The Rationale for a Statewide Health Insurance Exchange
by Robert E. Moffit, Ph.D.
Summary: The Mississippi Legislature has options available under current federal law to improve the affordability and availability of private health insurance coverage, with little to no government funding required.
Health insurance markets in the United States are governed by a complex system of state and federal laws and regulations, many of which are outdated or counterproductive. The most influential of these are found in the federal tax code. Americans get unlimited federal tax breaks for health insurance, as long as they receive that coverage through their workplace. Outside the workplace, however, they almost always pay for coverage with no tax break.
A statewide health insurance exchange is a solution to this inefficient inconsistency. An exchange would give individuals and families the opportunity to secure the health plan of their choice without losing current tax benefits. It would also allow those individuals and families to own their own policy, regardless of their place of employment, increasing the number of insured Mississippians.
Why Do Employers Own the Health Policies of Their Employees?
The federal tax code profoundly distorts health insurance markets. By law, Congress ties the enormous tax benefits of health insurance almost exclusively to the place of work. Workers who buy health coverage outside of the employer-based system often have to cope not only with high administrative costs and inflexible government mandates, but also with the loss of federal and state tax breaks. The loss of these tax breaks could add 40 to 50 percent to the cost of a policy when compared to a policy purchased through the place of work.
Employers do not own auto, life, homeowners', or property and casualty insurance policies on behalf of their employees. Indeed, most Americans would find such arrangements strange. But in contrast to every other type of insurance in the private market, health insurance in the United States sticks to the job, not the person. Employers own health insurance policies; individuals and families do not.
The current tax law also directly affects coverage. Recent empirical data shows that among the total number of the uninsured, the proportion of long-term uninsured is small--only slightly more than one out of ten over a four-year period. The overwhelming majority of the uninsured are in and out of coverage, usually due to changes in their job situation. They had access to insurance but lost it. Without personal ownership of health insurance policies, there is not any real portability in coverage. The problem is not simply access to health insurance coverage; it is also keeping that coverage. The right policy, then, would have health insurance stick to the person, not the job.
Why is State Action Necessary?
Congress could simply change the federal tax code to give individuals and families tax relief for the purchase of health insurance regardless of where they work so that they can buy and own the coverage they want at competitive prices. In other words, by changing the tax code, Congress could take a dramatic step to creating a real, consumer-driven health insurance market. Going even further, if Congress allowed interstate commerce in health insurance -- letting individuals and families to buy coverage across state lines from any licensed company in the United States -- it would create a single national market for insurance coverage. In this large market, with large health insurance pools, individuals and families would own and control their own health insurance. These reforms would create a robust system of consumer choice and competition.
Short of congressional action to reform the tax code, the burden to improve health coverage rests with state officials. The best way to enable individuals and families to buy, own, and keep health insurance from job to job--without losing the tax advantages of the employment-based coverage--is to transform the balkanized and dysfunctional state health insurance market into a single health insurance market. This new market would function well for all sorts of individuals and small businesses, not just workers employed by large companies.
A sound legal framework is necessary to secure fully functioning and efficient markets. Current law governing health insurance in many states does not work well to control costs or to expand personal access to coverage. Accordingly, state officials who are serious about creating new, consumer-based systems need to create a new legal framework for health insurance.
The Best Option for States
The best option is a health insurance market "exchange". A properly designed exchange would function as a single market for all kinds of health insurance plans, including traditional insurance plans, health maintenance organizations, health savings accounts, and other new coverage options that might emerge in response to consumer demand.
From a consumer's perspective, the concept is similar to that of internet travel sites, which offer a single market where consumers can choose from a variety of airlines or hotels or car rental companies to find the price, schedule, and amenities that best meet their needs. Another similar market is a farmers' market - single locations where shoppers can purchase a variety of fresh fruits and vegetables that are offered by a variety of sellers.
