Members of Congress, pursuing President Barack Obama's health
policy agenda, want to create a national health insurance exchange
as a platform for a public health care plan to compete against
private health insurance.
Variants of the exchange proposal are embodied in the America's
Affordable Health Choices Act of 2009 (H.R. 3200), promoted by the
leadership of the U.S. House of Representatives, and the Affordable
Health Choices Act, sponsored by Senators Edward Kennedy (D-MA) and
Chris Dodd (D-CT). Both of these huge bills are backed by the
President and the Democratic congressional leadership.
While a national health insurance exchange is sometimes
described as a nationwide pool of health insurance providers that
would facilitate access to coverage for individuals and employers,
its major function would be to provide a platform for a
government-run public health plan that, using Medicare-style
administrative pricing, would "compete" against private health
insurance. Congressional champions of the idea say that this would
increase the range of choice and competition available to
Americans. In fact, it would do exactly the opposite.
In reality, the result would be a massive erosion of private
health insurance. According to a recent analysis by the Lewin
Group, the nation's most prominent health policy econometrics firm,
assuming full implementation of the House bill, 103.9 million
Americans would be covered under the public plan, and 83.4 million
people would no longer be covered by private health insurance.
Moreover, a federally designed health insurance exchange would
consolidate federal control over the financing and delivery of
Americans' medical services.
Initially, Americans may respond positively to the idea of a
national health insurance exchange, but they are almost certainly
unclear about its functions, how it would affect them, or which
health policy problems it would solve. The maddeningly elastic
language used in the health care debate can conceal as much as
convey the true meaning of proposals embodied in the complex
provisions of the mammoth House and Senate health care bills.
A Better Alternative: A State Option. A state-based
health insurance exchange can indeed be a sound way to achieve a
level playing field and a statewide market for a variety of
different private health plans to compete directly for the business
of employers and employees, individuals, and self-employed persons.
That is why conservatives in Congress and elsewhere have promoted
the exchange as a voluntary option for those states that
could use such a mechanism as part of their reform of their
often-dysfunctional health insurance markets.
Though a health insurance exchange has been promoted as a policy
initiative in many states, so far it has been translated into
working models in two: Massachusetts and Utah. Given the radical
differences in these two states' insurance markets, regulatory
climates, political cultures, and policy objectives, it is hardly
surprising that the implementation and operation of a health
insurance exchange is very different in these two states as well.
It is further unsurprising that the concept has also been a source
of seemingly limitless confusion as different proposals are
advanced to achieve very different policy objectives.
The underlying policy objectives determine the functions of the
health insurance exchange. In a truly competitive market based on
real consumer choice and genuine competition, the suppliers of
goods and services would operate on a level playing field and
government would be confined to making and enforcing rules to
protect consumers from fraud and misleading advertising,
establishing minimum standards for health and safety, and enforcing
An exchange could facilitate that process. The government would
not undermine competition by fielding its own enterprise with the
special advantages of taxpayer subsidies, picking winners and
losers, or imposing discriminatory tax or regulatory policies on
different consumers or firms. The key to a level playing field is
that the government would in no way favor one competitor over
another or give any legal advantages to any player in the
Federal Control. Based on the provisions of the House and
Senate bills, as well as the proposals offered by President Obama,
the structure and dynamics of the national exchange would be very
different from those proposed by reformers who design state health
insurance exchanges as optional mechanisms for consumer choice and
- Instead of a single market open to any willing private health
plans, the leading House and Senate bills would allow participation
only by plans that met highly prescriptive federal standards,
foreclosing any other options for consumer choice and
- Instead of establishing a level playing field among different
insurers, the House and Senate proposals would foreclose the
possibility of anything even barely resembling a genuinely level
playing field for fair competition.
- Private health plans would assume all risks and remain subject
to a variety of state and federal laws beyond the proposed House
and Senate provisions for a level playing field.
- With the new public health plan, taxpayers would retain the
risk, and the public plan would function apparently free of the
legal requirements that burden private health plans.
