Designing the Health Insurance Exchanges
I've said before that the Health Insurance Exchange is arguably the most important element of health-care reform. And I'm worried about it. Just like there's a strong and weak version of the public plan, there's a strong and weak version of the exchange. It's been hard to get people to care about the exchanges. So maybe this will help: The Health Insurance Exchange is where the public plan will live. And if the exchange doesn't survive, or thrive, then neither will the public plan.
The strong version is national, or at least regional. It's open to everyone: The unemployed, the self-employed, and any business, no matter the size, that wants to buy its workers in. There's risk adjustment to reduce the incentive for cherrypicking. And all this means that each exchange has many tens of millions of people, giving it tremendous advantages in scale, simplicity and standardization. With tens of millions of potential customers, insurers are eager to participate, and they will bid aggressively to ensure they're included in the market and compete aggressively to make sure they're successful within it. Over time, the combination of increased efficiencies and greater competition drive down costs in the exchange, which will lead more employers to use it, which will in turn give it more scale and bargaining power.
The weak version is state-based. It's open to only the unemployed, the self-employed and small businesses. Risk-adjustment, if it exists at all, is crude. With such a limited pool of applicants, insurers aren't driven to compete, and the efficiencies of scale and competition are minimal. It never really grows, and instead exists as a marginal policy to mop up those who aren't covered by employers.
Right now, the weak version is a lot likelier than the strong version. There are a couple of reasons for this. One is that there are tricky policy problems inherent in the exchange. The largest of these is adverse selection: If you open it to large employers, but the only large employers who join are those with aging and ill workforces, then costs will shoot up.
And then there are the political problems. A better exchange will attract more employers. And the more employers who join it, the more you'll hear opponents of reform darkly warn that "X million people will lose their current health insurance under the president's plan." That's not, as you might imagine, a strictly accurate way of explaining the situation: Employers choose our insurance now, and if they can get a better deal on insurance somewhere else, they will choose that. But it's still a concern for reformers, and a legitimate one.
But for all those difficulties, the better the exchanges work, the more we'll have actually reformed the health-care system. The weaker and smaller they are, the more we'll have just pumped extra money into the existing structure. The exchanges, in other words, are the key to reform. They're the key to regulating insurers and cutting down administrative costs. They're the key to productive competition and more choices for individuals. They're the key to the public plan. And they're getting a lot less attention then they deserve.
Photo credit: AP Photo/Jacquelyn Martin.
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