impossible to say how long it would take to fix things. Things looked dim, not just for Insurance Exchanges, but for any other hugely complicated proposal giving politics the highest priority over technology. It was muttered that the fault was the government procurement process, whatever those mysterious words mean.

Up until October 2013, it had been axiomatic that other requirements must be sacrificed to preserve the priorities of the Federal Government. Of a sudden, the possibility had to be faced that the computer age -- or worse still, the nerds and long-hairs -- might impose a revision in Big Government's notions of sovereignty. These electronic systems are expensive, in the multi-billion dollar range. It is simply not tolerable to keep throwing them out until you find one that works. So what's left to conjecture is the awful possibility that government must change. There may turn out to be multiple ways to address the situation, but at the moment there is only one. It's called privatization, and it's not something a liberal political party welcomes.

But let's not go on about that; it is what it is. To some of us in the policy world, the great pity was that the Electronic Health Insurance Exchange was one feature of the Affordable Care Act which seemed like a good idea. Its sudden collapse might well force the Administration to continue its dependence on the existing insurance industry, along with its antiquated approaches. It might endorse caution about changing anything which seems to be working, or making reforms which are even mildly difficult. For example, direct marketing.

Direct marketing implies sales of insurance directly from the insurance company to the customer, without a broker or other intermediary. The insurance industry has been burdened since the 19th Century with heavy marketing costs and middle-men, reflecting the difficulty of convincing consumers of the safety of paying premiums without immediate contact with what it actually buys. Putting marketing in the hands of employers may once have been a necessary feature, but "job lock" and reduced international competitiveness for employer sponsors, have now grown to be fairly serious problems. The resulting incentive is to prefer to hire well people who are cheaper employees, thus hampering national efforts to hire the handicapped and extend the age of retirement. Employer sponsorship still retains one advantage: control of a large block of customers positions the employer to muscle down healthcare prices in the community through board seats at the local hospitals, health insurers, or newsmedia. But employer involvement creates an unexpected feature, that of union domination of the employer's seat at the table. These are all delicate balances, and a switch to direct marketing must be slow and incremental. Doing it all by the first of October may have advantages for politicians with their eye on the first week in November, but political deadlines can, and sometimes have, brought the system to its knees. It is definitely not liberating to have a goal of mandatory universal coverage, right now, immediately. Nevertheless, direct marketing does force insurance products to be more uniform and price-sensitive. And voluntary, not mandated.

Electronic insurance exchanges also address the Constitutional awkwardness. Both healthcare and insurance directly respond to the Tenth Amendment, that everything not Constitutionally mandated to be federal, must be state-regulated. And it's a good thing that is so, from the point of view of the small and sparsely settled states, who do not have enough actuarial power to support more than one monopolistic health insurer. By original intent, no Constitutional amendment could pass, over small-state opposition. But cheer up, the Tenth Amendment also applies to every major corporation in the country, and nevertheless, the little state of Delaware has no trouble harboring hundreds of corporations. These corporations operate as "aliens" in their home states, and for the most part, exist in Delaware as a brass plaque on the wall of a lawyers' office tower. Their corporate stock is listed in New York, on the stock exchange. Their products are sent to all corners of the nation, by Amazon, located in Seattle. These dispersed arrangements sound tortured and complex, but nevertheless, they are driving down transactional costs to the despair of their competitors. If we depend on competition to discipline prices, we must make competition possible.

Finally, computers make it easy to break health insurance into a hundred pieces, and allow the individual subscriber to tailor the pieces as an itemized package, or ultimately, a personalized list. If someone forces me to have obstetrical insurance, I feel sure some distant insurer would sell it to me for a dollar a year, knowing that the claims from an elderly widower would still allow them to make a profit on my nonexistent obstetrical care. Or if I have had my appendix removed, the risk of paying for a second time is pretty small. It works the other way around, as well. If some hospital wishes to charge "Medicare plus seventy percent", let them do so. I'm interested in buying health insurance that pays "Medicare plus five percent", and whether the hospital agrees in advance to accept it as payment in full. To capsulize this point: buying health insurance interstate and at a great distance, forces the products to be uniform, clearly defined, and cheap. And while any political entity may subsidize whom they please, the subsidies will be forced into the open.

So those are the reasons the electronic insurance exchanges seemed to have the kernel of a good idea, ruined by being in too big a hurry to do something which takes time getting used to. Like making it mandatory, universal, non-voluntary, and inflexible. But worst of all, demanding that it work by the first of January, next year. We're not selling snake oil, here. We're planting an oak tree.

Furthermore, name the CEO of almost any successful computerized business. You probably do know his name, whether it is Andy Grove, or Bill Gates, or Steve Jobs, or Tom Watson. But the name of the person in charge of electronic Obamacare is unknown to almost anybody. That he is a billionaire seems unlikely, even in a field full of billionaires; just about all of them are in the top 1%. Now that the Electronic Insurance Exchanges are such a notorious flop, it is going to be harder to find an outstanding person willing to accept the job--at anything approaching the laughable top salary level considered appropriate in a political environment. George Washington refused to take a salary, but that was then. The current situation is much like the one described by Mark Twain, of the man who wouldn't mind being hanged for his mistakes, except for the honor of the thing.

Privatization puts people out of work, and has other political liabilities, particularly for a President who has made such a point of denouncing the top 1%. But privatization is one quick way to find a genius to run a company, promising to make him and his close associates into billionaires as a reward for success, threatening disgrace if he fails. Awarding the whole program to a corporation after demonstrated success, not before then, concentrates the rewards on the politician who makes the correct choice. If his company is too small to handle it all, he can merge with others if he pleases, and fight with them about unpleasant succession issues. Privatization is not guaranteed to be successful, but privatization has been shown to work, more often than not.

Establishing an eventual goal of direct marketing will also force the insurance product to conform to what is useful for direct marketing, but such pressures do not seem to be injurious, as will be discussed in subsequent chapters. But one thing is pretty sure: mandatory universal coverage would be the last step in implementation, not the first.

Originally published: Saturday, December 28, 2013; most-recently modified: Thursday, May 16, 2019