5 HIX Challenges for Health Insurers

The long-awaited proposed rules for health insurance exchanges were revealed Monday and so far industry reaction has been generally positive.  But health insurers face new business risks and increased competition as they work to figure out how to appeal to the individual and small group market.

HIXs are among the Accountable Care Act's arsenal of cost-cutting weapons. Individual states will create these new marketplaces where almost anyone will be able to compare the prices and benefits of a mix of health plan offerings. The idea is that through exchanges individuals and small employers will enjoy the same cost breaks on healthcare insurance as big employers.

Much of the HIX focus has been on what states will need to do to create and manage exchanges, but a new report says health plans need to get in the game and start planning how they will position themselves to sell their products in what is estimated to be a $60 billion business.

"The exchange is an entirely new market that doesn't exist now," Jeffrey Gitlin, a health industry principal at PricewaterhouseCoopers, explained in a telephone interview. "Payers will need to make some significant changes in the way they do business."

So what are the key considerations for insurers as they prepare for health insurance exchanges? A PwC report, Change the Channel: Health Insurance Exchanges Expand Choice and Competition, offers some insight into what insurers are thinking about as they take the leap into exchanges. The study is based on a nationwide survey of 1,000 consumers and 153 health insurance executives concerning their expectations of exchanges. PwC also conducted in-depth interviews with 35 healthcare industry leaders.

Here are some of the highlights:

1. Health insurers want to participate in exchanges but they're worried. More than 52% of the healthcare executives said their companies plan to participate in exchanges. PwC estimates that HIX will generate $60 billion in premiums in 2014 and that number could more than triple by 2019. So what's not to like? Adverse selection is a big worry. "It's critical that insurers understand the risk adjustment process," said Gitlin. That means developing analytics on the enrollment population, learning about their medical status and understanding how to deliver cost-efficient, evidence-based care to them.

2. Insurers will need to shift from risk selection to risk management. Insurers will need to manage the risk they receive rather than rely on choosing the risk they will manage. Health plans are notorious for rejecting coverage for individuals who don't fit their risk profile. That will no longer be an option. Insurers will be required to cover a minimum level of services identified by the HHS as the "essential health benefits" and no applicant can be denied coverage. Each state will conduct its own actuarial analysis.

3. Insurers prefer the open exchange to the active purchaser exchange but they don't have a say in the design. The open model allows any health plan that meets state and federal criteria to participate in the exchange. This is the model used by Utah and is the exchange of choice for 44% of the survey participants. The active purchaser model, which is used by Massachusetts, requires insurers to compete to be selected to participate in the exchange. Only 10% of insurers like this model.

States will have the flexibility to decide what model they want to implement so insurers will face variations in exchange designs across the country. The differences could make some exchanges profitable for some insurers but not for others the report shows, and insurers will need to decide which ones they will enter.

4. Health insurance will shift from a wholesale to a retail business. Some 37% of healthcare insurance executives who said they plan to participate in exchanges said their companies aren't active in the individual market today and 20% don't offer small group policies. Gitlin says insurers will need to learn a new business and compete in ways they never have before to earn consumers' business and loyalty. That means understanding who the consumers are, what motivates them and how they behave so insurers can tailor communications, products, and services to this new market.

5. Business will be brand neutral. According to the report, the four most important considerations in selecting a health plan are price, benefits, provider network and coverage area. A company being well known is the least influential attribute. Gitlin says that means insurers will need to be prepared to compete for exchange business on the basis of value for the consumer.

Gitlin cautions that health insurers will also face a huge consumer education challenge to help individuals understand the benefits of purchasing health insurance through an exchange. In the PwC survey some 56% of consumers didn't even know what health insurance exchange was.