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How do the exchanges work?

Throughout the health-care debate, I've been steadfast in my belief that the exchanges are the most important element in the plan. They are, in effect, the bridge between the system we have and the system we want. So how, in the final bill, do they work?

The bill gives states the option of setting up one exchange for individuals and one exchange for small business or simply setting up one exchange that serves both. States can also partner with one another, so you could have California and Arizona and Colorado and Washington operating a single, mega-exchange. (They should name it Sauron.) In 2017, states can decide to open the exchanges to larger employers.

All this is a bit worrying. The exchanges will do better when they are bigger. That will give them a larger risk pool and more power to negotiate with insurers. The smaller and more fractured they are, the more likely you are to see insurance death spirals. But this is, for better or worse, left up to the states.

The bill envisions the exchanges not just as markets for insurance, but as data-rich markets for insurance with regulators providing a skeptical barrier to entry and misbehavior. That, the authors hope, is how you'll get real competition among insurers.

To help this along, the bill's first direction to the exchanges is that they must "implement procedures for the certification, recertification, and decertification." As that implies, the hope is that insurers who raise prices unnecessarily, or behave poorly, will be kicked out and only let back in when they forswear the offending behavior. There's no public option, but there is public oversight. A state with an ambitious exchange administrator could really do a lot with this provision.

Once insurers are actually in the exchange, there needs to be "a standardized format for presenting health benefits plan options in the Exchange." And that doesn't just mean the insurer's brochure. "The Secretary shall develop a rating system that would rate qualified health plans offered through an Exchange in each benefits level on the basis of the relative quality and price. The Exchange shall include the quality rating in the information provided to individuals and employers through the Internet portal." In other words, you should be able to tell the difference between insurance plans and see some numbers on how well they perform.

And the secretary isn't the only one gathering quality data: The bill also develops "an enrollee satisfaction survey system that would evaluate the level of enrollee satisfaction with qualified health plans offered through an Exchange" and post that information on the exchange Web site "in a manner that allows individuals to easily compare enrollee satisfaction levels between comparable plans." As I've put it before, the idea is to make the for health-care plans.

Finally, the exchanges will be the site for all the other elements of the system: That's where the insurance regulations are. That's where the risk adjustment is (an insurer who ends up with sicker applicants gets more money and an insurer who gets a healthier pool is paid less, thus ending the incentive to compete to avoid sick people). That's where the national, nonprofit plans are. And finally, that's where the subsidies are.

But it's not necessarily where all the insurers are. Insurers can still sell health-care insurance outside the exchanges. That raises the possibility of risk selection between the two markets: You could have insurers trying to snap up healthy people outside the exchanges, which leaves the unhealthy in the exchanges. The hope is that the lure of subsidies will give the exchanges a massive customer base from the start, and the promise of rules and competition and clear choices will make it a favored market from then on. As larger and larger employers enter the market, the exchanges will stop being an add-on to the system and become, in effect, the system.

The danger, however, is that they are instead fractured magnets for bad risks and poorer Americans and remain isolated outposts. The state-by-state nature of the administration even makes it possible that the exchanges will become powerful and competitive in some states (or consortium of states) while becoming backwaters in other states. Since the success of the exchanges is the difference between health-care expansion and health-care reform, it's worth watching closely.

By Ezra Klein  |  March 22, 2010; 5:49 PM ET
Categories:  Explaining health-care reform  
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Ezra Klein:

Now that the health care bill has passed. Could you please make predictions on how this will benefit the nation?

For example:

Do you predict that the national death rate will go down?

Do you predict that the national bankruptcy death rate will go down?

Do you predict that health care costs will go down?

I mean you have been such a strong advocate of this health legislation don't you think that providing metrics for your legislation to be judged is the ethical thing to do?

