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Health Insurance Exchanges: The Most Important, Undernoticed Part of Health Reform


If I had to choose the most important aspect of health reform, it wouldn't be the public plan. Nor would it be the individual mandate, or the employer mandate, or the employer tax exclusion, or the Medicaid expansion. It wouldn't, in fact, be any of the issues that are dominating the political conversation.

Rather, it would be the Health Insurance Exchange. This idea goes by a lot of different names. Massachusetts has a variant called the Connector. Ted Kennedy's bill talked about Gateways. Ron Wyden and Bob Bennett's legislation calls for Health Help Agencies. The name is fundamentally unimportant. But the concept itself is the bridge between the health system we have and the health system we want.

The central problem facing health reformers is a simple one: America's health-care system is a mess. But a lot of people rely on it very heavily. But how do you merge the need for root-and-branch reform with the public's fear of rapid change?

The answer, put simply, is that you don't institute rapid change. You don't take what people have. But you give them the option to trade up to something better. As the theory goes, if the current system really is so inefficient, and your alternative really is so much better, then the lure of lower costs and better quality will persuade Americans to switch to the new system of their own accord.

This was a little-noticed wrinkle in President Obama's speech to the American Medical Association yesterday. Traditionally, reformers promise that if you like what you have, you'll be able to keep it. Obama echoed that vow. But he also said that "if you don’t like your health coverage or don’t have any insurance, you will have a chance to take part in what we’re calling a Health Insurance Exchange.” That is, in effect, the opposite promise: If you don't like what you have, you'll be able to change it.

The vehicle for that promise is the Health Insurance Exchange.

Imagine that you decided you didn't like your current health insurance and you wanted to change it. Your employer very likely doesn't offer any alternatives. If you do have a choice, it's almost certainly not between more than three different plans.

You could, of course, spit at your employer's offerings and go buy insurance on your own. But the individual insurance market is a scary place. You're on your own, so you have no bargaining power with insurers. Providers can simply refuse to sell you health insurance, or they can jack up your prices because of past illness. They can sell you a plan that's insufficient for your needs and that's thick with loopholes and technicalities. A favored trick, for instance, is to sell plans that don't cover any preexisting conditions: If you go to a doctor complaining of back pain, but it turns out you've felt back pain before, they don't have to cover any costs relating to the ailment.

The Health Insurance Exchange gives you another option. Unlike your employer, it will have a wide array of competing providers offering different plans with varying benefit levels, emphases and price tags. Unlike the individual market, insurers won't be able to discriminate based on your health history or your future risk. Plans will have to be certified as meeting a minimum level of comprehensiveness. Plans that routinely screw over members will lose customers to competing insurers.

The Health Insurance Exchange, combines the benefits of choice that are theoretically available on the individual market with the bargaining power and scale that's generally accessible only in large employers (and the exchange will, in theory, have more bargaining power than even the largest employers, as it will have a much larger base of customers). You also have a space to test out innovative ideas that might make the market better, like Sen. Jay Rockefeller's (D-W.Va.) insurance rating agency, or the public insurance option. You can standardize billing and payment methods and force the adoption of electronic medical records.

And what happens when you introduce productive competition, efficiencies of scale, more innovation and increased consumer power into a market as dysfunctional as the current situation for health insurance? In theory, you get lower prices and higher quality. And if the Health Insurance Exchange has lower prices and higher quality, more individuals will use it and more companies will buy into it. And if that happens, then the efficiencies of scale should increase, and so should the pace of innovation (as the rewards will be greater with more customers), and so the Health Insurance Exchange should further outpace the other markets, thereby attracting yet more customers, thereby further accelerating the virtuous cycle. Eventually, it could become the country's primary insurance market.

To be sure, the exchange faces considerable difficulties. At the beginning, it's likely to be limited to individuals, the self-employed, and small businesses. Otherwise, experts worry -- probably correctly -- that only businesses with sick and expensive workers will buy in, and the costs of the exchange will start high. Instead, the hope is to get it on stable footing and then progressively open it to new groups. Its success isn't a sure thing. It's a theory. But it's arguably the best one we've got.