With Congress fielding its own plan in competition against
private health plans, taxpayers would be forced in effect to
underwrite the marketing costs of an entity designed to displace
their own private coverage. Based on recent experiences with Fannie
Mae and Freddie Mac, it is certain that Congress would force
taxpayers to underwrite the cost overruns of such a health
insurance enterprise no matter how unsuccessful its performance.
Medicare alone, a prime example of congressional micromanagement,
has an accumulated unfunded liability of $38 trillion. In a
national health insurance exchange, taxpayers could be certain that
the deck would be stacked against private-sector players in a game
that is rigged from the start.
How Congress Would Create a Health
Among Administration and congressional champions of a national
health insurance exchange, the structure or functions vary.
Likewise, the intellectual rationale for the health insurance
exchange is, based on the plain record, maddeningly elusive. If
there is a specific health policy problem that a national health
insurance exchange is designed to solve, it is not at all clear
what exactly that problem is or why it simply cannot be solved by
other, more direct and less intrusive means.
The Obama Proposal. President Obama proposed a national
health insurance exchange as elemental to his health care reform
agenda. There are precious few details in Obama's campaign
documents on the national health insurance exchange itself or how
it would function. He briefly described it as a "watchdog"
Thus, the national health insurance exchange would serve as a
regulatory rather than purely administrative body. It would be a
national rule-maker and enforce a common set of rating and
insurance rules that would apply to private health plans within the
national exchange, as well as to the public health plan itself. It
would also serve as the regulatory vehicle to enforce the decisions
of his proposed "institute" to judge the comparative effectiveness
of medical treatments and procedures.
A version of this idea of an "institute," the 15-member Federal
Coordinating Council for Comparative Effectiveness Research, has
already been enacted in the stimulus bill earlier this year. The
new agency is charged with making determinations on the
"comparative effectiveness" of different medical services, devices,
drugs, and procedures. In short, in Obama's version, the national
exchange would be not only an independent regulatory agency in
itself, but also the central channel for the regulatory decisions
of other federal agencies, governing both public and private
Outside of this centralized system of muscular control, the
rationale for the national exchange, at least as championed by
independent health policy analysts, is somewhat elusive.
First, in sharp contrast to the champions of a statewide
health insurance exchange--for whom the remedy of federal tax
inequities is the primary rationale for its establishment--the
President does not even mention the unfairness of existing
federal tax policy, even though it undercuts millions of Americans'
access to affordable health insurance. If President Obama wanted to
rectify this problem and advance progressive tax relief, as
recommended by Jason Furman, one of his top economic advisers, he
could simply have proposed a consequential change in the federal
treatment of health insurance and eliminated the unfairness and
inefficiency of the current tax system. In other words, there would
be no reason to create a national health insurance exchange to
secure the objectives of a rational tax policy.
Second, the President is not pursuing a national exchange
as a way to create a robust and competitive national market for
health insurance. Health insurance is an odd exception to the
general rule. There is a robust and competitive market for
virtually every other set of goods and services in the economy,
including complex items, and none of these requires the
congressional creation of anything like a national exchange,
administered by a commissioner, to facilitate their availability to
consumers. If the President wanted to create a national market for
health insurance, he could simply propose the repeal of outdated
provisions of federal law that erect barriers to the purchase of
health coverage across state lines. The President is obviously not
interested in creating anything like a normal national, competitive
market for health insurance.
Third, and most important, the national health insurance
exchange would become the mechanism for the new government health
plan to compete against private health insurance plans. This would
seem to be its main function. The national health insurance
exchange would be the "level playing field," or the arena for such
a competition, and would thus serve as the key mechanism to secure
the crowd-out of private health insurance coverage and pave the way
for a single-payer system. As Martin Feldstein, professor of
economics at Harvard University, has recently observed:
The Obama plan to have a government insurance provider that can
undercut the premiums charged by private insurers would undoubtedly
speed the arrival of such a single payer plan. It is hard to think
of any other reason for the administration to want a government
insurer when there is already a very competitive private insurance
market that could be made more so by removing government
restrictions on interstate competition.
