What Even Is A “Health Insurance Exchange?”

3

In less than one year, state and federal health insurance exchanges will go live as part of the Affordable Care Act (also known as “the Healthcare Reform law” and (ugh) “Obamacare”). However, some companies are jumping the gun and forming their own private exchanges. What do these exchanges mean for consumers, and (how) will they make the market more competitive?

What is (and isn’t) the federal healthcare exchange?  The exchange is essentially a virtual “shopping mall” for health insurance.  Any company that wants to participate (participation is NOT compulsory, nor is any business that participates limited from offering plans outside of the exchange) has to submit a plan to the review committee by April of this year.  Plans fall into four coverage tiers – bronze, silver, gold, and platinum – based on percentage of coverage from 60-90%.  All plans in the exchange must also cover a few specific bases: no “generic only” prescription plans, caps on deductibles, and no coverage limits on certain illnesses/conditions to name a few (source). The exchange is NOT welfare – businesses and individuals use the exchange to shop for the plan best suited to them and can calculate if they qualify for a tax cut as part of purchasing a plan through the exchange.  The exchange does NOT force these structures and plans on all insurers: companies that wish to be included may do so, companies that don’t wish to adhere to the minimum standards for the exchange may continue to operate as they always have.

Let’s discuss health insurance as it is presently: chances are if you’re insured, you’re insured through your employer and didn’t really have much say in your provider. Your employer probably picked what plan was cheapest but still had reasonable benefits (after all, nobody wants constantly ill employees). What insurance is available varies wildly from state to state, and insuring is only done in-state (which isn’t to say the company itself is in-state, only that the plan is, so a “basic” Georgia rate and plan from BlueCross BlueShield isn’t necessarily the same as a California one), so really companies only had to compete at a relatively local level, and, while price fixing is a violation of antitrust laws, there is typically little variation in pricing and coverage in basic plans from one large company plan to the next.  Not a great market for business owners and individual consumers.

The exchanges change this arrangement in that, while states have the option of setting up their own exchanges, there will be a federal exchange as well that allows consumers to select a plan from a nationwide pool of plans. This is NOT public healthcare—more of a government initiative to collect data regarding plans to help the public buy into a private program.  It also allows for small businesses and individuals to get a tax cut for buying private insurance, allowing people to use more of their own money to buy into a private system (which, theoretically, should make private insurance affordable to many more Americans).

How will this increase market competition, since the law basically forces Americans to buy insurance or face a tax penalty?  It actually already has increased competition, as some private companies have already created their own exchanges, devoid of government interference, offering lower rates and more coverage. The government exchange has set minimums and tiers for plans, and the private market is actually exceeding these levels to be more competitive and beat out the federal system in response to the government exchange plan! Insurance companies are under no obligation to participate in the public exchange or a private exchange, but, as consumers and business owners begin to see the advantage in competitively shopping for insurance, it will make little business sense to shun the system.

For businesses large and small as well as individual consumers, this is great news—competitive healthcare costs reduce overhead, covers more people (which also reduces overhead), and pushes the market to tailor their services better and faster to meet consumer needs.  The Affordable Care Act exchanges program encouraged the private market to do what the private market often does best: take a hold of the market and make it better.