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The New Health Dialogue

A Blog from New America's Health Policy Program

HEALTH REFORM: National or State Exchanges?

Published:  January 14, 2010
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Exchange? Connector? Gateway? These terms mean little to Americans lucky enough to escape the day to day health reform “sausage making” inside the beltway. But legislators on Capitol Hill are taking how and where to create a new insurance marketplace (a.k.a. exchange, connector, or gateway) very seriously. So much so that the issue is one of the major yet-to-be decided questions hanging over Democrats as they try to get a health reform bill on President Obama’s desk before the State of the Union speech. 
So before we run down the pros and cons of the House and Senate approaches to setting up an exchange, let’s be crystal clear about what an exchange is and is not. 
The exchange is a new marketplace where individuals, small businesses, and workers at larger businesses that do not offer them affordable health insurance can shop for quality coverage. Insurers who want to compete for business in the exchange would be prohibited from denying people coverage, refusing to cover pre-existing conditions, or charging customers more because they are sick or have a risky family history. Buying insurance will also be simpler because the exchange will offer customers easy-to-understand information comparing plans.  
The exchange is not a public plan or a government takeover of health care. People would have their choice of health insurance. The vast majority (if not all) of the choices in the exchange would be private insurance companies like Aetna and Blue Cross Blue Shield (and private plans can be for profit or nonprofit). The government’s role would be to set -- and make sure insurers follow -- the rules of the road. 
The House and Senate legislation have the same goals for their exchanges -- a regulated, yet competitive, consumer-friendly marketplace. The main point about which the House and Senate differ is whether the exchanges should be organized on the state or federal level, with President Obama and many liberals, especially in the House, favoring federal over state control. This is an important question. But when you look at the issues, this debate, like most debates in Washington, may be more about politics than technical policy.
In addition to more federal control, proponents of a federally-organized exchange seek a few additional benefits: tougher insurance regulation (by federal as opposed to state regulators), a larger risk pool, and streamlined administration. These are certainly worthy goals. But we should also consider a few practical questions:
Who can best regulate health insurance markets? At present, the federal government does not have the functional knowledge or the manpower to regulate insurance nationwide. While it could certainly build this capacity over time, it would need to rely heavily on state officials who know how local insurance markets operate, who the players are, and what to watch. As our Program Director, Len Nichols, said in testimony before Senate HELP Committee last summer, it might be smarter to leave insurance regulation to the states, while enhancing the regulatory capacity of the federal government if states do not fulfill their obligations. On the flip side, if the federal government were charged with operating and regulating the exchanges, it would need to work in partnership with state regulators on the ground.
How do we create a stable risk pool? The conventional wisdom is that the larger the risk pool, the better. Yet, actuaries tell me that not only are some smaller risk pools -- of say, 100,000 -- safe bets, but also that a national versus state exchange has little impact on how most insurers will choose to pool risk. Remember, with the exception of the proposed national plans that would be negotiated by the Office of Personnel Management (OPM), the vast majority of health plans offered in the exchange will not be available in every market. A national versus state exchange will not influence where an insurer offers insurance. So people in New York, for instance, will still be unable to access Kaiser or GroupHealth coverage. New Yorkers, therefore, will not be in the same risk pool as many people in California or Seattle, despite the national exchange. Bottom line: the national exchange’s benefit to the risk pool might not be all that it is cracked up to be, but a national exchange certainly wouldn’t cause harm in this regard either.
How can we minimize administrative burdens of a new insurance marketplace? Current House language establishes a national exchange with the ability for states to opt-out to administer their own exchanges, while the Senate looks to states to set up the exchanges with backup from the federal government if they fail. Federal and state governments have roles to play under both of these options. A national exchange is certainly going to need local offices (that mimic what state exchanges would look like), and state-based exchanges will require serious infrastructure on the federal level to protect Americans in states opposed to reform (that resemble a federal exchange). In the end, the difference administratively between the two approaches might not be that far apart. 
Who should we trust to make sure the insurance market is efficient and fair? This is truly the crux of this debate. If we give too much power to the states, can late-adopters and outright opponents stand in the way of progress? (My colleague Allison Levy will post shortly on some of the states already voicing protests.)  And if we centralize the exchange, do we risk thwarting state ingenuity and local knowledge?  Many people point to the Federal Employees Health Benefits Plan (FEHBP) as a federal exchange that works reasonably well, while others point to Massachusetts as a state model of success (both are, truth be told, arguably special cases).  

Like many on Capitol Hill, this decision will likely come down to politics, votes, and how the majority of Congress views the role of state and federal governments in domestic policy.  But Americans should sleep easy. The technical implications of these policies are not as divergent as they may seem.  With the right combination of state flexibility and federal infrastructure (and funding), either a state- or federally-based exchange -- or one of the hybrids models reportedly being considered by congressional negotiators -- can create a fair and efficient insurance market for all.


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