Assessing the Exchanges

Assessing what has gone wrong. [Link]

What has happened, at least so far, presents itself in several layers. One key problem, which to date has been the most prominent in public, has to do with a late-in-the-game decision to require users to go through a complex account-creation process before even reaching any coverage options. Administration officials apparently went back and forth several times on this question, and the ultimate decision required the creation of a series of patches over an already developed site in a very short time. Most of the problems people have faced so far are a function of that decision, and have had to do with creating user accounts and so getting through the very first steps involved in purchasing coverage. Some journalists and analysts have speculated that this decision was made in order to prevent people from seeing premium costs before they could also see any subsidies they might be eligible for, so that the shock of higher prices could be contained and so that simply curious observers and journalists couldn’t get a picture of premium costs in the various states. This explanation strikes me as plausible, and it struck several of the people I spoke with as plausible, but none of them could confirm it. It may be true, but it’s surely not the only possible explanation. Whatever the cause, that decision has created crippling problems that are still largely unresolved.

Many of these problems were reported in an October 12 New York Times story that detailed some serious dysfunction in the development process. The people I spoke with all confirmed that nearly all of the details in the story were correct, though several of them did strenuously deny one claim—that CGI Federal, the biggest contractor involved in building the site, was not provided with the information it needed to start writing code for the site until the spring of this year. This detail in the story aroused some shock and surprise among outside web developers, and these CMS officials say it’s just not true.

The people I spoke with did all confirm the importance of one other detail in the Times story: that CMS did not hire a general contractor to manage the exchange project but handled that overall technical management task itself. None of the people I spoke with wanted to get into how this decision was made or at what level, but all of them agreed that it was a very bad idea and was at the core of the disaster they have so far experienced.

The problems people are now facing with the basic interface have taken up most of the time that CMS and its contractors have devoted to troubleshooting so far, and although things have improved a little on this front quite serious problems remain. But there are very serious problems beyond that, which are more like the sorts of problems people were predicting before the launch: database problems at the nexus of several federal and industry data sources. The federal data hub itself is so far doing reasonably well at its basic tasks, and that has come as a relief to CMS. But some of the site functions that rely on the hub, both in the federal exchanges and a number of the state exchanges, remain highly problematic. The calculation of subsidies continues to fail tests, and it’s pretty clear that some actual consumers have made actual purchases with bad information, which will become apparent to them when they get their first bills. If the interface problems are addressed and the volume of purchases increases, this calculation problem could become a huge concern.

Meanwhile, the back-end communication between the exchanges and the insurers has been terrible, as is increasingly being reported. The extent of these problems has also been a surprise to CMS, and here too an increase in volume if the user interface issues are solved could lead to huge problems that would be very difficult to correct. CMS officials and the large insurers thought at first that the garbled data being automatically sent to insurers must be a function of some very simple problems of format incompatibility between the government and insurer systems, but that now seems not to be the case, and the problem appears to be deeper and harder to resolve. It is a very high priority problem, because the system will not be able to function if the insurers cannot have some confidence about the data they receive. At this point, insurers are trying to work through the data manually, because the volume of enrollments is very, very low. But again, if that changes, this could quickly become impossible.

In a couple of ways, then, the severe user-interface problems at the front end of the federal exchange has actually had some advantages from CMS’s point of view, because by keeping enrollment volume low it has kept some other huge problems from becoming instantly uncontrollable.

But that low volume is mostly a very bad thing for Obamacare, of course, since the viability of the exchanges depends on a certain size and demographic mix which cannot be attained unless these problems are resolved very quickly. I couldn’t get enrollment numbers from any of the people I spoke with, but I was told that the uptake model that HHS built (using CBO projections) to predict how the exchanges would work made a low-end estimate that just under half a million people would enroll nationwide by October 31st, and that enrollment would then accelerate dramatically between November 15 and December 30th. The October 31 target, which was thought to be modest, now looks essentially impossible to reach, but their bigger worry is that period in November and December. 

