Quotes of the Day

It's a fairly safe bet that the people telling pollsters they're satisfied with their health insurance or who are warning politicians to keep their hands off the current health-care system have never had to buy a health-insurance policy on the open market. After all, the conditions for individuals who do have to fend for themselves in search of health insurance couldn't be much worse than they are now. As one-person (or one-family) risk pools, they have no leverage, premiums are often prohibitively expensive, choice is usually limited and comparing available plans — in the event that more than one exists — is nearly impossible. That problem is at the root of much of what health-care reform is supposed to change, and one of the primary weapons intended to do that is a poorly understood, often overlooked facet of the various proposals that is dubbed the health-insurance exchange.

Under the plans from both the House and Senate, these new, government-run, Web-accessible marketplaces for private insurance (along with possibly a public or co-op alternative) could, theoretically at least, make reviewing and purchasing a new health plan as transparent and easy as entering your zip code and clicking your mouse. Certain broad aspects of the exchange concept are widely accepted: the exchanges would put individuals into large risk pools, allowing them to buy health insurance at a significantly lower cost; federal subsidies for individuals too poor to afford insurance on their own would be doled out via the exchanges; and plans offered there would be vetted by federal officials to ensure they meet minimum standards for coverage. But other exchange details, like exactly which (and therefore how many) individuals would get to shop there and whether states or the Federal Government would be in charge, are still very much under discussion. Which exchange design emerges from Congress could go a long way in making or breaking health reform as a whole.

By far the most controversial detail is who would participate in these exchanges. Both the House and Senate plans would restrict access to small businesses and individuals not eligible for employer-sponsored plans that meet a set of minimum standards for coverage. Plus, while the House plan would at least start with one national exchange, a Senate proposal would allow states to set up their own, and that could create problems from the outset; not only could they take longer to set up, but there is doubt about whether state or regional exchanges would be able to attract enough enrollees to leverage for lower premiums. Alain Enthoven, a leading health-care economist at Stanford University, says these conditions would make it impossible for the exchanges to reach the "critical mass" of pooled enrollees necessary to leverage insurers to offer lower premiums. Enthoven says exchanges need at least 20% of the privately insured population to be viable, far more than would participate under the House and Senate plans. He is among a community of health-policy experts who advocated for the exchange to be open to everyone at the outset, an idea that has been ignored thanks to President Obama's promise that "if you like what you have, you can keep it." An exchange offering more transparency and lower premiums could attract many large employers, destabilizing the current employer-based health-insurance system, from which more than half of Americans get coverage.

Then there's the problem of adverse selection. Under the House plan, the exchange would be the only place private insurers would be allowed to market and sell individual insurance policies. But under the plan from the one Senate committee that has released legislation, insurers could still sell insurance outside the exchanges. This is a recipe for failure, according to Karen Pollitz, a health-policy researcher at Georgetown University. "Anytime you've got competing markets, there is an opportunity for risks to get shifted," she says. (Both the House and Senate plans would allow, but not require, small businesses to participate, with the House plan opening the door to larger and larger companies over time.)

According to Pollitz, insurers and insurance brokers would have a strong incentive to nudge sicker or older individuals or small groups toward the exchange, skewing the risk pool there and driving up premiums. "You just have to cherry-pick a little bit to be really profitable," says Pollitz. Both the House and Senate plans call for regulations and rules to prohibit this. But, as Jacob Hacker, a health-policy expert at Yale University, puts it, "The real concern comes down to having adequate resources for enforcement. It's one thing to have rules and another thing to make sure insurance companies are abiding by those rules." The House plan calls for the creation of a new independent Executive Branch entity called the Health Choices Administration to oversee the exchanges, among other duties; a Senate plan is less specific, calling for exchanges to be administered by a "governmental agency or other nonprofit organization."

Insurance exchanges are not a new concept. Under President Bill Clinton's ill-fated health-care plan, they were called "alliances"; in a current alternative bipartisan reform bill offered by Senators Ron Wyden and Bob Bennett, exchanges are called "health help agencies." And when members of Congress talk about offering Americans health insurance that is as good as what they themselves have, they are referring to the largest exchange in operation, the Federal Employee Health Benefits Program (FEHBP). On the program's website, federal workers can enter in their location and see what private insurance plans are available and how much they would have to pay out of pocket. (See for yourself here.) In a complex private insurance system with varying co-pays, co-insurance, deductibles, annual out-of-pocket expenses and volumes of small print, this is no small feat. The FEHBP covers some 8 million federal workers; other small exchanges exist in some states for public workers, and there is one for all of Massachusetts, where the marketplace is called the Connector.

Perhaps the most misunderstood aspect of the exchange proposals is the "essential health benefit package." Health-reform critics have been using this legislative provision to scare people into thinking that the government will decide what services are covered under private insurance. But what the government would actually be doing is setting a standard for a minimum benefit package that all health-insurance plans would have to meet. The purpose of this is not to ration health care but rather to ensure that Americans don't buy plans with hidden loopholes and gaps. The House plan says this minimum benefit must cover at least 70% of the cost of hospitalization, doctor's visits, prescription drugs, maternity care and prevention, among other services. The House plan also limits annual enrollee cost-sharing to $5,000 for individuals and $10,000 for families. A Senate plan says minimum benefit coverage must include similar basic services and sets affordability at no more than 12.5% of annual income.

The minimum benefit package, in addition to setting standards for coverage, is also intended to bend that all-important curve of overall health-care costs. Federal subsidies given to individuals to buy insurance, which could be applied to plans only if they are purchased in the exchange, would not equal more than the cost of a minimum benefit package. If individuals want to purchase plans that are more expensive, they would be free to do so but would have to pay more out of pocket. Employers whose workers buy coverage through the exchange, under the House plan, would contribute at least 72.5% of the cost of an individual minimum benefit package premium and 65% for a family plan. Under this scenario, employees would have the freedom to choose their own plan, as opposed to being herded into a group plan selected by their employer. All of this is to encourage the purchase of fairly austere health insurance, which experts predict will help slow the increase in overall health-care spending.

"If you want something that costs more, you pay the difference and you have some skin in the game," says Enthoven. In Massachusetts, which passed universal-health-insurance provisions in 2006, some 40% of residents who purchased policies through the state's exchange opted for the cheapest plans, called bronze policies, according to Trudy Lieberman, a health-policy journalist who recently reviewed that state's experience for Columbia Journalism Review.

The clearest improvement that insurance exchanges would offer is choice. Made up of potentially millions of enrollees, exchanges would be too large for insurers to ignore; in that case they would have to start doing something that's fairly unnatural for them in the current system — compete against one another in a transparent way that consumers could understand.

• Kate Pickert
• They're key to the health-care-reform plans from both the House and Senate. They could make reform work -- but only if they're designed right