Again, based on the best independent evaluations of such an
arrangement, millions of Americans throughout the United States
would end up losing their private coverage, particularly if
employers dumped workers and their families into the new public
The House Tri-Committee Bill. Under Section 201 of Title
II of the America's Affordable Health Choices Act of 2009, Congress
would create a national health insurance exchange. This exchange
would be administered by a powerful Health Choices Commissioner who
would head a new federal agency called the Health Choices
Administration. The commissioner would be appointed by the
President and confirmed by the Senate. Among the commissioner's
chief duties would be to establish a process for the enrollment of
eligible individuals and employers, to negotiate contracts with
congressionally defined "qualified health plans," and to enforce
statutory requirements relating to federally defined health
Under Section 208, the commissioner could approve health
insurance exchanges created by a state or group of states that
perform "all of the duties" of the national health insurance
exchange and could terminate state exchanges that do not meet these
Under Section 203, the commissioner would specify each year the
health benefits and benefit levels (four levels are statutorily
required based on cost-sharing) for health plans that participate
in the national exchange, consistent, of course, with
congressionally determined benefit requirements. The commissioner
would also establish a process for a phased-in enrollment of
eligible individuals and small businesses, and would have the
authority to expand eligibility for enrollment in the exchange as
the commissioner "deems appropriate." Assuming full implementation,
the Lewin Group estimates that the number of Americans with private
coverage would fall from 172.5 million to 83.4 million, a 48.4
percent reduction in private coverage.
Under Section 204, the commissioner has contracting authority to
solicit bids and enter into negotiation with federally "qualified"
health plans on an annual basis, with an option for automatic
renewal. Congress further specifies that these plans must be
licensed in the states in which they operate and must comply with
the commissioner's requirements to provide requested data or other
information, as well as the commissioner's standards and procedures
for "grievances and complaints" and "network adequacy." The
commissioner would also see to it that approved health plans
implement the subsidies and credits for persons needing assistance,
participate in "risk pooling" arrangements, provide for "culturally
and linguistically appropriate services and communications," and
make contracts with "essential community providers."
Under Section 205, the commissioner is to establish outreach and
enrollment processes for "exchange-eligible" individuals and for
"vulnerable" populations, including adults and children with
disabilities and cognitive impairments. Under Section 207, Congress
would create a Health Insurance Exchange Trust Fund for the deposit
of funds to finance the operations of the Health Choices
The House Public Plan. Under Section 221 of Title I, the
Congress would require the Secretary of Health and Human Services
to create a "public health insurance option" to be offered within
the national exchange in 2013. The public plan would be required to
offer the same benefits required by law for private health plans
and obey the same insurance rules and other statutorily defined
network and consumer protection requirements.
Under Section 222, the Secretary would set the premium to cover
all benefit costs and projected administrative costs of the plan,
as well as a "contingency margin." The bill would authorize an
initial $2 billion for start-up costs and initial reserve
requirements. Congressional sponsors insist that the public plan
must be self-sustaining, based on its premium income.
Under Section 223 of Title I, the Secretary would set payment
rates for doctors and hospitals and other medical professionals
based on the Medicare payment rates, plus 5 percent for those
health care professionals who also participate in the Medicare
program. The bill would also abolish the Medicare update for
physicians' services based on the Sustainable Growth Rate formula,
a special formula for updating physicians' payment based on growth
in the general economy.
By 2016, the Secretary would have greater flexibility in setting
rates and would "modernize" payment for the public plan consistent
with reforms in the delivery system to achieve higher quality care.
For doctors and other medical professionals, Congress outlines the
conditions for participation and would apply Medicare's existing
anti-fraud and abuse rules to the public plan.
Because the payments in the House version of the public plan are
based on Medicare payment rates, the Lewin Group estimates that the
premiums for the public plan would be approximately 25 percent less
than those obtainable in the private sector. Payment below
private market rates would ensure cost-shifting from the public
plan to individuals enrolled in private health plans, which the
Lewin Group estimates at $460 per person under the terms of the
House bill. Not surprisingly, moderate and
conservative Democrats complain that the House bill tilts the
playing field against private providers.
Under Section 225, doctors who accept the payment in the public
plan as payment in full would be "preferred physicians";
"non-preferred physicians" are those who agree to the
balance-billing limitations that prevail in Medicare. For all
physicians, the HHS Secretary would be authorized to make more
detailed requirements, presumably through regulation, for
"conditions of participation" in the public plan.
