By Ashley Wheeland, Health Policy Attorney
Originally Published on the website of the Colorado Consumer Health Initiative 

The Patient Protection and Affordable Care Act (Obamacare) includes many reforms to our health care systems, including private market reforms. One of these reforms will open a door to health coverage for many families who have never had it before – the creation of state health insurance exchanges.

By 2014, all states will have these new regulated marketplaces for individuals, families and small businesses to purchase health insurance. It is estimated that 29 million Americans will be able to get health insurance in these exchanges.  States have the option to create their own exchanges, or the federal government will create them for the state. As of today 12 states have decided to create their own exchanges. (Welcome New York!)

Creating new health insurance marketplaces to compete in already established insurance markets is a complex and challenging goal. Insurance sold in these exchanges must meet certain requirements. They must cover services defined as essential, they must have large enough networks for customers to get the health care they need in the communities they live, they must provide online tools for customers to compare plans, and they must inform people if they qualify for public health coverage.

So why will people choose to purchase insurance through the exchanges? Many of these insurance customers will get federal assistance to help cover the costs of the insurance.  People will qualify if they are under a certain income (under 400% of the federal poverty limit or $44,680 for an individual, $92,200 for a family of four). Small businesses will also get an incentive to purchase in the exchanges – they can get a tax credit if they provide insurance to their employees and buy in the exchanges.

The next question is - will the exchanges really work? Consumer advocates fear one scary consequence known as adverse selection. Adverse selection occurs when people with more health needs seek out health coverage, while people without health needs do not, resulting in the costs of health insurance being more expensive generally. The risk for exchanges is that they will appeal more to people with more health care needs because they will have more comprehensive products, and other people without the need for good coverage will buy coverage outside of the exchange.

The drafters of Obamacare anticipated the risk of adverse selection and included protections against it happening in the law. First, Obamacare includes what is known as the “individual mandate.” Yes, the provision that the Supreme Court recently heard arguments for and against.  The individual mandate requires all Americans, including healthier ones, to purchase health insurance.  The goal is to reduce the costs of coverage for all because everyone is one risk-pool.  Next, Obamacare requires almost all plans (inside and outside of exchanges) to cover essential health services in different tiered plans, with the goal of leveling their values. The law also requires all insurers to spend a certain majority of premiums on health care services and quality rather than overhead. Finally, Obamacare only allows individuals and small businesses to get subsidies and tax credits if they purchase plans in the exchanges.

Some states with exchanges have done things to reduce the risk of adverse selection. Massachusetts is often touted as the model for Obamacare. Massachusetts has an individual mandate, requires plans sold inside and outside their exchange (the Connector) to be the same, allows the Connector to seek bids from insurers for exchange products, and includes subsidies for users. California, which is still building its exchange, is also planning to allow its exchange to negotiate with insurers to sell certain plans, and will require insurers to sell the different tiers of plans. Other states that are also still in the process of building their exchanges, are taking different approaches. In Colorado. the legislation establishing the exchange explicitly prohibits the exchange from being an active purchaser of health insurance.  (More info on active purchasing and exchanges)

Because of Obamacare, private health insurance will be available to many more American families.  The exchanges have the potential to be a place families will be able to get affordable and quality health insurance. But the exchanges need to be viable and successful. The danger of adverse selection in exchanges, as well as the danger of Obamacare’s repeal, could close the door to health coverage that is just starting to open for American families.