Issue Brief: Exchanges – Making a Market for Individual Insurance

A primary concern for consumers is that without an employer or union (and their hired benefits consultants) to negotiate benefits and rates, it is difficult to know whether the scope of coverage offered and the premium charged for an individual insurance plan are appropriate. Moreover, in most states where individual coverage is available, there have been very few plans to choose from, and the cost generally has been high relative to group coverage. In recent years, as states have sought mechanisms to remedy this, health policy analysts have developed and drawn states’ attention to a new alternative—the health “exchange.” An exchange offers a mechanism to provide a viable individual market as well as remedying certain worrisome problems in the group insurance market.1 It also is a construct that is well on its way to inclusion in federal health care reform legislation, even though the first real life example of an exchange, the Massachusetts Connector, has been in operation only for about two years.  

An exchange is conceptually similar to a stock exchange—it serves as a central, organized marketplace where consumers shop for health benefits. The purpose of an exchange is not just to provide the forum, but also to make it easier for consumers to compare plans and chose the one that is best suited for their needs. An exchange accomplishes this by providing information in easily accessible formats about premium costs, scope of benefits, cost-sharing, and other plan provisions. Through requirements for transparency of certain consumer information, an exchange can be used to further policy objectives such as a focus on quality of care, prevention and wellness, or options for maximizing consumer choice of providers. Furthermore, unlike insurance obtained through an employer, insurance purchased by an individual through an exchange would be “portable,” even if the insured changed jobs or became unemployed.  

Proponents of exchanges have cited two primary benefits. First, they believe that an exchange will make health care more affordable by creating direct market competition between private insurers and lowering the administrative costs of buying and selling private insurance for individuals and small groups. Second, they believe that an exchange will make health care more accessible by simplifying the insurance shopping process, helping people who have previously not purchased insurance—or who have purchased the wrong insurance for their needs—understand the relevant facts.

Moreover, although it is a market-based approach, the exchange construct lends itself to additional requirements of interest to those who desire greater regulation. For example, an exchange (through its conditions of participation) can be used to set and/or enforce insurance requirements and consumer protections, such as a prohibition on pre-existing condition exclusions.2 Prerequisites for offering an insurance product through an exchange also can be used to regulate quality or impose other requirements. Additionally, an exchange can facilitate administration of a governmentprovided subsidy or tax credit for health insurance—individuals who receive the benefit may redeem it for an insurance plan offered through an exchange.  

Although there are many details to be worked out, it now seems likely that health exchanges are in our future. President Obama talks about a national health insurance exchange, there are health exchanges in the House Tri-Committee health reform bill (H.R. 3200), and in the concept papers that form the basis of Senate Finance Committee health reform discussions. Moreover, the Senate Health, Education, Labor, and Pensions (HELP) Committee has reported out its version of the Affordable Health Choice Act, a fundamental feature of which is a public insurance option offered to individuals and certain employers along with private sector insurance through a health “gateway” (which appears to be another name for an exchange).  

As Congress begins to pull together the pieces of comprehensive health care reform, the following are among the critical exchange-related policy issues to be resolved.  

Who Can Purchase Through an Exchange  

An important consideration is who will be eligible to purchase insurance through an exchange. Most proposals have focused on individuals and small groups that do not have employer-based insurance. To permit individuals to control portability of their benefits, some proposals would permit workers with employer coverage to use an employer subsidy to purchase through an exchange. Other proposals would give employers of any size the option to purchase insurance through an exchange. And those proposals that have an individual mandate, like the Senate HELP Committee legislation, make an exchange/gateway the mechanism for otherwise uninsured individuals to obtain the coverage required by that mandate.  

At a basic level, the population covered in plans offered through an exchange must be sizable enough to attract health plans to participate.3 However, the issue of “who is in” also is critical because of the potential for sicker, more costly individuals to be in an exchange population— whether by individual or employer choice—driving costs up, while employers with younger and healthier workers (and few retirees) may self-fund benefits outside an exchange.  

What Plans Will Be Offered Through an Exchange  

A threshold question, of course, is whether a “public plan” will be offered through an exchange as one of the options available to participating consumers, as in the recent Senate HELP Committee legislation. Moreover, to permit effective consumer choice, it is likely that health plans will have to meet certain minimum standards with respect to quality, financial soundness, and benefits. The most contentious issue after the question of a public plan option is whether there will be a mandatory benefit package, and if so, what is included, and how much variation is permitted with respect to cost sharing and other requirements imposed on enrollees. Finally, some proposals would require all state-licensed private insurers to participate in an exchange; others would follow Massachusetts and limit the number of participating companies based on defined criteria. Indeed, it is even possible for Congress to establish broad parameters but leave some of the issues to be resolved in federal regulation or, as Massachusetts did, to an exchange itself. These details likely are of interest to virtually all stakeholders and will be the focus of much of the debate over the coming weeks.  

How Will an Exchange Be Structured and Governed

Various alternative proposals have suggested: (1) a single, national exchange that provides statespecific information, (2) multiple competing national or regional exchanges, (3) individual state exchanges with or without a national exchange default, or (4) multiple exchanges in each state. The Senate HELP Committee legislation appears to envision each state operating its own exchange, with a federal default if a state fails to do so. The bill that has been introduced in the House of Representatives, on the other hand, establishes a single, national exchange, but allows states or groups of states to apply to operate a state-based health insurance exchange in the state or states in place of the national exchange. Each of these arrangements has advantages and disadvantages with regard to the administrative costs, uniformity, simplicity, and ability to negotiate effectively with health plans.  

Likewise, an exchange may be governed many different ways. For example, an exchange could be run by a federal agency or a state agency or, like Massachusetts, an exchange could be run by a quasi-public entity. An exchange also could be operated by an independent third-party that contracts with federal or state governments.  

Next Steps  

As Congress addresses these various issues for creating viable exchanges, it will not be in isolation from the various other key pieces of health care reform. Rather, as the legislative package is developed, the structure and function of an exchange will be seen in the issue of a public plan option, the government’s role in setting benefits, the use of individual responsibility or mandates in dealing with adverse selection, subsidies and employers’ obligations, as well as the role of states.