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Using Insurance Exchanges to Govern Health Insurance Markets in Multipayer Systems

A central component of the Affordable Care Act is the establishment of state-based health insurance exchanges. Now under development in many states, the exchanges are scheduled to be operational by January 1, 2014, and will be available to individuals and small businesses. The exchanges will act as regulated marketplaces, in which consumers can search for and compare standardized health plans. Individuals with incomes below certain thresholds will be eligible for tax credits to subsidize purchasing insurance through the exchanges. It is hoped that the exchanges—in combination with other market reforms, such as prohibiting exclusion from plans based on preexisting conditions (known as guaranteed issue) and a ban on the practice of charging higher premiums based on age, gender, health status, and other characteristics (known as community rating)—will help correct current issues plaguing individual and small business insurance markets, such as the difficulty of attracting both healthy and unhealthy participants.

Insurance exchanges are not new. In the U.S., Massachusetts and Utah each operate an exchange, as does the Federal Employees Health Benefits Program. Internationally, the Netherlands and Switzerland achieve near-universal coverage for their populations through insurance exchanges. Their systems share a number of elements with the Affordable Care Act, such as an individual mandate, national standards for basic coverage, and guaranteed issue and community rating.

As the U.S. exchanges are established and begin operation, the experiences of the Netherlands and Switzerland could offer lessons on how best to use exchanges to improve insurance markets and health system performance.

Further Reading

A National Insurance Exchange in the Netherlands

In 2006, the Netherlands implemented a series of reforms designed to introduce competition, transparency, and consumer choice into its health care system. Central to these reforms was the transition to a system in which all individuals were required to buy a standard insurance package from private non-profit or for-profit insurers through a national insurance exchange. The system is primarily financed through income-based employer contributions—which are centrally collected and distributed to insurers through a sophisticated risk-adjustment formula—and individual premiums paid directly to the insurer, which are community-rated but can vary according to the chosen size of the deductible. Roughly 40 percent of low- and middle-income households receive a premium subsidy to ensure affordability. The standard insurance package is comprehensive though almost all residents buy supplemental insurance for additional services, such as dental care for those 18 years and older.

The reforms have led to some positive developments. Greater competition, combined with risk adjustment, have reduced premium differentials among insurers, as well as their operating costs. In addition, quality measurement and reporting now play an increasing role in contracts between insurers and providers, particularly hospitals. However, the insurance reforms are still a work in progress, and several issues have received attention—most notably, the necessity for good quality indicators, as well as better purchasing and payment methods. Furthermore, health care costs have continued to rise faster than inflation. The private insurance market has become heavily consolidated, with four insurers controlling 90 percent of the market, potentially raising concerns about the degree of competition. Finally, approximately 3 percent of the Dutch population is either uninsured or has defaulted on their premium payments, raising questions about how to better enforce the individual mandate.

Further Reading

Regional Insurance Exchanges in Switzerland

Since 1996, everyone in Switzerland has been required to buy a standard, comprehensive insurance package from a private insurer in their canton (similar to a U.S. state). Premiums are community-rated and low- and moderate-income households can receive subsidies to make coverage more affordable. A relatively crude risk equalization scheme redistributes much of the funding between insurers based on their enrollees’ age, sex, and canton. In 2012, this risk-adjustment formula will be modified to include hospital and nursing home stays in the previous year. Many people also buy supplemental insurance for services such as dental care, increased choice of provider, or hospital amenities. Insurers are not allowed to make a profit from the standard package, but may profit from the supplemental plans.

Unlike in the Netherlands, the Swiss insurance exchanges operate on a cantonal rather than national level—similar to how the U.S. exchanges will be state-based rather than federally run. Within regions (up to three per canton), an insurer’s premiums for the standard insurance package can vary only by age and the size of the deductible. Yet, wide premium variations persist among insurers within the same region. This variation is considered evidence of insufficient risk adjustment, which rewards insurers for enrolling healthier people, as well as the fact that consumers face barriers to switching plans (only 3% to 5% switch annually, despite guaranteed issue).

The Swiss insurance market is not as heavily concentrated as in the Netherlands, but rather is heavily fragmented, with the top five insurers making up 43 percent of market share. As in the Netherlands, a small proportion of the population (about 2% or 3%) is uninsured or has defaulted on their premium payments.

Further Reading

Publication Details



D. Squires, Using Insurance Exchanges to Govern Health Insurance Markets in Multipayer Systems, The Commonwealth Fund, June 2012.