This is Part II of a response to Ezra Klein on the relative importance of the Public Option (PO) (Part I) and the "exchange" through which individuals would gain access to the PO. Part I is here.

Now about the exchange(s). I agree that exchanges can be useful; I’m fine that the concept is in the bill. But to single out the exchange(s) (there could one in each state) as critically important relative to the Public Option seems to confuse their respective roles.

If you read what Ezra says about them, their principal value arises from the fact you might have better choices within the exchange. But that’s only likely if there is a viable PO competitor pushing prices down and serving as an alternative model you could choose if the private insurers didn’t provide products you wanted (or continued to abuse their customers).

Klein’s discussion confuses the benefits of an exchange — the place (or website) you go to to choose a plan — with the competing plans themselves. We could have some competition without a formal exchange — just as different insurers compete today in offering plans to employers. And if we had a strong PO available to employers, we could have some very interesting competition, still with no exchange.

But if we don’t have a viable PO, then whatever competition occurs in the exchange is limited to the highly concentrated private insurers whose "competition" among themselves has already proved to be inadequate and a long ways from any economic model for competitive markets.

As currently envisioned, the exchange is simply a place, or more likely, a web site/office staffed by state and/or federal employees (or contractors), where you can get information about competing plans. Reducing the costs of information is usually good for markets.

To be sure, the eligible competitors listed with the exchange must meet certain requirements and regulations — but those come from the government regulator. The exchange is just the place or entity that checks to see that if an insurer lists on the exchange, it meets the regulator’s rules and so qualifies as plan that can be listed (and in the bills, becomes eligible for federal subsidies). Regulators could do this without the exchange, or with it, but that hardly makes the exchange the central feature of reform.

There are also benefits to pooling risks (and risk sharing). An exchange can facilitate that. But the ability to pool risk is a function of access/eligibility for the plans being offered, as well as other rules. It’s not the result of exchange functions per se.

Since the bills make access to the Public Option dependent on the access rules for the exchange, it makes it seem as though the exchange is key. But what this really says is that the access rules are critical, not the exchange itself. Those access rules are set by Congress or in later years, by the Secretary of HHS, not by the exchange administrators. For example, Congress could specify 100 percent open access to the PO even if there were no Exchange.

So the important question is: if you have to go through an exchange, what can you choose in an exchange? If there’s no PO, then you can choose between mega insurers A and B who dominate the market. Don’t expect that "competition" to do much, and having it occur within an exchange isn’t a game changer. If there is a viable PO, however, then you can choose between mega insurers A, B and the PO. The PO makes the critical difference.