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Self-funding and the nonmarketplace

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“An actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments for money or barter.”

Please note with particular interest that the words “buyers” and “sellers” are plural. This is not an accident of grammar. It is how traditional markets operate.

The Patient Protection and Affordable Care Act (PPACA), as written, creates a market-like mechanism called an “exchange,” which we are now calling a “marketplace.” Why the change? Earlier this year, Julie Bataille, director of the Office of Communications at the Centers for Medicare & Medicaid Services (CMS), said, “We are recommending not using the word ‘exchange’ in the [PPACA] enrollment materials. Words like ‘marketplace’ resonate much more with the consumer and also tend to be something that is all inclusive.”

According to Bataille, this decision is based on external research and CMS focus group testing conducted in Cleveland, Dallas, Miami, Philadelphia and Houston. Additional sessions were conducted among Spanish-speaking focus groups in Houston and New York. So, marketplace it shall be.

For some, Exchange vs. Marketplace may be a distinction without a difference, especially since these marketplaces are already shaping up to be a bit different in nature than the traditional market definition above.

Economists know that markets can sometimes take different forms. For example, if the PPACA marketplaces roll out with a limited number of sellers (as appears to be the case in at least a few states), they will create more of an oligopoly than a traditional market. The difference is in the base definition. In an oligopoly, the market is dominated by a small group of sellers, which often reduces competition and leads to higher costs.

An oligopolistic marketplace would directly contradict much of what we were promised in the chaotic run up to PPACA’s passage. On July 20, 2009, speaking at the Children’s National Medical Center in Washington, President Obama said, “The reforms we seek would bring greater competition, choice, savings and efficiencies to our health care system […] For the average American, it will mean lower costs, more options and coverage you can count on.” In his 2012 State of the Union Speech, he said, “Our health care law relies on a reformed private market, not a government program.”

Unfortunately, PPACA appears to be designed to transform rather than reform. The ostensible commitment to a private market seems to contradict the actual intent of the PPACA framers. In June 2003, speaking to the AFL-CIO, Obama said, “I happen to be a proponent of a single-payer health care program. I see no reason why the U.S. cannot provide basic health insurance to everybody. A single-payer health care plan, a universal health care plan. And that’s what I’d like to see.” Recent statements by Senate Majority Leader Harry Reid, D-Nev., echo those sentiments.

Were that to happen, we would have a very different form of market — known as a monopoly, where, by definition, only one seller is available to a multitude of buyers.

Fighting marketplace “leakage”
Despite a softening of some of the president’s original rhetoric, the originally stated desire to eliminate other funding mechanisms and, thus, move closer to a single-payer system is alive and well, as evidenced by recent developments surrounding the growing popularity of self-insured plans. According to the Kaiser Family Foundation, today, more than 61 percent of covered workers are in a self-insured plan. In 2000, that number was just 49 percent.

Conventional wisdom held that the economies of scale for these plans (regulated under the Employee Retirement Income Security Act, or ERISA) would only work well for large employers. That is no longer the case. Today, these plans are becoming more and more attractive to companies with as few as 25 employees. Worried that this will keep some employers out of the marketplaces and PPACA plan designs, some in Washington are calling on federal regulators to eliminate what they term the self insurance “loophole” before more employers jump on the bandwagon.

On June 19, the Center for American Progress wrote and distributed an issue brief entitled, “The Threat of Self-Insured Plans Among Small Businesses.” The authors write, “The Affordable Care Act exempts these plans from many of its reforms, creating an incentive for employers looking to avoid complying with the law’s consumer protections to follow this path.”

Concerned about the number of smaller businesses creating self-insured plans, they worry that “this shift in the small-employer insurance market would undermine key protections for small-business employees and increase costs for other small businesses that stay in the traditional insurance market.”

While perhaps that will come to pass, that is how competitive markets operate. If PPACA proponents really want a free and open marketplace, all comers should be welcome. If buyers want to self insure after taking the up- and down-side risks into consideration, then let the other market players react as they see fit. That would encompass the “forces of demand and supply” in our original definition.

The authors of the Center for American Progress brief worry “the result of this shift could cause an insurance premium death spiral and threaten the stability of the exchanges — the health care law’s new insurance marketplaces. This outcome is not inevitable. State and federal policymakers can halt this shift even without new legislation.” Their focus is clear: to protect the PPACA marketplaces, even if it means making them less of a traditional marketplace and more of an oligopoly or monopoly. Fewer choices for consumers do not equal a vibrant marketplace. A sole choice is no market at all.

On Sept. 12, the Wall Street Journal reported that “Democrats in California have been leading this effort as usual, though more than a dozen states, including Colorado and Rhode Island, have either passed or are moving such destructive bills.” In a belt and suspenders approach, last May, the U.S. Department of Labor issued a regulatory “information request” that may be the harbinger of ERISA “reform.”

The DOL document is not shy about its intent either. “It has been suggested that some employers with healthier employees may self-insure and purchase stop-loss insurance policies with relatively low attachment points to avoid being subject to requirements while exposing themselves to little risk.” Clear enough?

Despite some of the more over-the-top rhetoric, self-insured plans are still regulated to some extent by PPACA provisions. According to Julian Lago, senior client advisor at Celedinas Insurance Group and a regional vice president with the National Association of Health Underwriters, “There are definite advantages for employers to explore with self-funded plans — in particular with employers with fewer than 100 employees who might not have considered this in the past.” But Lago cautions, “There are still premium taxes and employer notification requirements.” And these plans “are not in a total PPACA bubble.”

Time will tell whether this state and federal attempt to tamp down marketplace “leakage” attributable to self-funding is successful. In the broader context, it is increasingly clear that some interest groups, states and even the DOL view “greater competition” — what the president called for — as two wolves and one sheep discussing what to have for dinner.

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