How The Senate Health Care Bill Could Redline Minorities

The Senate bill suffers from the 101 exchanges problem. It would technically produce two exchanges per state (one for the individual market, and one for the small business market) and one ill-defined national OPM exchange within all the other exchanges. The bill would also allow states to set up multiple regional subsidiary exchanges within a single state. I can think of no legitimate reason to allow for multiple exchanges within a single state, but can think of several ways it could be used to hurt minority and low income communities.

From the Senate Bill:

Section 1311 (f) -

(2) SUBSIDIARY EXCHANGES- A State may establish one or more subsidiary Exchanges if--

(A) each such Exchange serves a geographically distinct area; and

(B) the area served by each such Exchange is at least as large as a rating area described in section 2701(a) of the Public Health Service Act.

In fact, the House bill specifically prohibits multiple exchanges in a single state if a state chooses to opt out of the national exchange set up by the House bill.

Section 308 (b) -

(1) IN GENERAL- The Commissioner may not approve a State-based Health Insurance Exchange under this section unless the following requirements are met:

[...]

(B) There is no more than one Health Insurance Exchange operating with respect to any one State.

There are very few policy arguments for using state-based exchanges instead of a single national exchange (with opt out for states that want to set up a better exchange), and they are poor. I guess one could argue that states have a history of insurance regulation, and they should continue in that function. I believe state regulation of health insurance has been a big failure, and feel state-based exchanges are clearly a recipe for administrative waste, patchwork regulator enforcement, insurance company abuse, and insufficiently large (in other words, small) risk pools. I will at least acknowledge that someone might try to actually make a policy argument for state-based exchanges.

On the other hand, I can't think of one policy justification for allowing multiple regional exchanges in one state. Even if you believe insurance regulation is best handled at the state level, there is no good reason to handle it at some sub-state level. The whole logic behind the exchange is to gather a large group of individuals into a single pool. It would simplify administrative overhead, give people the ability spread risk over a large pool, and help individuals get a bargain discount on premiums because of the size of the purchasing pool.

The exchange idea is modeled after the Federal Employee Health Benefit program (FEHB), the California state employee insurance program (CalPERS), and the Massachusetts connector. The FEHB is a national exchange. CalPERS is a statewide exchange which currently has more users than all but roughly five of the state-based exchanges are likely to have. The Mass connector is a statewide program serving one of the most populous states in the country. Clearly exchanges can be run at a national level or at a statewide level in even the largest states.

The only “uses” for regional subsidiary exchanges within a single state that I can think of would not be for the benefit of the general public. Subdividing already small state-based exchanges would allow insurance companies to keep premiums higher by reducing the bargaining power of individuals. It could allow several insurers to be active in a single state while avoiding direct competition with each other by only offering plans in different subsidiary exchanges. Most insidious, the regional subsidiary exchanges, in theory, could be used to redline minorities and low income communities.

States could create a subsidiary exchange that includes only a part of the state with primarily minority, low income communities, or communities with higher than normal health care problems. For example the Mexican border area in Texas, South Eastern Arkansas, Eastern Kentucky, the Detroit Area of Michigan, the list goes on. . . . This would drive up health care premiums just for people in these subsidiary exchanges by putting them in a smaller, less healthy community rating area. It could allow insurance companies to avoid these less desirable customers by not using those regional exchanges. The lack of competition could then further increase premiums in these subsidiary exchanges.

I can see zero potential upside and a many potential pitfalls to allowing states to set up multiple, regional, subsidiary exchanges within a single state. I have yet to find (and frankly don't believe there exists) a good policy justification for this provision. It appears to me nothing more than another potential goody for the health insurance industry. This just points to another reason why health care reform needs to have a single, national exchange with national regulator enforcement, instead of leaving enforcement up to the states where insurance will have ample opportunity to game the system.