The Kennedy-Dodd Bill. Under Section 143 of Title I of
the Senate bill, the Congress would create "affordable benefit
gateways" that would function as a health insurance exchange for
each state based on the proposed federal standards. The bill
provides some flexibility for the states in setting up or
administering these federally sponsored "gateways," and one gateway
could operate in more than one state.
To assist the states in doing this, the HHS Secretary would
provide grants and would have discretion over the amount of the
grants given to the states. If a state was not making progress
toward establishing a gateway in conformity with federal
standards--for example, by including a public plan to compete
against private health plans--the Secretary would have the power to
intervene and establish such arrangements.
The gateway would fulfill the conventional administrative
functions of a health insurance exchange, making health insurance
available, providing information on the federally qualified health
plans, and facilitating outreach to eligible individuals and their
enrollment in plans provided through the gateway or other
government programs such as Medicaid, SCHIP, or the new public
plan. Gateways would also be able to contract with private
entities, called "navigators," that would help to raise public
awareness of the existence of the gateway and available health care
plans. Health insurance plans that are not "qualified plans" could
still operate outside of the gateway.
Under the Senate bill, the gateways would be required to
establish a risk-adjustment system, thus providing an appropriate
payment to health plans that have enrollees with health risks
higher than the prevailing average in the state. Each year, the
state-based gateways would also be required to report to the
Secretary of Health and Human Services on their financial
Under Title I of the Senate bill, the health benefits and
medical procedures for health plans would be established by a new
federal agency, a Medical Advisory Council. The council would be
composed of medical experts who would make recommendations to the
Secretary on what health benefits are "essential" and what would
constitute "affordable coverage." The Senate bill would also
provide a process for congressional review of the benefit
decisions, and Congress could reject the Secretary's benefit
decisions through a joint resolution of disapproval.
The Senate Public Plan. Under Title I of the Senate bill,
Congress would create a new public plan, called the "community
health insurance option," to compete against private health plans.
This public plan would have to be offered in each state through the
gateway and compete with private health plans in the gateway.
Congress would establish a State Advisory Council to make
recommendations to the Health and Human Services Secretary on the
public plans' operations in each state.
The public plan would offer the "essential benefits" determined
by the Medical Advisory Council, but the states could also require
the public plan to offer additional benefits. The HHS Secretary
would be authorized to set payment rates for doctors and hospitals,
but they could not be higher than the "average rate" paid by health
plans participating in the gateway. The HHS Secretary would also
have the authority to contract with private entities to execute the
duties associated with the public plan.
As with the House bill, the Senate bill would create a special
trust fund for the financial operations of the public plan. The
Senate sponsors intend that there would be no additional costs to
the taxpayer beyond start-up costs and that premiums would cover
the costs of the Senate version of the public plan.
The Baucus Proposal. Senator Max Baucus (D-MT), chairman
of the Senate Finance Committee, is trying to produce yet
another major Senate health care bill. Outside of a legislative
product, however, Senator Baucus has also proposed a national
health insurance exchange that would "organize affordable health
insurance options, create understandable, comparable information
about those options and develop a standard application for
enrollment in a chosen plan."
In the Baucus proposal, health plans participating in the
national exchange would be able to compete on the national,
regional, state, or local level, and benefit packages could differ
"within reason," but they would have to meet federal actuarial
standards. Congress, however, would not actually do
the work of fixing the actuarial standard or defining the meaning
of coverage or affordability. Like former Senator Tom Daschle
(D-SD), Baucus would delegate such tasks to a
special body of political appointees.
This is also congruent with the Senate Health, Education, Labor
and Pensions Committee bill, which would create a Medical Advisory
Council, and the House Tri-Committee Bill, which, within statutory
guidelines, would delegate authority to set health care benefits to
the HHS Secretary with recommendations from an Advisory Benefit
Committee whose members would be appointed by the Secretary. In
the Baucus proposal, a new agency, the Independent Health Coverage
Council, would define the meaning of "affordability" and "coverage"
for participating health plans, as well as standards for chronic
care and quality reporting. This would mean, of
course, that Americans would be subjected to decisions over which
they would practically have little or no control.
