By Timothy Stoltzfus Jost
The health insurance exchange is the centerpiece of the private insurance reforms in the Affordable Care Act (ACA). If the exchanges function as planned, they will expand coverage to more Americans, reduce insurance costs, and improve the quality of coverage and perhaps of health care itself.
Yet previous attempts at creating health insurance exchanges have had mixed results. In implementing the exchanges, administrators at the Department of Health and Human Services (HHS) and state policymakers must try to avoid the problems that have undermined previous exchanges. The following issues will be key:
- The exchanges must be protected against adverse selection. If only sick or high-risk individuals enroll in the plans offered, coverage will become expensive and participation will be unattractive to insurers. A number of provisions of the ACA seek to level the playing field between non-group and small group plans inside and outside of the exchange, and states can further enhance protections against adverse selection.
- There must be sufficient and widespread market participation. If an exchange becomes large enough, it can wield market power and offer economies of scale, stable risk pools, and protection against adverse selection. The ACA's insurance subsidies and mandates should encourage individuals to participate in the exchanges, and tax credits should encourage small businesses to do the same. The ACA also offers opportunities for expanding risk pools, which should be fully exploited.
- The market structure and geographic coverage of plans must be carefully considered. The ACA enables states to maintain separate risk pools for individuals and small firms, or to combine them in one pool. It also allows for the creation of regional or subsidiary exchanges. The advantages and disadvantages of pursuing these options must be carefully weighed.
- The exchanges should offer a range of plan options, but avoid complexity. The exchange model created by the ACA offers consumers structured choices. An important implementation decision will be whether to further structure choices or instead to offer the maximum choice and flexibility possible under the ACA.
- Plans must disclose their terms of coverage. Choice is only meaningful if it is informed. The ACA includes several provisions designed to maximize transparency and disclosure. For example, exchanges are required to rate plans based on their quality and price and to make this information available to the public. Operationalizing such requirements will be one of the most important implementation tasks.
- The exchanges should aim to increase competition among insurers and focus it on price, value, and quality. A number of provisions of the ACA, including the insurance subsidies, mandates, and penalties, should spur value-based competition and innovation in plan design.
- Exchanges must hold down administrative costs. The ACA requires exchanges to fulfill a number of administrative functions that will add to their operational costs. But they should be able to push down the costs to health plans of offering insurance by lowering the costs of marketing, enrollment, and underwriting. To succeed, exchanges also must find ways to reduce employers' costs.
- The primary role of exchanges is to create a market, but this needs to be balanced against their regulatory responsibilities. Exchanges must certify plans for participation. An important implementation choice will be whether they should maximize plan participation by minimizing certification requirements or use their certification authority to limit exchange participation to high-value plans.
- The exchanges will play an important role in administering subsidies to help low- and middle-income families afford insurance. In addition, they must coordinate with other public programs because participants will often move back and forth between the exchange, Medicaid, and the Children's Health Insurance Program.
- States must choose whether to operate their own exchanges or participate in regional or national exchanges. Although the ACA promotes state exchanges, it also creates fallback authority to create a federal exchange as well as a multistate insurance program and regional exchanges. Different solutions will be appropriate for different states. The federal government must be prepared to operate an effective exchange in states that decline the opportunity to do so themselves.
- Careful consideration should be given to governance. Since the ACA provides little guidance as to how exchanges should be governed, HHS and the states must carefully consider how the entities that govern exchanges should be structured and how they should relate to other state and federal institutions.
- Exchanges must be employer-friendly. It will be crucial for exchanges to offer employers a meaningful choice among health plans as well as convenience.
- To succeed in the long run, exchanges must help slow growth in health insurance costs. This will be possible only if exchanges are able to maximize value-based competition, choice, and participation and minimize administrative costs and adverse selection.
The theory behind health insurance exchanges—that they can create sizeable and stable risk pools, minimize adverse selection, wield bargaining power with insurers, and hold down administrative costs, all while providing greater choices to enrollees—is sound. But their success will depend on avoiding the pitfalls of earlier efforts and making wise implementation decisions. A forthcoming report will provide specific recommendations on how to promote their success.