A healthy healthcare exchange

The California Health Benefits Exchange, established under the Patient Protection and Affordable Care Act to offer subsidized private coverage to most of the uninsured, represents an excellent opportunity to improve the quality and cost of healthcare in this state. The exchange, which expects to start enrolling Californians in October 2013 with coverage to take effect in January 2014, creates a market in which informed consumers can choose the healthcare system that suits them best, and in which competing health plans have a strong incentive to improve value for money spent by consumers.

This idea should appeal to people across the political spectrum. For Democrats it offers more affordable and better-quality care for working people. For Republicans, who generally favor reliance on markets, it offers individual responsibility and choice.

But healthcare is a complex service, and for this market to work, it must be designed and managed with care.

How can the exchange use its power to achieve a better-quality, more cost-effective healthcare delivery system for all, and not just those who qualify for subsidies? Its board members must choose wisely as they work their way through crucial design choices this summer. Because our state already has many organized delivery systems, California’s exchange, with its power to contract selectively with health insurance companies, is unusually well positioned to foster broader reforms.

Here are specific actions our state’s exchange can make now to change healthcare in California for the better. They may even ripple more widely across the nation in the years ahead.

In healthcare, it takes systems to pursue quality and efficiency. Individual doctors and hospitals can’t do it alone. Systems are needed to create a culture of quality and efficiency, to select doctors and ensure they are well trained and proficient, to adopt practice guidelines, to deploy information technology that facilitates teamwork and care coordination, and much more. The competitors should be distinct delivery systems, not just different insurance companies.

In today’s healthcare market, in most cases, one insurance company’s provider network is nearly indistinguishable from the next. All have thousands of the same doctors and hundreds of the same hospitals. This arrangement allows each provider’s price and quality decisions to hide among a forest of competitors, with the cost buried across many insurance companies rather than plainly visible to consumers before they sign up for coverage.

In contrast, if exchanges require insurance companies to offer distinct, non-overlapping, competing networks of doctors and hospitals, these networks would face the scrutiny of the marketplace the way other service providers do.

Strategies that lower cost or improve quality, as well as those that ignore cost or fail to improve quality, would be apparent to consumers. Price competition works only when consumers can understand the cost and quality effects of their choice among distinct and competing provider networks.

Open up competition by making insurance benefit designs comparable. Another means by which insurance companies can try to dodge the full impact of price competition is by hiding price differences in complex plan designs that are difficult for consumers to understand or sort out. Though the delivery systems should be distinct, the basic services covered or excluded should be the same, so they can be easily compared.

The Affordable Care Act takes an important step in establishing an “essential health benefits” package that all insurance carriers must offer. Under the existing state law governing the exchange, California can go a step further by defining the choices available even more clearly, making all benefits for one insurer directly comparable to those of other insurers.

Offer employees of small businesses a choice. The exchange should allow the employees of small businesses to choose among competing insurance carriers and delivery systems, just as consumers in the individual market can under the new reform law, and as employees of many large employers already can.

Find partners. The exchange will be a very large purchaser — perhaps 2 million Californians could enroll. But it will still not be large and powerful enough to drive today’s non-coordinated providers of care to form and offer efficient competing delivery systems. The exchange must align with other large purchasers, such as the CalPERS system, which buys coverage for state and local government employees; the employee health benefit arm of the University of California; or some other large employers.

The Affordable Care Act did not go as far as I believe it should have in transforming the way competition occurs in our healthcare system. But it gave the leaders of state exchanges — pioneers in a new land — the chance to write basic rules that may prove powerful in time.

The forces of competition can change how things are done in a positive way, and will be hard to turn back if pioneers choose to unleash them.

Alain Enthoven is a professor emeritus of public and private management in the Graduate School of Business at Stanford University and a senior fellow in the Kaiser Permanente Institute for Health Policy. He was chairman of the California Managed Health Care Improvement Task Force in 1997-98.