(Photo of Obama speaking before the AMA by Pablo Martinez Monsivais of AP Photo)

By Ezra Klein  |  June 16, 2009; 3:24 PM ET
Categories:  Health Coverage , Health Reform , Health Reform For Beginners  
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I'm highly sceptical of the benefits of an exchange, Medicare Part D has an exchange which no one can possible understand. It really does not work as a proper market because it is an uninformed market.

You got two ways to do reform. One is highly regulated the market to make sure it does what it needs, dutch system. Or just create a good government insurance, medicare/ public plan. Government programs are very hard to undo, as we have seen in banking, slowly eroding regulation peice by peice is much easier.

I don't think you can ever trust a health care system in America that is base only on a high level of regulation, not with Republicans trying to de-regulate every chance they can. Give them 8, 10, 20 years and they will start under the radar tearing down the regulation peice by peice.

Posted by: JonWa | June 16, 2009 3:40 PM | Report abuse

Trade up to what? The average health care spending for a healthy family of four is now $16,771 (Milliman Medical Index), and that doesn't include insurer administrative waste. A private health plan that actually works (not an under-insurance product) is no longer affordable for families at even 500% of the poverty level. Inefficient private health plans are an obsolete method of financing health care. We really do need to end the waste and inequities of health care financing, beginning with the establishment of a universal, equitably-funded risk pool: an improved Medicare for all.

Posted by: dmccanne | June 16, 2009 3:55 PM | Report abuse

A couple key questions:

(1) Would people buying on these exchanges be able to take advantage of the tax deduction?

(2) How many mandates would be required for these insurance exchanges? Would the mandates be determined by Congress and all their pet health causes, or would the determiners of mandates be insulated from special interests?

(3) If these exchanges have guaranteed issue, would there be a mandate for all under-employed Americans to use the exchanges?

(4) If there is a mandate, why isn't this just screwing young people who will be forced to subdizidize old people on these exchanges, on top of the already burdensome FICA tax and Medicare tax?

(5) Why not simply eliminate the employer-based system and mandate use of the exchanges? That way you have bargaining power and quality control, the only good parts of the employer-based system, but you also gain consumer choice, the main negative of the employer-based system.

(6) If these exchanges are so great, why is Wyden-Bennett dead?

Posted by: Dellis2 | June 16, 2009 4:17 PM | Report abuse

To put it another way I think the love of choice is misquided. It is better to fight to make sure there is at least one good option instead of 100 bad ones.

The only good thing about the exchange is it is the slow road to finally ending the stupid employer health care system. I think it is very ironic that Republicans fight the public option because business would switch to it and people would lose their current coverage, but want to tax benifits and not have "pay or play". Both would dramatically cause a decline employer health insurance

Posted by: JonWa | June 16, 2009 4:24 PM | Report abuse

Okay, so this is an interesting post. Thank you.

I see the exchanges the way I see credit unions. Is my understanding correct? That is, government provides some benefits to credit unions (for example, deposit insurance), but for the most part, credit unions are nonprofit banks. Is that the way the exchanges will work?

If so, I don't see the wide benefits unless the laws are clearly able permit anyone to join any exchange. That's the key. If the exchange is limited to geography -- certain towns, regions, cities, etc. -- forget it. There won't be any buying power. And, if the exchanges are allowed to omit overweight people or whatever, the only folks in the exchanges will be healthy ones. This will drive up the cost in the employer-side insurance policies.

But, if anyone in the country can get into any exchange (and each exchange is required to disclose material terms that anyone can read and figure out), it seems like a good idea.

The trouble is this: currently, insurers have reserve requirements that I suspect exchanges will have, too. This way, in the event that there is an outbreak or whatever, there is enough capital to pay claims. Will the government subsidize the exchanges at all? If not, what, exactly, is the government providing here? It would essentially allow anyone to form any sort of nonprofit insurance company.

