Should Congress create a national health-care exchange?
One of the core ideas behind the Affordable Care Act (ACA), President Obama’s ambitious and very controversial effort to expand access to medical insurance, is that state governments will work with the federal government to make high-quality care more accessible and affordable by creating subsidized state-based insurance exchanges. For those who aren’t covered by employer-sponsored insurance or Medicare or Medicaid, the exchanges are meant to offer a range of affordable insurance plans, with subsidies varying by household income.
The architects of the ACA believed the exchanges would be one of the more politically attractive aspects of the law, as they were designed to give states considerable latitude and to harness the power of market competition. But 34 states, representing two-thirds of the U.S. population, have thus far refused to establish their own exchanges, and the federal government is scrambling to create its own exchanges in the states that have refused to play ball.
Defenders of the ACA have noted the irony that conservatives, who tend to champion state autonomy, have led the opposition to the creation of state-based insurance exchanges. Yet as Douglas Holtz-Eakin of the American Action Forum, a leading critic of the ACA, has observed, the state-based insurance exchanges are best understood as “a second Medicaid program,” which will likely suffer from the same misaligned incentives as its more familiar cousin. While the federal government will cover the entire cost of the subsidies designed to make the insurance plans offered on the exchange affordable, state governments will be free to impose regulations and mandates on insurance plans that could raise their cost. State lawmakers might want to reward medical providers by deeming that various expensive and non-essential medical treatments must be covered by insurance, but state governments will be under no obligation to bear the cost of having done so.
Even without the exchanges, state governments are notorious for imposing costly regulations that have crippled health-insurance markets, as John Cogan, Glenn Hubbard and Daniel Kessler note in Healthy, Wealthy, and Wise. Many states, for example, impose “any-willing-provider” laws that require health insurers to reimburse any medical provider willing to abide by their terms and conditions. This requirement makes it much harder for insurance plans to form efficient provider networks that can compete against others by offering less-expensive, higher-quality care.
Given the strong tendency of state lawmakers to impose onerous regulations, it is fair to ask how the United States can have a functioning private insurance market at all. The reason is that self-insured employer-sponsored health insurance plans are largely exempt from state regulations under the Employee Retirement Income Security Act of 1974 (ERISA). This is a boon to large employers that operate across state lines, and it keeps employer-sponsored insurance relatively affordable, certainly when compared to the state-regulated individual and small-group health-insurance market.
Rather than have the federal government build state-based exchanges governed by state insurance regulations, Congress should consider building a national health exchange. Insurance plans sold on the national health exchange would have to be certified by the federal government, just as employer-sponsored health insurance plans offered under ERISA have to meet certain minimum requirements, but regulations and mandates would be kept to a minimum. Whereas families purchasing insurance on state-based exchanges would have to change their policy on moving to another state, a national health exchange would make health insurance truly portable, thus removing a significant burden. And while Congress might eventually mimic state legislatures by imposing expensive regulations and mandates, it would have to bear the cost of the higher subsidies that would be required to keep insurance plans affordable. This is a powerful built-in accountability mechanism.
Conservatives tend to oppose the idea of a national insurance market along these lines in favor of allowing individuals to purchase insurance plans across state boundaries. It is easy to imagine consumers flocking to cheap insurance plans regulated by a lax state, just as many U.S. business enterprises incorporate in Delaware. Yet as Cogan, Hubbard and Kessler suggest, the potential downside to this approach for health insurance is that the states in question won’t be able to safeguard the interests of consumers living in other states, and they’ll have weak political incentives to do so.
There is another obvious conservative objection to building a federal health exchange, which is that it centralizes power in Washington, D.C. That is a fair criticism. It’s not clear, however, that it makes sense to centralize the responsibility for paying for health-insurance subsidies while decentralizing the responsibility for regulating health-insurance markets. So we can either require that state governments will pick up the full cost of health-insurance subsidies, a deal virtually all state governments would reject, or we can suck it up and accept that a federal health exchange is better than a fiscal train wreck.
None of this is to suggest that conservatives shouldn’t continue working toward the repeal of the Affordable Care Act. But even if the ACA is successfully repealed ‑ a big if ‑ state regulation of health-insurance markets will continue to exacerbate cost growth and make it impossible for families to keep their health plans as they move from one state to another. Although there are many things the states are better-positioned to do than the federal government ‑ educating children, providing social services to the poor and building and maintain infrastructure, to name just a few ‑ regulating health insurance is not one of them.
PHOTO: Medical equipment sits in labelled bins inside of the doctor’s office of One Medical Group in New York March 17, 2010. REUTERS/Lucas Jackson