Tuesday, June 30, 2009

Comments on health insurance exchanges in the US context

Massachusetts, as part of its health reform plan, constructed an exchange where health insurance plans could be relatively standardized and sold to consumers. Commonwealth Choice products sold on the exchange are placed into three tiers, Gold, Silver and Bronze; Gold plans have less cost sharing and Bronze plans have the most. The tier of a plan is determined by its actuarial value, which can be stated as the percentage of medical costs that a plan would cover if a nationally standardized population were run through the plan.

In some ways, the Massachusetts exchange is like Carmax, the used car retailer in the US. Carmax inspects all the cars it purchases. It offers fixed price sales - there's no negotiation on the price. Financing is done separately from the purchase, so the terms of each deal are more transparent to the consumer.

The US will likely have an insurance exchange, or multiple insurance exchanges, in health reform. There are two questions, whether or not insurers can sell products outside the exchange, and whether or not there can be competing exchanges - progressives would probably like one national exchange, whereas I've heard some Republicans say they want it to be so that each state can have one or more. For example, the Senate Finance Committee's policy options paper suggests that one option may be to allow several competing exchanges; I believe this is at the insistence of the Republicans.

Allowing competing exchanges would be idiocy. Consider the case of Countrywide Financial. In the US, financial institutions can choose their own regulator. Countrywide chose the Office of Thrift Supervision, which is supposed to oversee regular banks. However, Countrywide was involved in originating and securitizing subprime mortgages - a more complex business. I'll grant that more than one regulator dropped the ball, but OTS was home to several of the biggest blowups - AIG, IndyMac and Washington Mutual were also under their oversight.

In fact, a Washington Post article argues that OTS was known for being a lenient regulator, and may well have lobbied Countrywide to come under their umbrella.

Countrywide Financial's decision to reconstitute itself as a thrift and come under the OTS umbrella was a victory for Darryl W. Dochow, the OTS official in charge of new charters in the Western region, home to Washington Mutual, IndyMac and other large thrifts.

In the late 1980s, Dochow had been the chief career supervisor of the savings-and-loan industry, and federal investigators later concluded he played a key role in the collapse of Charles Keating's Lincoln Savings and Loan by delaying and impeding proper oversight of that thrift's operations.

Dochow was shunted aside in the aftermath and sent to the agency's Seattle office. Several of his former colleagues and superiors say he eventually reestablished himself as a credible regulator and again rose in the organization. Dochow did not return a phone call requesting an interview, and OTS said he declined to give one.

As early as 2005, Angelo R. Mozilo, then the chief executive of Countrywide, approached OTS about moving out from under the supervision of the Office of the Comptroller of the Currency, which regulates national commercial banks. In 2006, Dochow and his OTS colleagues met with Countrywide at its headquarters in Calabasas, Calif., in a room decorated with color photos of the company's float entries in the annual Tournament of Roses parade. One depicted a big bad wolf, with arms outstretched, huffing and puffing on a brick house.

Senior executives at Countrywide who participated in the meetings said OTS pitched itself as a more natural, less antagonistic regulator than OCC and that Mozilo preferred that. Government officials outside OTS who were familiar with the negotiations provided a similar description.

"The general attitude was they were going to be more lenient," one Countrywide executive said. For example, he said other regulators, specifically OCC and the Federal Reserve, were very demanding that large banks not allow loan officers to participate in the selection of property appraisers. "But the OTS sold themselves on having a more liberal interpretation of it," the executive said.

Winning Countrywide was important for OTS, which is funded by assessments on the roughly 750 banks it regulates, with the largest firms paying much of the freight. Washington Mutual paid 13 percent of the agency's budget in the fiscal year ended Sept. 30, according to OTS figures. Countrywide provided 5 percent. Individual firms tend to make a larger difference to OTS finances than other bank regulators because the agency oversees fewer companies with fewer assets.

Polakoff said in an interview that the main reason Countrywide sought a new charter was that OTS was a better fit because it regulated banks that focus on mortgage lending. He said he challenged Mozilo: "If you're looking for a weak regulator, and if you're calling us because you think we're a weak regulator, stop now. We will walk away."

Polakoff said Mozilo told him, "That is absolutely not the reason we're even talking to you about a charter." Mozilo declined to be interviewed for this article.

But critics in government and industry said Countrywide's shift from OCC oversight to that of OTS was evidence of a "competition in laxity" among regulators eager to attract business. "Institutions should not be able to find a safe haven in one regulator from the reasonable concerns of another regulator," said Karen Shaw Petrou of Federal Financial Analytics, referring to the Countrywide episode.

In September 2007, six months after helping orchestrate the arrival of Countrywide under OTS, Dochow was promoted to head the agency's Western region.

He had arrived just in time for the second savings-and-loan crisis.

Allowing several competing insurance exchanges in the same geographic area would invariably mean that one will weaken its standards to attract more business. This would be bad - poorly designed insurance products have left many people in debt. For example, a policy might offer poor coverage for cancer care or for diabetes. There is reason to believe that many of these products were intentionally designed poorly - so as to attract healthier people, which has so far been the main way the insurance companies have competed for business.

Allowing the sale of insurance products outside the exchange would actually be a bad idea as well. Aside from the insurance plans of large employers (who normally offer fair terms and generous subsidies), insurers might want to sell skimpy plans to healthy people. That will undermine the whole purpose of the exchange; it is likely that a method called risk adjustment will be used to redistribute funds among plans according to the health status of their members, so that plans with sicker enrollees will get more money (and their enrollees will continue to pay the same premium), but having a significant market outside the exchange will undermine the accuracy of risk adjustment. It would be acceptable to only allow people to receive income-related federal subsidies within the exchange, but then there's the question of what happens to people who work for a large employer but can't afford insurance even with the employer's subsidy. Those are questions someone else can work out.

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