NCPA - National Center for Policy Analysis

Why Health Exchanges Don't Work

September 9, 2011

Utah's experience demonstrates why unsubsidized exchanges are unlikely to attract significant numbers of beneficiaries from the small-group market, says John R. Graham, director of health care studies at the Pacific Research Institute.

Key points Graham makes in his study:

  • The Utah Health Exchange is failing to meet its goals.
  • It is almost certainly true that the administrative costs of operating an exchange are greater than the administrative costs of the traditional small-group market.
  • Any exchange that offers unsubsidized, voluntary coverage will likely have the same poor results as the Utah Health Exchange.
  • Reformers who believe that they can overcome the federal government's discrimination against individually owned health insurance by establishing such exchanges are misguided.
  • Only federal tax reform can remove the impediment to individually owned health insurance.

The failure of the Utah Health Exchange is not idiosyncratic.  It is the destiny of any unsubsidized and voluntary exchange.  The reason is pretty straightforward: The administrative costs of operating an exchange plus the administrative costs to a small business of migrating to the exchange are almost certainly greater than the administrative costs of participating in the traditional small-group market (or taking a chance on other "work arounds" promoted by some insurance producers).  Therefore, unless an exchange is subsidized from non-exchange sources (as per the new health care reform law, "ObamaCare"), it will not attract many participants.

Eliminating employer-monopoly health benefits in favor of individually owned health plans is a critical goal of health reform.  The evidence strongly suggests that this can only be done through federal tax reform.  Unfortunately, those brave souls who attempt it through non-ObamaCare, state-based exchanges are engaged in a fruitless quest.

Source: John R. Graham, "Why Health Exchanges Don't Work," Pacific Research Institute, August 2011.


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