I like the state health insurance exchange concept. It offers a necessary corrective to our failed employer/government-dominated group insurance system by giving American consumers the direct power to hold their insurers’ feet to the fire to deliver value. Letting exchanges operate at the state level also allows 50 different experiments to discover what works best, something we’re already beginning to learn from Utah’s promising marketplace and Massachusetts’ deeply troubled one.

The problem is that the Affordable Care Act’s version of insurance exchanges is to this consumer-market ideal what Victor Frankenstein’s creation was to humanity—a good idea gone so very wrong. But unlike the good doctor’s bad doppelganger, ACA is reparable. The fix requires major surgery to excise the Abbie Normal parts of ACA’s monster, replacing them with features that enable consumer purchasing power to transform health care into just another, normally affordable necessity of modern life.

Here are the essentials for fixing the exchanges:

1.    Treat consumers and insurers as rational economic beings. ACA treats consumers like idiots and insurers like an evil to be beaten into submission. It fails to acknowledge that the very nature of the exchanges will force carriers to provide competitive premiums, benefits, and customer service if they want savvy consumers to buy from them. We must rid exchanges of ACA’s punitive, paternalistic features and replace them with market-enabling mechanisms that simplify regulation, remove unnecessary obstacles, and allow consumers to make their own decisions:

  • Eliminate arbitrary premium restrictions. With insurers competing for individual members, we won’t need regulators to approve insurance prices, actuarial values, or loss ratios any more than we need it for Fords, hamburgers, blue jeans, airfares, or condos. That’s what markets are for.
  • Allow flexible, affordable benefits. ACA has exacerbated premium increases by arbitrarily boosting minimum benefits, removing benefit ceilings, imposing provider taxes and fees, aggravating cost shifting, restricting deductibles, and mandating zero-copay preventive services that will never, ever save any money. Get rid of them and establish High Deductible Health Plan definitions as the standard for affordable minimum benefits. Insurers will figure out what else consumers will buy.
  • Allow any willing insurer. Success for the exchanges will require the emergence of new health plans built around high-value medical providers. Yet ACA allows regulators to arbitrarily restrict participation by carriers that otherwise meet all legal requirements. This threatens new plan creation, not to mention limits consumer choice. Instead, any health insurer in good standing should have file-and-use exchange access, subject to state regulatory examination and enforcement remedies.
  • Expand age-rating. ACA unconscionably burdens the young with age-rated premiums that can’t exceed a 3-to-1 differential, forcing heavy subsidization of older adults by younger ones, many of whom will be priced out of the market. Age is a natural risk class (along with geography and gender) that insurers have long used in setting premiums. Actuaries, not legislators, should determine the correct age adjustments for premiums.
  • Allow gender rating. I want my daughter to someday be able to choose a women-centric health plan that provides top OB-GYNs, endocrinologists, breast cancer authorities, and other women’s health virtuosos. This won’t happen with ACA’s supposedly gender-blind premiums. Women’s health costs are higher than men’s until about age 50, at which point the situation reverses. Unless insurers are allowed to set premiums according to natural age and gender differences (and employers can similarly fund them), there will be no incentive to innovate with gender-specific health solutions.

2.    Repeal and replace the individual mandate. The mandate is un-American, won’t work, and isn’t necessary. See Part 2 for a full discussion.

3.    Open the exchanges to everyone. Allow all 311 million Americans in—not just the 40 million individuals and small-business employees that ACA now contemplates. Despite the massive potential benefits of exchanges, ACA’s unaffordable middle-class welfare entitlement forces the government to minimize exchange access to avoid driving government deficits even deeper into the abyss (I’ll explore fixing this in Part 5). The exchanges must be open to the following:

  • Large employers. Let them replace their insurance with fixed contributions (adjusted for age, gender, & location) to employees’ enhanced HSAs to pay premiums and out-of-pocket costs. Let employees supplement them with their own pre-tax funds. Repeal all ACA employer requirements and penalties, allowing them to compete for employees with pay and benefits.
  • Medicare. Replace Medicare Advantage with an option for existing beneficiaries to buy exchange insurance with HSA funds provided by Medicare. Require all new beneficiaries to do this, eventually replacing the unsustainable fee-for-service Medicare system with improved choice, higher quality, and lower costs for beneficiaries and taxpayers.
  • Medicaid and SCHIP. Let the states convert Medicaid and State Child Health Insurance Programs to sliding-scale, means-tested HSA contributions for recipients to use to purchase (or, failing that, to be assigned) exchange insurance and to pay out-of-pocket costs. (See “Medicaid and SCHIP Reform”).

4.    Delegate ACA regulation to the states. Before ACA, health insurance was capably regulated by state insurance commissioners. Obamacare changed that by imposing a plethora of duplicative regulatory functions on an inexperienced, unprepared HHS. ACA should establish uniform boundary rules within which all state exchanges would work and then delegate implementation and regulation to the states to minimize duplication and maximize innovative experimentation.

Only individual insurance markets—like lightly regulated, universally accessible exchanges—will give everyone the multitude of options necessary to force insurers to compete on value—including (ta! da!) premiums that actually drop every year as consumers stop tolerating massive waste and inefficiency.

Exchanges should not be a marginal source of insurance for beleaguered small employers and the uninsured, but rather an essential component of real, consumer-driven health reform that provides all Americans with affordable insurance and high-quality medical care at a fraction of today’s costs.

Next, Part 4 will examine how to fix ACA’s prevention incentives.