That seems like a very small benefit. Is that really all that's keeping the 45,000,000 from being insured -- the profit margin of an insurance company? Or, is it the very high cost of medical care?

Posted by: teoandchive | June 16, 2009 4:55 PM | Report abuse

How does limiting the exchange to individuals, the self-employed, and small businesses solve the problem of only sick and expensive workers potentially buying in?

Posted by: nospam778 | June 16, 2009 4:55 PM | Report abuse

How I've heard these exchanges/gateways/connectors described is virtually an "Orbitz-type" system for health plug in some info, and like Orbitz, several options appear. Is that assessment somewhat accurate?

Posted by: AnnandaleAnnie | June 16, 2009 5:00 PM | Report abuse

More noise to block the healthy sound of single-payer.

Posted by: perhapsnot | June 16, 2009 5:04 PM | Report abuse

why is that different than now? seriously. There's sort of competition, but not really.
Is the government going to force insurers to do stuff they don't want to do?
Why are we so concerned about insurance anyway? Don't we want everyone to have ACCESS to healthcare? Who cares if people have insurance at all?
Cause the idea of 'oh no!! all these people don't have INSURANCE' is a red herring. Not that they have it easy , mind you , but insurance is different than ACCESS.
In any event, we're on the path to having it all government run and anything you want you'll have to run by them. And in that instance, more than 50% of our economy will then be government run.
Have fun and good luck.

Posted by: atlmom1234 | June 16, 2009 6:23 PM | Report abuse

Ezra, your so-called exchanges are like Mass. Connector which only has Blue Cross and a few other little insurance companies. The cheapest plan from Blue Cross is $324 a month for a 30-year-old male. This cheapest BLUE plan is an HMO. In contrast the same person can get HSA insurance in Lansing, MI for $57 a month.

The exchange cost is 550% more than the free and open market.

Ezra, you say buying individual insurance is so scary. Trust me ezra, it's so simple a caveman could do it. Do you need help buying Blue Cross from an exchange too?

The HSA insurance also comes with a FREE tax free HSA so all medical, vision and dental expenses can be paid with pre-tax dollars.

Ezra, if you need help just go to and we will hold your hand and get you the security of portable individual HSA health insurance. Your current coverage will terminate if you become too sick to work ezra.

That's crazy, a wonk with employer-based health insurance that thinks buying insurance in the free and open market is scary. You have me rolling ezra.

Posted by: RonGreiner | June 16, 2009 6:44 PM | Report abuse

99.9% of Americans will have NO CLUE how to deal with this. The laws, the regulations. Ezra do you expect that all Americans are as informed as you on the subject? Most Americans won't have a clue how to deal with it.

It will only slightly less complicated than private insurance and as complicated as medicare. You'll also have NO INSURNACE AGENTS so good luck trying to navigate your way through the system. I'm betting medical bankruptcies rise with this system.

Posted by: visionbrkr | June 16, 2009 7:44 PM | Report abuse

How does the exchange work to its best advantage w/o a public health insurance plan option?

Posted by: eRobin1 | June 16, 2009 8:14 PM | Report abuse


If nothing else, we now know that you know who writes this blog.

Posted by: newjersey_lawyer | June 16, 2009 8:50 PM | Report abuse

the usual definition of an "exchange" is a market place, not a product or plan that one purchases from competitive suppliers in a market place. The Mass. "exchange" is a market place.

The exchange can have certain rules/conditions for the competitors. the rules might say, you have to accept all without screening for preconditions; you can't discriminate due to prior condition; you have to use compensation reforms different from fee-for-service, etc. All the competing plans would have to meet these conditions if they wanted to be eligible for purchase on the exchange.

What Ezra seems to be describing is the conditions he'd like to see for competitors in the exchange, but there's no rule that anyone has to be a competitor in the exchange. And without a robust public option that meets all the conditions, there is unlikely to be any/many competitors who would show up.