Under the Baucus proposal, health plan premiums would reflect
differences in benefits, not risk, and premiums offered by plans in
the national health insurance exchange would have to be the same as
those offered outside of the exchange.
In contrast to President Obama, Baucus appears to be more
flexible: He would require a division of labor between federal and
state authorities in the regulation of health insurance. While
determinations of affordability, actuarial equivalence, and benefit
standards would be federal responsibilities, all plans
participating within the national health insurance exchange would
be subject to state laws and regulations governing consumer
protection, solvency, reserve requirements, and premium taxes.
In short, the rules governing health plans in the national
health insurance exchange would be both federal and state laws. The
federal government would make rules governing the insurance
coverage, and state governments would make and enforce rules
governing consumer protection.
The National Health Exchange and a New
Irrespective of their differences, leading congressional health
care proposals are strikingly clear in their main features:
centralized decision-making in Washington and a dominant role for
the federal government at the expense of the states in regulating
Control by Washington means that special-interest politics
concentrated in the nation's capital would dominate Americans'
health care decisions even more than they do today. As with
Medicare, it would be inevitable. According to The Washington
Post, health care industry lobbyists have made $298.9 million
in contributions to Members of Congress since 1989, and nearly 60
percent of that amount has gone to Members who sit on the five key
congressional committees that handle health care legislation.
Decisions would focus on a myriad of issues: what is or is not
to be covered in the health benefits package; which and how many
plans can participate in the national health insurance exchange;
which states--if any--will or will not be able to chart a more or
less independent course. This would guarantee the frenzied lobbying
of powerful special interests desperate to secure their competitive
It is fanciful to believe that government officials at HHS, a
board, or a council would be able to devise a set of fair and
equitable rules that would efficiently and effectively account for
the very diverse and distinctive circumstances that prevail in
different states across the country. Proposals to insulate such a
process from special-interest politics by creating a body of
politically appointed "experts," ensconced somewhere in the
administrative offices of HHS, or a commissioner administering a
National Health Exchange reflect the triumph of fantasy over
experience. No such body or official will be immune from either K
Street lobbyists and their lucrative campaign coffers or powerful
congressional committee chairmen.
Politics of the Public Plan. The introduction of a
public, government-run health plan would further complicate the
operation of a national health insurance exchange. If the exchange
became a powerful regulatory agency--Obama's vision-- Congress
would have equally powerful incentives to set the rules to the
advantage of its own health plan. This could be done in a variety
of ways: by setting the government's health plan premiums
artificially low (using Medicare rates as in the House bill); by
reducing or eliminating cost-sharing requirements; or by
manipulating benefits to make the government health plan more
attractive than the private health plans. Congress would have every
incentive to make sure that its own creation did not incur the
legal or financial risks that private firms ordinarily bear.
Because the public plan is a political creation, political
decisions would overrule all other considerations concerning key
items: benefit levels, premium levels, co-payments, the kinds of
medical treatments that could or could not be included. The annual
lobbying circus that accompanies annual Medicare legislation is
instructive as congressional leaders fight to preserve or maintain
existing federal reimbursements for favored groups against
competition, most recently for payment for durable medical
equipment and supplies.
A massive crowd-out of private coverage would be accelerated
under the employer mandate, embodied in both the House and Senate
bills, as employers dropped private coverage and paid the requisite
tax. Likewise, lobbyists for businesses or private insurance
industry executives might see the government health program as a
convenient dumping ground for high-risk individuals or families,
which would reduce business and insurance industry costs but would
also amount to significant adverse selection against the taxpayers.
Faced with the rapidly rising costs of the public plan, let alone
Medicare and Medicaid, taxpayers have demonstrably fewer lobbyists
working on their behalf in Washington than those who are reimbursed
with public or corporate money.
Double-Edged Sword? Lobbying for or against the policies
and decisions of an administrator, council, or commissioner of a
national health insurance exchange would be, of course, a two-way
street. Once established, the legal and regulatory powers of such
an agent or agency could turn out to be a double-edged sword,
wielded by proponents of the public plan or advocates of private
insurance. A public plan, after all, would be a wholly owned
subsidiary of Congress.
