What Can We Expect From the New Health Insurance Exchanges?

Posted: 07/24/2013 4:23 pm

By Sandeep Baliga and Nikhil Joshi

Huffington Post


In less than three months, the health insurance exchanges established by the Affordable Care Act will go into effect. Proponents of the law argue the exchanges will offer high-quality insurance at competitive rates for millions of consumers. Critics argue that Americans, especially those who are healthy, will balk at enrolling, causing the would-be markets to unravel.

So who is right?

Fortunately, there is a rich body of independent research that uses detailed real-world health care datasets to infer what will happen when the new insurance markets open. The studies show that well-functioning exchanges will offer lower premiums and more consumer choice.

These benefits, though, are contingent upon attracting consumers, especially those who are young and healthy, to the exchanges. A working paperby professors from Northwestern University and the University of California performs a simulation of a health insurance exchange by using data from a firm that offered each of its 9,000 employees a set of coverage options. The study finds that in a worst-case scenario, where anyone who does not see an expected gain from purchasing insurance forgoes coverage — i.e., young people — about 60 percent of people ages 25 to 30 would still benefit from purchasing a “bronze plan” at an annual (unsubsidized) price of about $2,700.

But if more young and healthy Americans sign up, a virtuous cycle occurs, with premium costs dropping, encouraging yet more young and healthy Americans to join, and so on. In the above simulation, this would cause premiums for those ages 25 to 30 to fall by more than a third.

If properly implemented, the exchanges will bring a somewhat novel feature to the health insurance market: competition. According to a 2012analysis by the American Medical Association, 70 percent of markets have little competition between private insurers.

In these “highly concentrated markets,” insurers have enough market power to set prices based not on the cost of providing insurance, but on other factors, including how much a firm purchasing insurance for its employees makes in profits.

A liquid health insurance exchange can offer much-needed competitive pressure and lower costs. According to a National Bureau of Economic Research paper, after health care reform in Massachusetts was put in place, premiums in the exchange fell more than 10 percent because of reduced insurer markups alone.

In addition to lower premiums, competition can help consumers by simply increasing choice. One analysis showed that consumers would be willing to pay increased premiums of up to almost 30 percent to include their ideal health plan in their employer’s offerings.

Well-functioning health insurance exchanges could generate benefits beyond the pool of previously uninsured individuals that join the exchanges. By providing a plausible alternative to employer-sponsored health care and ending discrimination based on pre-existing conditions, the health care law could meaningfully improve labor mobility, a critical feature of a strong economy that has been dampened since the recession.

An influential 1994 study found that a typical 38-year-old male is 25 percent less likely to change jobs if his only source of health insurance is his current job. Meanwhile, the study found that married men who are working in jobs without health insurance (e.g. as entrepreneurs) are twice as likely to seek new jobs if they have pregnant wives.

During the recession, the number of workers moving from job to job in a quarter (“job churn”) dropped by more than 20 percent, and has remained low throughout the recovery. The number of business start-ups launched each quarter also fell, and remains about 10 percent below pre-recession levels. If the health care law can, as research suggests, reduce “job lock” on the order of 25 percent, the economic benefits would be significant.

While we cannot be sure how the new markets for health insurance will work, studies based on real-world health data give us a valuable window into what may happen. The economic research indicates that well-functioning exchanges will bring much-needed competition and individual participation to a market currently characterized by high prices and little choice — and that can benefit everyone.

Sandeep Baliga is a Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management. Nikhil Joshi is the Research Director at Business Forward, and former Associate Policy Director for Economics on President Obama’s re-election campaign. They are coauthors of the report, “Implementing the Affordable Care Act: The Value of Efficient Health Care Exchanges.”