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Insurance Exchanges Are Useless at Controlling Costs

"Exchangz.... " (photo: CaioSchiavo / flickr)

There is a zombie myth that if you make people buy health insurance on exchanges the magic of the marketplace will bring down costs. The problem is that this idea has never worked in reality. It didn’t work for Medicare Advantage’s private health insurance exchange, it didn’t work in the federal employee insurance exchange, and it has not worked when tried by other countries.

In an article for the New England Journal of Medicine, Ewout van Ginneken, Ph.D., and Katherine Swartz, Ph.D. examine the private health insurance exchanges in Switzerland and the Netherlands and conclude the exchange mechanism itself is a failure at cost control.

A sobering message is inescapable: although exchanges will help greatly to cover previously uninsured people, cost containment and quality improvements are not outcomes to be expected from the exchanges alone. The experience of Switzerland and the Netherlands suggests that reforms involving the provision and purchasing of health care are needed along with health insurance exchanges. Massachusetts, which established the first exchange in the United States, recognizes this lesson. Continuing in this direction, just 3 weeks ago (on July 31), the Massachusetts legislature passed a bill that establishes a commission to monitor the growth in health care costs, creating incentives for hospitals and other providers to reduce costs, and encourages the creation of accountable care organizations.

The article was written to be a cautionary note to states as they set up their exchanges under the Affordable Care Act, but the basic point applies equally as well to the Republican plan to voucherize Medicare.

There is absolutely no reason to believe, based on decades of past experiences, that making seniors shop around for insurance on an exchange will control costs. The only way turning Medicare into a voucher program will save the government money is if the government then starts giving old people insufficiently small vouchers shifting the costs onto them. Simply making old people pay more to get insurance is how the original plan by Paul Ryan saves the government money.

It would be much easier for Democrats and their allies to point out the exchange idea, which forms the basis for the Republican’s plan to turn Medicare into a voucher program, is simply bad if they didn’t spend a year claiming insurance exchanges were great in an attempt to sell Obamacare. Now Democrats either need to pretend the zombie myth is true or risk looking like total hypocrites on this point like Ezra Klein and Peter Orszag do.

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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