Insurance Exchanges: What Europe Can Teach Us

The Netherlands and Switzerland gave us the director of Robocop and Nestléfood products, respectively. But these countries have also provided two key lessons germane to the implementation of insurance exchanges in the United States as part of the Affordable Care Act (ACA). In an article for the New England Journal of Medicine, researchers from the Harvard School of Public Health and the Commonwealth Fund Harkness Fellowship Program describe these lessons.

The creation of state-regulated health insurance exchanges, or market places, is a key component of the ACA. Beginning in 2014, purchasers of health insurance (i.e., individuals and small businesses) will be able to use exchanges to compare plans before they buy them as well as enroll under particular health plans. In theory, these exchanges will create a competitive market, in which insurers will be forced to compete on the price and quality of their services, which will help contain costs for consumers. Along with the expansion of benefits outlined in the ACA and the provision of the individual mandate, exchanges will increase the number of individuals with insurance. But whether the insurance exchanges will, in practice, improve the quality of care is questionable.

Enter two lessons from the Netherlands and Switzerland. The first lesson is that the creation of insurance exchanges must be accompanied by reforms to the health care purchasing market. Such reforms are absent in the two European countries. In practice, Dutch and Swiss insurers and providers (namely hospitals) negotiated the price, quality, or volume of health care services. However, costs to purchasers were not contained. The result was an inefficient system in each country. Providers experienced a surplus of funds, and many prospective purchasers were priced out of the market.

Each country’s situation illustrates the first lesson. In Switzerland’s decentralized system, where insurers and providers only negotiate prices, hospitals nevertheless drive up purchasers’ health care costs. Meanwhile, in the Netherlands, upon the institution of a payment system based on diagnosis-related groups, negotiations between insurers and hospitals were delayed and hospitals were over funded.

The second lesson is that an effective risk-adjustment formula must be in place when the health insurance exchanges are created. A risk-adjustment formula is used by an insurer to calculate the expected health care expenditures of a consumer over a period of time. An effective formula is one that will not incentivize insurers to enroll only healthy individuals and ignore those with a history of illness.

On this front, recent policies in both countries show promise. Until January, the Swiss risk-adjustment system exhibited large differences in premiums within and among cantons, the member states that comprise the federal state of Switzerland. But in the same month, Switzerland began to include prior hospitalization as an adjustment factor. More recently, the country has adjusted for patients’ medical conditions. Historically, the Netherlands has fared better: the formula it has used for the past 20 years “thus far has discouraged insurers from engaging in risk selection.”

In sum, the creation of health insurance exchanges, a key component of the ACA, may not be sufficient to improve and expand rates of health insurance coverage. Reforms in the purchasing market and effective risk-adjustment mechanisms will need to accompany the creation of such exchanges. When U.S. policymakers consider the list of gifts received from the Netherlands and Switzerland, they might consider adding sage advice on health insurance exchanges right behind the best sci-fi film of 1987, and Nestlé Crunch.

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