You can induce competitors to list on the exchange, but subsidizing premiums for any consumer that meets the non-wealthy enough criterion. But that doesn't reduce costs. it just forces the govt to pay the subsidies, and the competitors will take that into account in the prices they offer. Again, without a strong public option to push prices lower, there's no reason for non-public options to push prices down. They won't be affected by "competition," because the market is typically highly concentrated; efficient competition won't occur with only two or three competitors.

The post suggests the exchange is important because it assumes it functions as an efficient competitor, but that's the public option's job. The exchange is just the market place -- like a farmers' market. so unless these terms mean something different from their ordinary meaning, I don't see how the exchange really achieves all the objectives attributed to it in the post.

Posted by: Scarecrow2 | June 16, 2009 9:39 PM | Report abuse

And where does the "market power" come from. Individuals seeking a plan don't have market power. The plan providers have the market power. Unless there's strong competition (e.g., from many plan providers and/or a strong public plan), they will exercise their market power.

Individuals shopping in a the exchange do not increase their market power merely by shopping in the exchange, because they aren't shopping as united group. They're individuals, or small businesses, and they have no more bargaining power than they had without the exchange.

So unless Ezra is describing something different from usually understanding,it's not clear how the consumers gain market power in this exchange.

One could conceive of a pool, in which the pool operater became the single purchaser for all individual consumers buying from the pool. In that structure,, the pool selects the most cost-effective plan/provider, and that purchasing power benefits the individuals. Of course, this only works is supplier realize that many, many consumers can be had only be winning the pool's competitive auction. And the auction must be competitive, driving the suppliers' bids down to marginal costs -- if they function as an oligopoly this won't happen. So how is this to work. What am I missing?

Posted by: Scarecrow2 | June 16, 2009 9:49 PM | Report abuse

"Unlike the individual market, insurers won't be able to discriminate based on your health history or your future risk."
This seems ridiculous as a model for any insurance. If you can't price risk, you're not an insurance plan.
One strategy would be to sign up for the cheapest plan possible now, and then go to the exchange to buy something that pays for more of the coverage if I develop an expensive condition. Since the regulation forces the provider to take all comers, you break the risk model.

I think the problem is that many people don't really want health INSURANCE. They want someone else to pay for healthcare that they can't afford. All of these regulations seem destined to make healthcare insurance into something other than insurance.

Posted by: staticvars | June 16, 2009 10:21 PM | Report abuse

What about "the exchange" makes it different and better than what the "free market" offers today? How is lumping these plans together under a government-named program going to help the individual get better insurance?

The "free market" should be doing all the things you say this "exchange" will do. If you look at those online insurance bidders, you get lots of options - but when it's time to sign the deal, there's a whole lotta stuff that happens to jack up the rate between what you see first and what you're asked to pay in the end.

What will ensure that the insurers will not be able to weed out the sick - those with those pesky pre-existing conditions - from affordable insurance?

The "exchange" sounds like a new name for nothing new at all.

Posted by: anne3 | June 16, 2009 11:17 PM | Report abuse

Are you a healthcare professional who is committed to a robust public health plan option? Please join us in petitioning Congress!

We are a diverse group of healthcare professionals and students of the health professions that support the choice of a public health insurance plan as an essential component of comprehensive health care reform this year.

Posted by: NPAlliance | June 17, 2009 12:02 AM | Report abuse

The previous commenters have done a good job demolishing this non-idea so I'll just concentrate on the myth about "public's fear of rapid change".

Here is a question from a Washington Post - ABC poll:
"Which would you prefer: the current health insurance system in the United States, in which most people get their health insurance from private employers, but some people have no insurance, OR, a universal health insurance program, in which everyone is covered under a program like Medicare that's run by the government and financed by taxpayers?"

62% favored Medicare for All; 33% were opposed. That's pretty decisive. And this is with the facts suppressed. Other questions in the poll show that the 62% supporting the universal program mostly believe it will cost more when it will cost less. They believe they won't be able to pick their doctor when Medicare allows much more freedom than most private plans. They believe there will be long waiting times when this is a myth. And still they support a universal plan like Medicare for All by 2 to 1.

