Ins and outs of health insurance exchanges

The Supreme Court is expected to rule later this month on a central part of the Affordable Care Act, the individual mandate that would require everyone to purchase health insurance. While the individual mandate is important, health insurance exchanges are another key feature of the legislation. They would allow individuals and small businesses to band together and use strength in numbers to purchase plans at lower costs. The exchanges are to be set up on a state-by-state basis. Some states have been dragging their feet or outright refusing to begin the process, but others have been moving rapidly.

When it comes to setting up a health insurance exchange, states face three main challenges, said Leemore Dafny, an associate professor of management and strategy and expert on health insurance exchanges. (Dafny will be on leave from the Kellogg School next year to serve as a deputy director at the Federal Trade Commission’s Bureau of Economics.) The first is “developing a governing authority, and identifying leadership for that entity,” a process that can be fraught with politics. Next the state has to determine how prescriptive it will be regarding plan specifics. “Do they emphasize the quality? The lowest bid? A combination of the two?” she said.

Finally, states have to determine how risks will be spread across participating insurers. Since insurers have no choice in customers—preexisting conditions are not grounds for denial—one could become overloaded with sick people. For the exchange to function properly, other insurers would compensate that company for its outsize share of the risk burden, Dafny said.

Once an exchange is up and running, states can still tweak their approach. “Massachusetts has been refining theirs regularly—most recently, by constraining the proliferation of plan variations to reduce overwhelming choice and to facilitate price comparisons,” Dafny said. That removes some of the pressure to create a perfect exchange from the start.

Health insurance exchanges will likely have a significant impact on how people shop for health insurance. Their scope is limited for now, since current exchanges are aimed toward individuals and small businesses. Employees of large firms, which typically provide health coverage, are welcome to apply, but likely won’t—they would probably pay more than they currently do through their employer.

But in the future, new exchanges could be geared toward just such people. Dafny explored the idea in a recent research paper. She discovered that employees of large firms participating in an exchange would give up at least $1,240 in employer subsidies for the opportunity to select the plan of their choosing. In this case, employers would benefit by saving money, Dafny noted, and employees would be happier by gaining access to a plan that they feel suits them better.