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Opt out at your own peril
States may be hurting their own citizens by letting feds run exchanges

By Merrill Goozner
Posted: February 16, 2013 - 12:01 am ET

There's never a shortage of ironies when it comes to healthcare reform. The latest comes from the decision by more than two dozen states to opt out of starting their own health insurance exchanges (the exact number won't be known until after this goes to press). Not surprisingly, most of them have conservative Republican governors and are in the Deep South, the Great Plains and the Midwest.

Whatever happened to states' rights? You'll recall that during the healthcare reform debate, House liberals pushed for a single national exchange with a publicly run insurance option to compete with private insurers. Besides wanting to expand the public sector's role in healthcare finance, they saw a national exchange as a boon to areas that suffer from a lack of health insurance competition.

Not only was the public option rejected, so was the national exchange. Ultimately, more conservative Democrats in the Senate such as Sen. Max Baucus of Montana (Republicans mostly ignored the debate) thought that when it comes to selling insurance, it was better to let states determine the best solution for what ultimately is a local market driven by local conditions.

Perhaps governors and state legislatures now opting out are thinking that the federal government will fall flat on its face with incompetent bureaucrats failing to get their act together to develop an exchange that can operate in multiple states without help from local authorities. There's no reason to think that will be the case.

The federal government already has experience offering health insurance options in every state. It's called the Federal Employees Health Benefits Program, where the government's more than 2 million workers and their families pick among private firms that compete for their business. The program is so successful that its expansion was briefly considered as one way to extend coverage to the uninsured.

Moreover, there are efficiencies of scale in operating a single national exchange. Developing one single Internet-based interface where individuals and businesses can go to learn their options makes more sense than having 50 states reinventing the wheel. It certainly makes marketing simpler. Massachusetts' highly successful Health Connector paved the way, of course, and is freely available to the feds or any state that wants to use it.

So what's lost in letting the federal government take over the job? Ironically, it is what MIT health economist Jonathan Gruber, who helped design both the Bay State and federal reform laws, calls the easiest and most fun part of insurance reform: designing and choosing the plans that will be made available to consumers and small businesses that use the exchanges.

The Patient Protection and Affordable Care Act calls for creating a menu of choices for consumers depending on the level of benefits: dubbed bronze, silver, gold and platinum. States can choose whether to standardize options within each level or allow variations that are equal in actuarial value. Massachusetts has chosen a mix of those approaches: there are two variations of the high-end plans but only one in the more basic plans that many low- and moderate-income people will likely choose.

States also can choose to be active participants in the marketplace by limiting the number of insurers who can participate within each category. Pre-screening allows states to avoid the confusion that comes with a proliferation of choices such as what happened when Medicare's drug benefit program was introduced in 2004. California has taken that route.

There was wisdom in allowing states to go their own way. Given the differences in regional healthcare delivery and insurance markets, tailoring approaches to local conditions should give local health insurance consumers the most choice in the least confusing manner. By turning it over to the feds, the only people those state governments potentially hurt are their own citizens.

Merrill Goozner, editor


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