If the problems now plaguing the system are not resolved by mid-November and the flow of enrollments at that point looks like it does now, the prospects for the first year of the exchanges will be in very grave jeopardy. Some large advertising and outreach campaigns are also geared to that crucial six-week period around Thanksgiving and Christmas, so if the sites are not functional, all of that might not happen—or else might be wasted. If that’s what the late fall looks like, the administration might need to consider what one of the people I spoke with described as “unthinkable options” regarding the first year of the exchanges.

All of the CMS people I spoke with thought the state-run exchanges are in far better shape than the federal system under their purview. But the insurers do not seem that much happier with many of those state exchanges. Back-end data issues seem to be a problem everywhere, and some of the early enrollment figures being released by the states are not matching up with insurance company data about enrollments in those states, which suggests a breakdown in communication that is only beginning to be understood. The insurers believe that only Nevada, Colorado, Washington state, and Kentucky have what could reasonably be described as working systems at this point. Still, there is no question that on the whole the states with state-run exchanges are in better shape than those with federal ones.

The tone of the CMS officials who spoke with me was a kind of restrained panic. Among the insurance company officials (who, I should stress again, work in the Washington offices of some large insurers, and so are basically policy people and lobbyists), there was much less restraint. The insurers are very, very worried about the viability of the exchange system—especially but not exclusively at the federal level.

One key worry is based on the fact that what they’re facing is not a situation where it is impossible to buy coverage but one where it is possible but very difficult to buy coverage. That’s much worse from their point of view, because it means that only highly motivated consumers are getting coverage. People who are highly motivated to get coverage in a community-rated insurance system are very likely to be in bad health. The healthy young man who sees an ad for his state exchange during a baseball game and loads up the site to get coverage—the dream consumer so essential to the design of the exchange system—will not keep trying 25 times over a week if the site is not working. The person with high health costs and no insurance will. The exchange system is designed to enable that sick person to get coverage, of course, but it can only do that if the healthy person does too. The insurers don’t yet have a clear overall sense of the risk profile of the people who are signing up, but the circumstantial evidence they have is very distressing to them. The danger of a rapid adverse selection spiral is much more serious than they believed possible this summer. They would love it if the administration could shut down the exchange system, at least the federal one, until the interface problems can be addressed. But they know this is impossible.

And they believe, as the CMS officials I spoke with do, that all of these problems will not be addressed immediately. No one wants to say how long it might take, and no one would share with me what estimates they might be getting from their contractors (whom they no longer trust anyway), but there has so far been relatively little progress and it seems like everyone involved is preparing for a process that will take months, not weeks. An extension of the enrollment period for coverage, now set to end on March 31, seems to be almost taken for granted. A delay of the individual mandate penalty—which effectively begins in the middle of February—is not thought to be a crazy idea (though the people I spoke with said they have not seen internal preparations for such a move at this point). 

The nightmare scenarios, the “unthinkable options,” involve larger moves than that—like putting enrollment on hold or re-starting the exchange system from scratch at some point. No one seems to know how this could work or what it would mean, but everyone involved is contending with a far worse set of circumstances than they were prepared for. This is a major disaster from their point of view, not a set of glitches, and they simply do not know how long it will take to fix. They dearly want to see progress day by day, but they are generally not seeing it. 

The fate of these sites is the fate of Obamacare, for reasons that may not be immediately obvious. Health insurance is highly sensitive to the integrity and robustness of the market in which it is sold: though we don’t often think of it this way, health insurance is a financial service, a protection against risk, so the nature and structure of a given insurance plan is highly responsive to the scope and the character of the demand for it at any given time. It is in this sense rather different from most consumer products. This means it is not possible to think of the exchange websites as just sites where products are sold, and to believe that the product is fine but the site has some glitches. If the site doesn’t work, the product cannot work, and the insurance market created by the law cannot be sustained. So a great deal is at stake here, and it now seems a great deal is at risk.