In the same way, a health insurance exchange would allow consumers to choose among a variety of insurance plans from a variety of insurance companies. The exchange would provide a catalog that would describe the plans, their benefits, and their costs, along with other information to help consumers make the choices that best meet their needs. This approach is already used in the Federal Employees Health Benefits Program.
Employers who choose to participate in a health insurance exchange would designate the exchange itself as their "plan" for the purpose of the federal and state tax codes. Thus all defined contributions (specific dollar amounts provided by the employer for their employees to use for certain benefits) would be tax free, just as they are now for conventional employer-based health insurance. The major benefits of this arrangement for employers, particularly small employers, are a reduction in administrative burdens, costs, and paperwork and the ability to make defined contributions to their employees' preferred plans.
A health insurance exchange would expand coverage and choice. Rather than have to decide whether to pay for full coverage or not, employers could make defined contributions of any size to the exchange on behalf of their employees. Moreover, employers could also enable employees, including those working part-time and on contract, to buy health insurance with non-taxed income, if it is done through a Section 125 plan, sometimes called a "cafeteria plan."
This is especially important for workers whose firms require them to pay part of their health insurance premiums, because those payments are usually paid from the employees' taxable income. Employees, not employers, would choose their health care coverage, would own their own health plans, and would take them from job to job without the loss of the generous tax benefits of conventional employer-based coverage. This is a revolutionary change in the health insurance market.
Unlike other state-based initiatives, the creation of a statewide health insurance exchange would not violate the Employee Retirement Income Security Act of 1974 (ERISA). This approach complies with ERISA because employer participation in an exchange is voluntary. An exchange can be designed within the existing framework of other federal insurance laws, including the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Insurance Portability and Accountability Act (HIPAA).
A health insurance exchange could be the basis of a new legal framework for health insurance at the state level. It could eventually replace much of the existing state law, which creates separate individual and small group markets. Ideally, an exchange should be open to all state residents and all interested employers, regardless of the size of the firm, who want to arrange health insurance through the exchange.
The specific functions of an exchange would be mechanical, not regulatory. An exchange should not license or standardize health plans or impose underwriting rules or benefit mandates. The focus should be on processing paperwork--mostly processing employer and employee contributions or independent premium payments--and administering enrollment and coverage selection through an annual open season. An exchange could also be a mechanism for the administration of government subsidies for low-income persons, if state officials wanted to extend that help. Similarly, it could be a mechanism for the administration of federal health care tax credits for individuals and families, if Congress should ever decide to enact individual tax relief for health care and help individuals and families without employer-based coverage.
An exchange should be administered by a non-governmental entity operating under a special state government charter. Irrespective of the organizational structure, the functions of an exchange could be contracted out to private entities or private third-party administrators. From the perspective of health policy, the issue of governance is of secondary importance.
A state-level health insurance exchange would increase health insurance coverage, significantly lower prices in the individual coverage market, give individuals and families more choices, allow coverage portability, and increase employers' flexibility in offering health benefits.
Ideally, Congress should reform the tax treatment of health insurance. But short of congressional action to rectify the inequities of the federal tax code, a health insurance exchange is the best way for individuals and families to secure personal and portable health insurance that best meets their needs, without incurring heavy tax penalties.
Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.
This Issue Brief was adapted by the Mississippi Center for Public Policy from The Heritage Foundation's WebMemo No. 1230, "The Rationale for a Statewide Health Insurance Exchange."
About the Governing by Principle Series
The Governing by Principle Series is published by the Mississippi Center for Public Policy. It is intended to help policy-makers and the public consider the important issues of the day from a principled perspective. The ten principles by which we believe all state policy should be measured are described in our Governing by Principle primer, which is available by calling 601-969-1300 or making a request at www.mspolicy.org, where the primer is also available for reading or printing.
The two principles that relate most directly to this Issue Brief are:
Principle #6: Individuals are ultimately responsible for governing
themselves and for the consequences of their decisions.
Principle #8: The free market should not be distorted
by government-designed dictates or advantages.
View the PDF of this Issue Brief here