Posted by: lensch | June 17, 2009 12:13 AM | Report abuse

If the political landscape is as lensch suggests, then why not propose a federal referendum on a number of options? That would be very hard for legislators to oppose.

Posted by: albamus | June 17, 2009 5:04 AM | Report abuse

Yeah, why not?

Seriously though, I afraid that outside of California (and look at where they are), referendums (referenda?) are generally not done in the US.

Posted by: lensch | June 17, 2009 8:38 AM | Report abuse

Are you a healthcare professional who is committed to a robust public health plan option? Please join us in petitioning Congress!

We are a diverse group of healthcare professionals and students of the health professions that support the choice of a public health insurance plan as an essential component of comprehensive health care reform this year.

Posted by: NPAlliance | June 17, 2009 8:49 AM | Report abuse

"You could, of course, spit at your employer's offerings and go buy insurance on your own. But the individual insurance market is a scary place. You're on your own, so you have no bargaining power with insurers."

Just curious, Ezra: When was the last time you were actually in the individual health insurance market? It's not really that scary if you know how to use, oh, say Google.

I almost did spit at my employer's offerings at my last job and I found individual and association based plans that would have aptly served my needs. Ultimately, I went with the high deductible HMO+HSA that my small business employer was offering and LOVED it. I had more direct choice in how my insurance dollars were spent.

Let's consider my insurance options if I lived in Massachusetts versus Virginia:
Ok, so let's check out . As a 27 year old female living in Arlington, Virginia, I get a choice of about 100 plans ranging in monthly coverage cost from $63 to $776.

The real kicker for you, Ezra, is that over 48 plans are offered that are less than the MINIMUM premium I find through the Massachusetts Connector (as a 27 year old female in Springfield, Massachusetts). Seriously, check it out for yourself:

Through the Massachusetts Connector, I only get the choice of about 20 plans ranging in monthly coverage cost from $186.51 to $475. 20 is a far cry from the nearly 60 PLANS I get to choose from under $475 living in Arlington through Http://

Another disservice to the smart health insurance shoppers of Massachusetts: If you're trying to use, you can't. The site apologizes and then send you to Blue Cross Blue Shield- Massachusetts. How 'bout them apples?

Give me over anything resembling the Massachusetts Connector site ANY day. The former is a consumer driven solution, the latter is not.

Sadly, you don't even take into account the fact that for less than $186 per month you could go see a nurse practitioner or physician at a retail health care location (one of the hundreds of urgent care locations at a CVS, Walgreens, Walmart, or independent care location) EVERY month if you wanted to. There is no discussion of this aspect of the debate and I don't understand why. These locations are a consumer driven solution that's emerged in the last five years. And don't worry, if you're forced to have it, they do take insurance. (Obviously, this greatly increases their costs because of paperwork processing.)

The situation begs the question for healthy individuals: Aside from a very high deductible catastrophic care plan to cover high cost treatments, why are we shelling out for insurance that covers routine CARE that we could pay for out of pocket for less than the cost of today's typical premiums?

There is no reason why we shouldn't have more health CARE options rather than less, and it looks like the government will be doing a fair bit of limiting of our health CARE access in the future. That's called rationing, right?

-Elizabeth A. Terrell

Posted by: ElizabethATerrell | June 17, 2009 9:50 AM | Report abuse


It’s official. America and the World are now in a GLOBAL PANDEMIC. A World EPIDEMIC with potential catastrophic consequences for ALL of the American people. The first PANDEMIC in 41 years. And WE THE PEOPLE OF THE UNITED STATES will have to face this PANDEMIC with the 37th worst quality of healthcare in the developed World.


We spend over twice as much of our GDP on healthcare as any other country in the World. And Individual American spend about ten times as much out of pocket on healthcare as any other people in the World. All because of GREED! And the PRIVATE FOR PROFIT healthcare system in America.