Posted by: croceamors | March 22, 2010 6:49 PM | Report abuse

Ha ha - it would be a pretty freaking incredible health care reform bill if it makes the national death rate go down! I think that you'll find that even with superlative health care the best you can get is a longer and hopefully healthier life, not immortality!

Posted by: lazza11 | March 22, 2010 6:58 PM | Report abuse

I predict that health care spending per person insured will not rise as fast as current projections indicate if we do nothing.

I predict that many more people will have some kind of insurance coverage.

I predict that life expectancy will go up in the long (20 year time frame) run.

How is that? And I am not even the great EZRA.

Posted by: srw3 | March 22, 2010 7:19 PM | Report abuse

I agree, and I hope Secretary Sebelius has already had a task force planning the implementation. Hiring someone from Massachusetts and/or bringing in Mark McClellan wouldn't be a bad move either.

Posted by: bharshaw | March 22, 2010 7:22 PM | Report abuse

"As that implies, the hope is that insurers who raise prices unnecessarily"

Ezra, you keep saying things like this, without ever showing that any insurers have raised prices unnecessarily. In all the hubbub over Anthem's rate increase in CA, no one has yet provided any evidence that it was unnecessary, and they've provided their data to Sebelius. So when are you going to stop these constant implications of improper behavior by health insurers?

Posted by: ab13 | March 22, 2010 8:22 PM | Report abuse

And the fact that the Mass connector, or the FEHBP, or CalPERS--none of them has brought down premiums a whit--that doesn't concern you.

Posted by: bmull | March 22, 2010 8:24 PM | Report abuse

I hate to have to point this out, but Sauron was the Shadow in the *East.*

Posted by: pj_camp | March 22, 2010 9:10 PM | Report abuse

You know what else would give the exchanges a massive customer base? Opening them to everybody. Instead, most of us have been told in no uncertain terms that we have to keep our current employer-provided insurance whether we like it or not. This has been sold as a benefit but it feels from this side more like a ball and chain.

Posted by: pj_camp | March 22, 2010 9:13 PM | Report abuse

"The bill also develops "an enrollee satisfaction survey system that would evaluate the level of enrollee satisfaction with qualified health plans offered through an Exchange" and post that information on the exchange Web site "in a manner that allows individuals to easily compare enrollee satisfaction levels between comparable plans." As I've put it before, the idea is to make the for health-care plans."

I've gotta say Ezra this is a really dumb idea. The stats will be slanted potentially due to really poor reasoning. If an insurer correctly denies something someone will give them a bad review. If an insurer pays something correctly but someone has a "crappy" plan the person will give them a bad review. If someone misunderstands how to use their coverage and pays more out of pocket costs than they think they should people will give it a bad review.

I'm sorry just like WebMD where people are now going around asking questions like they're a doctor, freaking out looking for additional tests to rule out dreaded diseases this is a BAD IDEA.

We already have this in a much more systematic and strucutred way. Its NCQA.

Posted by: visionbrkr | March 22, 2010 10:20 PM | Report abuse

Why do you insist on calling it an exchange? An exchange is a many-to-many marketplace where I can buy something one day and turn around and sell it the next. What you are describing is a one-to-many marketplace where individuals are only buyers. Maybe you should call it a bazaar.

If you can't even get the nomenclature right how do you expect to get anything else right?

Posted by: poshaugh | March 23, 2010 8:30 AM | Report abuse

What is the best way for me to monitor my own states progress with the exchanges? What can I do if I feel they are not doing it right, or doing enough?

I live in Utah so I know they will delay, delay delay before implementing as little as they can get away with.

Posted by: chrynoble | March 23, 2010 11:51 AM | Report abuse

Are insurance plans sold outside the exchange subject to the same regulations? (pre-existing conditions, rescission, free preventive care, community rating, etc.) Also, I see in many of the writeups about near-term effects of reform that "new plans" will be subject to the regulations first. What does "new plans" mean?

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Posted by: linjian76 | March 24, 2010 12:52 PM | Report abuse

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