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.

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  1. Daniel says:

    Steve –

    I think your ideas on this are exactly what Obama wanted to avoid: sticking sicker people (and women) with higher premiums because their health care costs are higher. As an actuary I could see how this would make fundamental sense to you, but the goals of PPACA go beyond actuarial measures into a higher sort of moral measure. We liberals don’t just want to make the system more efficient…we want to turn it on its head and make it more equitable. In short, we don’t want actuaries to have anything to do with it.

    I wrote a report for my graduate-level health policy course on the insurance market reforms under PPACA, and the theme of the report was that PPACA is trying to take a scale that is heavily weighted in favor of young, healthy males (the most desirable for actuaries but the least in need of health insurance) and tip it so it’s more balanced.


    Steve Replies: Daniel, you’re apparently advocating the use of pure community rating in which everybody pays the same premiums, regardless of age or gender. History has shown us that there is probably no stronger incentive than community rating for forcing young Americans to refuse to buy insurance and for insurers to discriminate against women and the elderly, which is what we saw when HMOs were forced to use it in the 1970s. Fortunately, even the Congress finally realized it was a really bad idea and dropped the requirement in the early 1980s. You can find a more complete discussion of this in my book “Cured!” (pp 155-162).

    Without meaning to, community-rating proponents are actually advocating misogynistic age discrimination—hardly a “higher sort of moral measure.”

  2. Daniel says:

    I think we’re talking about a different time with a different set of circumstances. With a strong individual mandate (the one in PPACA is too weak in my opinion), you take away the incentive to not purchase insurance. Community rating on its own can’t work, but community rating and guaranteed issue WITH a strong individual mandate can work.

    Of course I think the real solution to this is to just extend Medicare to everyone and pay for it through taxes like they do in most industrialized countries.

  3. Daniel says:

    Addendum: With a strong individual mandate combined with guaranteed issue, even young people who choose not to buy insurance will be buying something like insurance by paying the penalty.

    Ultimately I’m more concerned about financing health care than about making sure everyone has insurance.

    Perhaps we compromise on modified community rating.

    PPACA has 3-to-1 age banding. What do you suggest — 5 to 1? 10 to 1?

    As for gender and age discrimination, it won’t happen if the law lays down the hammer on any insurer that tries to do it.

  4. Daniel says:

    Thanks so much for deleting my previous comment! Were you afraid I was actually saying something that could undermine you on your own website?

    There will only be gender and age discrimination if insurers are allowed to get away with it. Threaten them with big, big fines and it won’t happen.

    As for the incentive for young people to drop insurance under community rating, the individual mandate can mitigate that. Even if they choose to pay the fine, they are buying a form of insurance so long as there is guaranteed issue.

    Ultimately it’s less important that people have insurance and more important that we actually finance health care.

    Of course this is all patchwork until we start taking lessons from the rest of the industrialized world and really make coverage universal (even single payer in many cases). The rest of the industrialized world flat out kicks our asses when it comes to health care cost and quality.

  5. Stephen Hyde says:

    Steve Replies Again: With respect to Daniel’s points, a few brief comments:

    1. On “deleting my previous comment.” We’ve posted everything we’ve received from you and it’s all still there, so please let me know what you think is missing.

    2. Penalties for insurers that game the system. It reminds me of the old joke about the consultant who tried to claim a reimbursable business expense for a Burberry raincoat he left in a taxi. After his employer repeatedly refused to allow it, he submitted a final expense statement with a note, “There’s a lost raincoat in here and I defy you to find it.” There aren’t enough regulations in the galaxy to stop people from gaming the system—any system. That’s why market-based economies work and bureaucratically controlled ones don’t.

    3. Medicare for all. Bad example; Medicare is bankrupt.

    4. Follow “the rest of the industrialized world.” Bad example. They’ve been no better at controlling medical inflation rates than we have and are thus equally unsustainable. They’re cheaper largely because of rationing, meaning the rich get great care and the rest get in line.

  6. Daniel says:

    The rationing and wait times in Canada, Western Europe and East Asia are wildly exaggerated. You’re actually suggesting that the rich are MORE privileged in their systems than ours? Nobody goes bankrupt from medical bills, nobody is left off transplant wait lists due to lack of insurance…please. The American health care system is a disgrace and needs to be disintegrated and rebuilt from the ground up. It’s wasteful and it is unconscionable from top to bottom.

    I work for a health insurance company and I am ashamed of the things we do for the sake of profit. We are the problem.

  7. Daniel says:

    Steve —
    I work for the largest private health insurance company in America, and I can tell you that the powers that be have every incentive to deny health care (talk about rationing!) and sell the most worthless policies possible.

    After all, they’re cheap…who cares if they actually protect you from financial ruin? Before being promoted to my current position (I am not a disgruntled employee; I just have a conscience), I used to answer the customer service hotline and deal with all of the angry customers who got stuck with big medical bills despite having “insurance.” Somehow you seem to advocate more insurance like this that covers less and less.

