Ins and outs of health insurance exchanges
Skip to content
Jun 20, 2012

Ins and outs of health insurance exchanges

By Tim De Chant

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.

Editor’s Picks

A mentor puts capes on proteges.
Careers

Podcast: How to Be a Great Mentor

Plus, some valuable career advice that applies to just about everyone.

Kids decide whether to buy water or soda.
Marketing

A New Way to Persuade Kids to Drink More Water and Less Soda

Getting children to make healthy choices is tricky—and the wrong message can backfire.

Computational Social Scientists discuss solutions.
Innovation

How Can Social Science Become More Solutions-Oriented?

A conversation between researchers at Kellogg and Microsoft explores how behavioral science can best be applied.

An entrepreneur enters an established company.
Innovation

Buying a Company for Its Talent? Beware of Hidden Legal Risks.

Acquiring another firm’s trade secrets—even unintentionally—could prove costly.

Careers

Take 5: Tips for Widening—and Improving—Your Candidate Pool

Common biases can cause companies to overlook a wealth of top talent.

Drug innovation at a pharmaceutical company
Innovation

Everyone Wants Pharmaceutical Breakthroughs. What Drives Drug Companies to Pursue Them?

A new study suggests that firms are at their most innovative after a financial windfall.

Careers

4 Key Steps to Preparing for a Business Presentation

Don’t let a lack of prep work sabotage your great ideas.

Healthcare workers meet in a hospital corridor.
Healthcare

Video: How Open Lines of Communication Can Improve Healthcare Outcomes

Training physicians to be better communicators builds trust with patients and their loved ones.

A man tries to improve OR scheduling.
Operations

Here’s a Better Way to Schedule Surgeries

A new tool could drive savings of 20 percent while still keeping surgeons happy.

Voters who do not trust each other.
Politics & Elections

Why Economic Crises Trigger Political Turnover in Some Countries but Not Others

The fallout can hinge on how much a country’s people trust each other.

A clerk scans brand trademarks.
Marketing

Building Strong Brands: The Inside Scoop on Branding in the Real World

Tim Calkins’s blog draws lessons from brand missteps and triumphs.

two coffee growers harvest beans
Economics

How the Coffee Industry Is Building a Sustainable Supply Chain in an Unstable Region

Three experts discuss the challenges and rewards of sourcing coffee from the Democratic Republic of Congo.