Why Health Insurance Exchanges Unnerve CFOs

With health insurance exchanges mandated to launch in 2014, the government has awarded its next round of Affordable Insurance Exchange Establishment grants in an effort to get these programs up and running on schedule. The money is intended to give states the flexibility and resources to create new health insurance marketplaces.

But healthcare CFOs remain wary of the potential financial ramifications of these state-run commercial payer plans, with some calling it "scary" or a "game-changer."

Many industry experts believe organizations that face greater uncompensated care stand to fare better with health insurance exchanges (HIX), as the uninsured will now have some coverage. However, for those healthcare organizations with few uninsured and small Medicare and Medicaid populations and greater amounts of commercial insurance, exchanges stand to hurt the bottom line.

"For us, we have very little Medicaid, very little uninsured, and we have 40% commercial insurance, which is going to now get paid at Medicare or Medicaid rates," says Mary Ann Freas, CFO at Southwest General Health Center, a private, nonprofit, 354-bed hospital located in Middleburg Heights, Ohio. Freas was one of several CFOs who spoke about insurance exchanges while attending the HealthLeaders Media CFO Exchange, an invitation-only event held in September at Kiawah Island, SC.

"We've worked so hard to get our payment rates up to a par with some of the other larger organizations that have a lot of market power in Cleveland, and now [those healthcare organizations] are saying they're going to create our own exchanges. We could be looking at huge reductions in reimbursements from exchanges, and that's what's scary," she says.

Last spring, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act but made participation in the expanded Medicaid program optional. The new flexibility with Medicaid expansion led many states announce that they'd opt out of the program—a decision with the potential to leave an estimated three million people uninsured, according to the Congressional Budget Office.

But PPACA also requires that states make insurance plans available for purchases through HIX by January 1, 2014.States must also demonstrate to the Department of Health and Human Services by January 1, 2013, that an exchange will be operational by 2014. If a state cannot meet that 2013 deadline, then the federal government has the authority to establish and operate an exchange for that state.

To encourage states to create their own HIX, the federal government has allotted about $1 billion to go toward research, planning, and technology for exchanges. Just last week, HHS Secretary Kathleen Sebelius announced that Arkansas, Colorado, Kentucky, Massachusetts, Minnesota, and the District of Columbia would receive one of the Affordable Insurance Exchange Establishment grants.

These six are among the 49 states, plus the District of Columbia and four territories, that have now received federal grant money to plan HIX; 34 of those states plus the District of Columbia have received grants to build an exchange. The ultimate goal is to allow consumers in every state to be able to buy insurance from qualified health plans directly through these marketplaces and to be eligible for tax credits to help pay for their health insurance. 

Establishing a state exchange is a highly complex process, however—another reason several financial leaders at the HealthLeaders Media CFO Exchange expressed concern about how they might ultimately impact healthcare organization finances.

For instance, states must grapple with establishing governance and certification procedures, determining competitive standards among plans, and creating IT structures. Additionally these exchanges must develop small-business health plan options as well as plans that can take on a disproportionate share of high-risk, high-cost individuals that don't impose higher premiums on those individuals.

Once these exchange plans are established, some financial leaders believe they could cause area employers to stop offering their sponsored programs altogether, forcing employees to opt for the new plans instead.

A McKinsey & Company report says, "30% of employers will definitely or probably stop offering ESI [employer-sponsored insurance] in the years after 2014 and at least 30% of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries." It also noted that "Contrary to what many employers assume, more than 85% of employees would remain at their jobs even if their employer stopped offering ESI, although about 60% would expect increased compensation."

Aaron Coley, vice president of decision support for MemorialCare Heath System, a six-hospital system based in Southern California, says "We did some modeling around what would happen if our commercial rates went just halfway between where they are now and Medicare, and what does that do in terms of revenue here? It will be $200 million for us a year that comes out of our system on a total net revenue base of about $2 billion. And that's just if the rate goes halfway to Medicare [rate]; that's not even getting to Medicare rates."

Freas adds, "In many ways, exchanges are worse than losing [inpatient] volume, because now we're taking care of all those patients, perhaps even more patients than before, and that's going to drive up the competition for [clinical] labor and the need for more staff, and we'll have to deliver care at a much lower cost. I just don't know how this is going to work out for us."

Trying to get a handle on which employers and industries might forgo offering insurance in favor of HIX is causing a great deal of financial uncertainty, as CFOs try to analyze how much of their patient base may be at risk to leave higher-reimbursing, employer-sponsored plans for the likely lower-reimbursing exchange plans.

"It's probably going to be industry-specific to some extent. And in certain industries they may say, My competitor is doing it and since they've already opted to use [an exchange], then I don't have to fear losing my employees if I do it as well," says Coley.

"I wouldn't be surprised if we see some municipalities who have highly unionized workforces also dump their people into exchanges because they need to get out from under their costs, which are crushing the state budgets," adds Michael T. Burke, CFO, senior vice president, and vice dean at NYU Langone Medical Center, a three-hospital system in New York, NY.

Not only will a state's industry's response dictate the degree to which hospitals and health systems may be affected by health insurance exchange, healthcare finance leaders at the HealthLeaders Media CFO Exchange believe the state offerings will influence their response.

"I know in Massachusetts, the exchange-offered products which were almost tied to the Medicaid HMOs and were run by Cambridge Health Alliance, Boston Medical Center, and places like that …  did allow you to access care at other institutions and to be paid at a certain rate, but it was always a Medicaid base type of payment rate, which isn't necessarily great. It could be a huge reduction in reimbursement for some [if it happens like that elsewhere]," says Burke.

Though at one time Medicaid reimbursement rates weren't very appealing to organizations, with the addition of insurance exchanges, financial leaders at the HealthLeaders Media CFO Exchange say they may be wishing for those rates in the coming years. But can they survive on them?"There's no way," says Freas. "Not on Ohio's [Medicare reimbursement] rates."

"Or California's rate either," adds Coley. "If reimbursement on a commercial side goes, and you don't have this cross-subsidization happening anymore, it's going to be a game changer."