And while all this is going on, some members of congress seem mostly concern about how to protect the corporate PROFITS! of our GREED DRIVEN, PRIVATE FOR PROFIT NATIONAL DISGRACE. A PRIVATE FOR PROFIT DISGRACE that is in fact, totally valueless to the public health. And a detriment to national security, public safety, and the public health.

Progressive democrats and others should stand firm in their demand for a robust public option for all Americans, with all of the minimum requirements progressive democrats demanded. If congress can not pass a robust public option with at least 51 votes and all robust minimum requirements, congress should immediately move to scrap healthcare reform and demand that President Obama declare a state of NATIONAL HEALTHCARE EMERGENCY! Seizing and replacing all PRIVATE FOR PROFIT health insurance plans with the immediate implementation of National Healthcare for all Americans under the provisions of HR676 (A Single-payer National Healthcare Plan For All).

Coverage can begin immediately through our current medicare system. With immediate expansion through recruitment of displaced workers from the canceled private sector insurance industry. Funding can also begin immediately by substitution of payroll deductions for private insurance plans with payroll deductions for the national healthcare plan. This is what the vast majority of the American people want. And this is what all objective experts unanimously agree would be the best, and most cost effective for the American people and our economy.

In Mexico on average people who received medical care for A-H1N1 (Swine Flu) with in 3 days survived. People who did not receive medical care until 7 days or more died. This has been the same results in the US. But 50 million Americans don’t even have any healthcare coverage. And at least 200 million of you with insurance could not get in to see your private insurance plans doctors in 2 or 3 days, even if your life depended on it. WHICH IT DOES!

Contact congress and your representatives NOW! AND SPREAD THE WORD!

God Bless You


Posted by: JackSmith1 | June 17, 2009 12:45 PM | Report abuse

What the Greiner/Terrell axis don't address is the following:
Purchasing coverage isn't purchasing health care nor is it really purchasing insurance-it's a gamble that the provider won't find a way to cancel coverage in the likely event that you get sicker than is profitable for them. Is chemotherapy a treatment or a prescription drug?
Even the best privately purchased insurance has limits that could leave you crippled or dead because you can't afford treatments that they refuse to cover. That's rationing to the nth power. Remember when the emergency rooms were dumping people who couldn't afford treatment into cabs to be sent off to die quietly? That's you and me when the insurance provider decides not to cover you any longer, aka recission.
Look at Chris at Americablog's experiences contrasting the French system and the US extortion program. Look at Sicko. Look at how much Blanche Lincoln gets from insurance companies to defend their racket. Then look at what you pay, how much it increases every year, and how your coverage is diminished as the prices increase.
We are the victims of an extortion racket of vast proportions that is destroying our economy and our nation no less than the mafia and other forms of corruption. We need to stand up on our little hind legs and demand some services for the taxes we pay and the hassles we put up with. There are millions of people who would be doctors for half the money if they didn't have to deal with crooked insurance companies billing practices and claims procedures. Let's make Obama do what's right for a change.

Posted by: sparkplug1 | June 17, 2009 2:40 PM | Report abuse

You gotta be kidding me, Ezra. You are that much of a free market fantasist? You just lost 90% of your credibility with me, a formerly loyal reader.

How well has the NASDAQ stock exchange worked for the average small investor? How well did the real estate market work over the last decade?

And those markets consisted entirely of optional transactions with substantial market information in plain view.

More to the point, how are we all enjoying our choice of cable or satellite TV? Prices dropped like a stone, new technologies flew at us daily, and we can pick our channels a la carte, changing daily? NO? But that was the purpose of the '96 Act, wasn't it?

The health insurance exchange will be meaningful, IF THERE IS A STRONG PUBLIC OPTION TO MOVE TO.

Without a take-no-prisoners public plan, "Choice" just a plaything to be manipulated by lobbyists.

Welcome to the Village, Ezra. You sold out quick.

Posted by: Dollared | June 17, 2009 4:04 PM | Report abuse

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