Though admittedly far less likely, the political dynamics could
run in a direction exactly the opposite of the "single-payer"
conclusion for which the Left yearns so passionately. Congressional
conservatives could decide--for budgetary or ideological
reasons--to enact measures, amendments, and riders to expand
private health plans and shrink the public option, create payment
limitations or more restrictive reimbursement rules, and discourage
public program enrollment. Currently, liberals in Congress, upset
about existing levels of payments to private health plans in
Medicare, which they deem excessive, are committed to rolling them
back, hoping to halt the rapid growth of these increasingly popular
Medicare Advantage health plan options.
The more likely outcome of this political process is that the
national health exchange would serve as an efficient mechanism to
erode what is left of private health insurance. On the part of many
in Congress, particularly those who favor a direct federal takeover
of the entire system or the enactment of a single-payer health care
system, the national health insurance exchange provides an arena
for the destruction of the hated private health plans that, in
their view, consume so many dollars in unwanted and unnecessary
administrative costs and "immoral" profits.
There is good reason to believe that a public plan operating
within a national health insurance exchange would accomplish the
single-payer objective. In a December 2008 independent assessment
of the likely impact of a public plan, the Lewin Group concluded
that there would be major shifts from private to public coverage:
Anywhere between 10.4 million and 118.5 million Americans,
depending on how many are eligible for enrollment and the plan's
payment rates, could be transitioned out of private health
In its first analysis of the House Tri-Committee bill, Lewin
estimated that, based on the statutory requirement for the use of
Medicare rates as payment rates in the public plan, plus the
progressive eligibility of all employees over time, the House bill
would result in a dramatic expansion of government enrollment and
that an estimated 113.5 million Americans would lose private
coverage. A recent Urban Institute study
and Lewin's most recent estimate of the latest version of the House
bill show a smaller displacement of private coverage, but
nonetheless a massive crowd-out.
During the markup of the Kennedy-Dodd bill, Douglas Elmendorf,
director of the Congressional Budget Office (CBO), reported to the
Committee on Health, Education, Labor and Pensions that, as a
result of the provisions of the $1 trillion Senate bill, several
million Americans would lose their employer-sponsored health
At the very least, the creation of a national health insurance
exchange as a platform for a public plan to compete against private
health insurance would cut short state innovation in health
insurance market reform and accelerate the already rapidly growing
federal domination of the financing and delivery of health care.
Even more likely, it would ensure the eventual triumph of a
single-payer system of national health insurance run by Washington.
The national health insurance exchange combined with a public plan,
falsely advertised as a mechanism to advance consumer choice and
market competition, would be the institutional vehicle to guarantee
the exact opposite.
President Obama and the congressional leadership are intent on
creating a national health insurance exchange. In its various
legislative forms, their version of the health insurance exchange
is a powerful regulatory agency; it is not merely an administrative
agency to facilitate enrollment and to promote choice and anything
remotely approaching free-market competition.
In many respects, the national health insurance exchange
resembles a solution in search of a problem. If the President or
Congress wanted to create a national health insurance market, they
would not need to create a national health insurance exchange--they
would merely have to repeal existing federal barriers to insurers
competing across state lines. If the President and Congress wanted
to fix the inequities of the federal tax law, a key rationale for
creating a health insurance exchange at the state level, all they
would have to do is to reform the federal tax laws governing health
insurance and end the practice of discriminating against those who
cannot or do not get health insurance through their place of
If the objective of the President and Congress is to expand the
role of the federal government in providing health insurance and
determining the kind of health insurance that Americans will get,
the national health insurance exchange is a convenient tool for
that federal expansion and control. It would be tantamount to a
national arena for the public plan to undercut private health plans
and erode existing private health coverage.
There is little doubt that a national health insurance exchange,
combined with a public plan, can achieve that policy objective. But
there is also little doubt that such an objective is not what most
Americans had in mind when they embraced the cause of comprehensive
Moffit, Ph.D., is Director of the Center for Health Policy
Studies at The Heritage Foundation.