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The Small State-Based Exchanges In The Senate Bill Will Not Control Costs

Almost all evidence points to the simple conclusion that the new health insurance market places in the Senate bill called “exchanges” will not slow the out-of-control increase in health care costs. Similar exchanges have been tried in this country and have failed to slow the growth rate in health care. The two best examples are the Federal Employee Health Benefit (FEHB) plan and the California Public Employee’s Retirement System (CalPERS).

The FEHB provides health insurance for roughly 8 million Americans, while CalPERS provides insurance for roughly 1.3 million. Over the long term, both have health care growth rates on par with the average for large employer plans. This was the general conclusion of a GAO report in 2007, and similar study in 2009 by the Kaiser Family Foundation. A GAO study from 2000 found that small employer purchasing cooperatives (very similar to exchanges) also failed to bring down overall costs. If these two public employee exchanges with decades of experience managing health care benefits have failed to control costs, there seems little reason to suspect the smaller exchange in the Senate bill will perform any better.

The Senate bill will produce at least one exchange per state, and is designed to create two exchanges per state (one for the individual market and one for small businesses), which can be merged if the state chooses. The bill will allow states to further divide up their exchanges by region of the state, or merge with other states.

For the sake of argument, let’s assume only 50 state-based exchanges are created and no state is foolish enough to follow the bill’s intention of dividing the risk pool more by creating two separate exchanges. Only about 10% of people in the country will use one of these exchanges. That means not even the largest state, California, will have an exchange with more people/market power than the FEHB. At most, five states (CA, TX, NY, FL, IL) are likely to have exchanges with more users than CalPERS. Many of the smaller states will end up with exchanges that have fewer users than several of the largest private employer-provided plans.

If you believe exchanges–which serve only as a regulated centralized marketplace for the current broken private health insurance companies–will bring costs under control, I have yet to see any strong evidence for that position. If your excuse for the failure of FEHB and CalPERS to control cost is that they lack sufficient market size to bring down cost, then the smaller, state-based exchanges created in the Senate bill are clearly doomed to fail for the exact same reason. Under this big market size theory for exchanges, only the single nationwide exchange created in the House bill, with roughly 30 million users, might be large enough to bring down cost.

Personally, I think the entire concept of exchanges as designed in either bill is flawed, based on both the domestic and international evidence. I believe only a centralized provider reimbursement negotiator for all plans on the exchange (similar to Switzerland, Belgium, and the Netherlands), precisely defined benefit packages, and/or a robust public competitor (the public option) can bring down cost. While the public option in the House bill is much weaker than I would like, I agree with the CBO’s conclusion that it would put downward pressure on premiums.

There are two reasons, the public option and large size, which lead me to believe it is possible the House bill’s exchange might bring down the growth in heath insurance premiums. This is why I support that bill. I simply have no reason to believe that the Senate bill’s system of small, state-based exchanges run by local insurance commissioners will be able to control cost. This is why I can’t support that bill.

*One caveat: Exchanges, by reducing some administrative work for both customers and insurers, will see a one-time drop in cost. By spreading the risk of a larger pool, some high-risk people will see their premiums go down, while others will see their premiums go up. A one-time drop in price due to reduced adminstrative work and averaging out the premium increases over a large group will not change the current, terrible trajectory we are on for health care costs. Average costs in the small state-based exchanges will continue to rise at the same dangerous pace as the rest of our private, employer-based insurance system. They will do nothing to stop the inpendening economic disaster that will be caused by our failure to rein in the health care industries.

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Jon Walker

Jon Walker

Jonathan Walker grew up in New Jersey. He graduated from Wesleyan University in 2006. He is an expert on politics, health care and drug policy. He is also the author of After Legalization and Cobalt Slave, and a Futurist writer at