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Insurance exchange is key to health-care reform

MIchelle Christensen, Deseret News

WASHINGTON — The central problem in health-care reform is that good policy and good politics point in opposite directions.

Good policy proceeds from the understanding that our health-care system is a fractured, pricey, inefficient mess. Good politics, however, proceeds from the insight that a lot of people rely on this fractured, pricey, inefficient mess and don't trust Washington to change it.

Good politics means, as Barack Obama frequently says, that if you like what you have, you get to keep it. But put those imperatives together and you have a strange problem indeed: How do you reform a system that you're not allowed to change?

The answer that reformers have come up with is that you don't change the current system. In the short term, you strengthen it with subsidies and regulations on insurers. You make it kinder and gentler. But you also build the beginnings of a new, better health-care system off to the side. You let it demonstrate its efficiencies and improvements. You let the lure of lower costs and higher quality persuade Americans to migrate over of their own accord.

This is what the health-insurance exchange is designed to do. It is arguably the single most important element of health-care reform, because it is the bridge between the system we have and the system we want. But amid the clamor over public insurance options — which, incidentally, would be housed on the exchange — and employer tax exclusions and all the other points of controversy, the health insurance exchange is hardly being discussed. And there are signs that it, and thus the long-term promise of reform, might be in danger.

Compared with the crazy-quilt system we have now, the idea behind the health-insurance exchange is almost weirdly simple: It's a single market, structured for consumer convenience, in which you choose between the products of competing health insurers (both public and private). This is not a new idea. It is how we buy everything from books to socks to soup. Everything, that is, except health insurance. The benefits of reversing that bit of accidental exceptionalism are obvious to anyone who has ever stepped inside a Target: Consumers will benefit from more choice, from direct competition between insurance providers hungry for their business, from regulations meant to protect them from deceptive products, from efficiencies of scale, and from the sort of purchasing power that only a large base of customers can provide. They will benefit, in other words, from an actual, working market — something health insurers have managed to avoid for far too long.

But all health-insurance exchanges are not created equal. Just as there's a weak and strong version of the public plan, there's a weak and strong version of the exchange.

The strong version is national, or at least regional. It's open to everyone: The unemployed, the self-employed and any business, no matter the size, that wants to buy in. There's risk adjustment to reduce the incentive for cherry-picking. The huge pool of users gives the exchange tremendous advantages in scale, simplicity and standardization (experts say that you need at least 20 million to fully achieve these benefits — easy in a national exchange but harder in a regional or state-based one). With so many potential customers, insurers are eager to participate, and they will bid aggressively to ensure they're included in the market and compete aggressively to make sure they're successful within it. Over time, the combination of increased efficiencies and greater competition drive down costs, which will lead more employers to use the exchange, which will in turn give it more scale and bargaining power. You could easily see this exchange slowly emerge as the de facto American health-care system. And not through government fiat. Through consumer choice.

The weak version is state-based. It's open to only the unemployed, the self-employed and small businesses. Risk adjustment, if it exists at all, is crude. With such a limited pool of applicants, insurers aren't driven to compete, and the efficiencies of scale and competition are minimal. It never really grows, and instead exists as a marginal policy to mop up those who aren't covered by employers. Sort of an outlet shopping model for health-care, accessible only to the few able to get there.

Right now, the weak version is a lot likelier than the strong version, for a couple of reasons. One is that there are tricky policy problems in a strong exchange. The largest of these is adverse selection: If you open it to large employers, but the only large employers who join are those with aging and ill workforces, then costs will shoot up. There are, however, ways to address that problem: In particular, risk adjustment, which the Netherlands, Germany and every other largely private universal health-care system uses to deal with similar issues, can be deployed to make sure no insurer is penalized for signing up sicker customers and no insurer benefits from signing up healthier customers. This is not an insurmountable policy problem.

But there is a tricky political problem: If the exchanges are effective, and open to everyone, then workers and employers alike might well decide to use them. Politicians are very interested in the optics of preserving current insurance arrangements. They are afraid of a Congressional Budget Office estimate that says something like "80 million Americans will transition from employer-based health insurance to the exchange." That estimate, translated into political-speak, will come out sounding like "80 million Americans will lose what they have." And that scares people, which scares politicians.

Some politicians, however, remain uncowed. Oregon Democrat Ron Wyden has proposed something he calls the Free Choice Act: It would open the exchanges to all Americans and all businesses. It would also let those of us with employer-based insurance take the money our employers are paying for our insurance and use it on the exchange instead. This idea wouldn't take away what anyone has. But it would allow those of us who don't like what we have to change it. More so than any other idea in the health-care debate, it offers a concrete way that reform could benefit the insured. It gives them a way out of a health-care system that is eating through their wages and limiting their choices.

And that's no small gain. The only way that health-care reform will truly give us a more efficient, more effective, more affordable health-care system is if it begins to fundamentally change the inefficient, ineffective, unaffordable system we have now. The strength of the health-insurance exchanges is the key to that transition. That is not to underplay the political or policy challenges. Change is scary. But it's what Obama promised, and it's what the health-care system needs.

Ezra Klein reports on domestic and economic policy for The Washington Post.