    Nobody goes bankrupt from medical bills in Switzerland. Yet, according to a 2007 study published in the American Journal of Medicine (

    “Using a conservative definition, 62.1% of all bankruptcies in 2007 were medical; 92% of these medical debtors had medical debts over $5000, or 10% of pretax family income. The rest met criteria for medical bankruptcy because they had lost significant income due to illness or mortgaged a home to pay medical bills. Most medical debtors were well educated, owned homes, and had middle-class occupations. Three quarters had health insurance.”


    As for Medicare being bankrupt, we can fix that with higher Medicare taxes and some of the delivery system reforms that were in PPACA (like medical homes, comparative effectiveness research and pay-for-performance programs)…it would still be a lot cheaper than the insurance premiums we’re paying.

    To your point about rationing in other countries, reports about wait times and rationing have been grossly exaggerated. The UK in particular has made huge strides with wait times. To suggest that there is more class distinction in health care there than here is ludicrous…American patients awaiting transplants are not allowed on the waiting lists if they are uninsured.

    I really do appreciate that you have actual ideas for the system (even though I don’t agree with them). That’s more than I can say for the entire GOP.


  8. Daniel says:

    False! According to the Kaiser Family Foundation (a very reliable non-partisan source):

    “It is reasonably well known that for some time the United States has spent more per capita on health care than other countries. What may be less well known is that the United States has had one of the highest growth rates in per capita health care spending since 1980 among higher income countries. Health care spending around the world generally is rising at a faster rate than overall economic growth, so almost all countries have seen health care spending increase as a percentage of their gross domestic product (GDP) over time. In the United States, which has had both a high level of health spending per capita and a relatively high rate of real growth in that spending, the share of GDP devoted to health grew from 8.8% of GDP in 1980 to 15.2% of GDP in 2003 (Exhibit 5). This almost 7 percentage-point increase in the health share of GDP is larger than increases seen in other high-income countries.

    …Compared to other developed nations, the U.S. spends more on health care per capita and devotes a greater share of its GDP to health. Since 1980, the U.S. also has had among the highest average annual growth rates in per capita spending on health care. Despite this relatively high level of spending, the U.S. does not appear to provide substantially greater health resources to its citizens, or achieve substantially better health benchmarks, compared to other developed countries.”

    We not only have the highest per-capita spending, the highest percentage of GDP devoted to health care but also the highest rates of medical inflation (albeit not by leaps and bounds).

  9. Daniel says:

    I think your comment about the rich getting better care in other nations is hysterical. You think health care is LESS equitable in, say, France or Canada than it is in the United States?

  10. Stephen Hyde says:

    Steve Replies: Daniel, you pain me greatly by painting me as an apologist for the current system. A closer reading of my writings in book and blog should confirm the one key thing we do both seem to agree on, which is, in your own words, “The American health care system is a disgrace and needs to be disintegrated and rebuilt from the ground up. It’s wasteful and it is unconscionable from top to bottom.”

    Actually, I agree with your words more than you seem to, since you advocate rebuilding it not from the ground up, but from the top down, i.e., by bureaucratic regulation, which, in my opinion, not only won’t work, but can’t. The system is simply too self-adaptively complex to ever be optimized by such a necessarily rigid, feedback-insensitive, broad-brush approach.

    I conclude that a far better approach is to allow the collective savvy of America’s consumers to rebuild it from the “ground up,” by giving them the ability, information, and resources to individually make their own choices about health insurance and medical services—aided as necessary by government safety nets—because they will simply refuse to tolerate or pay for the massive waste, abuse, inefficiency, and low-quality care that you so articulately and passionately describe. And, in the process (as I have previously written), they will most likely put insurers like your employer out of business.

    Your faith in top-down solutions is not unusual, but I challenge you to become more open to alternative approaches—modeled on how most of the rest of our democratic economy works—to create a uniquely American system of health care financing and delivery that could become a far better model for the rest of the world than anything now extant.

    I admire your zeal and sympathize with the cognitive dissonance you must be enduring as a result of your beliefs being in such conflict with your job. I sincerely wish you all the best.

  11. Daniel says:

    You’re a good, serious guy for talking this out with me.

    I never thought you wanted to keep the status quo (I’ve been reading your blog avidly for months), but I fear that what you’re suggesting might even be worse in some respects. I’m particularly skeptical of your proposals to make insurance LESS comprehensive when most people don’t realize how little their current policies cover or how high their deductibles are.

    I want to point out that I have not met one bad or dishonest person in our company (and I’ve met the CEO). This is a for-profit company, and it’s our fiduciary responsibility to get good earnings for our shareholders. That’s what we do. And we’re not any different from any other insurer (except we’re bigger).

    But it’s what we have to do to get good results for them that troubles me. We have to rely on actuarial analyses (not that actuaries are bad people either) to select for healthy people and weed out sick people. The sick people we keep get charged much higher rates. That makes perfect sense when you think of health care financing as “insurance.”

    But perhaps that’s what’s really wrong. Instead of an insurance mechanism that is based on risk tiering, what we need is a health care financing mechanism that actually creates certainty for providers instead of requiring them to chase down payments from their patients.

    That’s what makes Medicare so appealing to me…yes it’s financially troubled (fixable with tax increases and advanced directive requirements), but as so many on the right have suggested, it’s not really insurance. It’s a funding mechanism that is currently underfunded.


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