A Texas-Sized Health Care Failure

Dallas

THE Senate Finance Committee has for the moment rejected the idea of creating a public health insurance plan. It’s difficult to see how Americans will be able to find good, affordable health insurance without one. But if we are to go forward without a public option, it is more important than ever to make sure that we get another part of health reform right: the exchanges, where it is envisioned that small businesses and people without employer-sponsored insurance could shop for policies of their own.

Back in the 1990s, I was the founding chairman of Texas’ state-run purchasing alliance — an exchange, essentially — which ultimately failed. There are lessons to be learned from that experience, as well as the similar failures of other states to create useful exchanges.

The Texas Insurance Purchasing Alliance, created by the Texas Legislature in 1993, was meant to help small businesses, which often cannot afford coverage for their employees. (More than half of all uninsured Americans work for small businesses.) Small businesses are charged higher rates — on average 18 percent higher than those paid by large companies. And their administrative costs, built into those premiums, are typically as high as 25 percent of the premium, compared to only 10 percent for big companies.

Our system pooled small employers into purchasing groups large enough to obtain the lower wholesale insurance rates that big companies get.

Initially, the alliance worked exactly as planned. Sixty-three percent of the businesses that participated were able to offer their employees health coverage for the first time. The alliance offered small businesses a low-cost, nonprofit option: our administrative arrangements did away with the high marketing costs that insurers pass on to small businesses. And we didn’t charge higher rates to firms with older or less healthy workers. This in turn led other insurers, outside the alliance, to lower their prices. We did all this not by creating a government bureaucracy, but by relying on the private sector.

Nevertheless, six years after the program got off the ground, it folded. Many factors contributed to our failure. Some elements of the program, like the restriction it put on the size of eligible companies (only employers with 50 or fewer employees could join), proved unpopular. In addition, the governor who helped create the alliance, Ann Richards, was replaced in 1995 by George W. Bush, who did not consider it a priority.

Most important, though, our exchange failed not because it wasn’t needed, and not because the concept wasn’t sound, but because it never attained a large enough market share to exert significant clout in the Texas insurance market. Private insurance companies, which could offer small-business policies both inside and outside the exchange, cherry-picked relentlessly, signing up all the small businesses with generally healthy employees and offloading the bad risks — companies with older or sicker employees — onto the exchange. For the insurance companies, this made business sense. But as a result, our exchange was overwhelmed with people who had high health care costs, and too few healthy people to share the risk. The premiums we offered rose significantly. Insurance on the exchange was no longer a bargain, and employers began backing away. Insurance companies, too, began leaving the alliance.

Texas wasn’t the only state to see its insurance exchange fail. Florida and North Carolina were also unsuccessful. And California, which had the first exchange (established in 1992) and the largest market, shut its doors in 2006. All these state exchanges failed for the same reason: cherry-picking by insurers outside the exchange.

If Congress now creates new exchanges, as seems increasingly likely, it must prevent this phenomenon by setting two national rules: Insurers have to accept everyone and have to charge everyone the same rates regardless of health status.

Such rules would force insurers to spread risk. But enforcement would also be difficult. Every aspect of health insurance — from the rules for underwriting and setting premiums to the marketing of policies — would need to be monitored stringently to prevent companies from steering all bad risks to the exchanges.

It would be smarter for Congress to revisit the idea of creating a public plan that could provide an attractive choice for consumers and real competition for private insurers, to give them the incentive to offer good coverage at affordable prices.

But without a public plan, tough rules and restrictions on insurance companies will be essential. Otherwise, Americans will never be able to count on good, affordable health care.