!n 1993, California set up a Health Insurance exchange where small businesses could purchase health insurance.  The exchange was later taken over by a non-profit.

The businesses taking part in the exchanged learned that they could get the same coverage straight from the Insurer at a lower price as long as their workers were relatively healthy.  Small businesses with healthy workers began bailing out of the exchange, leaving only those businesses that had workers with health problems being covered by the exchange. The fact that the population covered by the insurance exchange became limited to less healthy workers resulted in rates rising, and health insurance companies backing out of participation.  The exchange closed in 2006.

(Sounds like the prediction I made on what will happen if John Kerry’s proposal to tax high-cost Insurance policies was implimented.)

The “lesson” the Government learned from California’s failed experiment?   Government must impose rules governing rates and eligibility to protect the exchange from attracting a disproportionate share of high-risk people.

In other words, change the rules so that health exchanges can compete with private insurance plans.  And you can only do that by subsidizing the health insurance exchange and/or by finding ways to increase the cost of private insurance.

Why?

Look at what happened in California.  Joining a Health Exchange resulted in the employees that had relatively healthy workers encountering higher health care cost.   A plan that raises health insurance cost for the majority of employers is not tenable.

The only was Health Insurance Exchanges can exist  is if people are forced to use them, or if the Government regulates the rates.   When the Government sets the rates, it now has to subsidize the insurance in order to keep the exchange solvent.  This means the Insurance doesn’t actually cost less, it just has a large percentage of the cost hidden from the end user.

As an alternative to setting rates for insurance bought through the exchange, it could simply drive up the cost of private insurance making the insurance bought through the exchange look more attractive.

In the end, Health Insurance Exchanges are not a way to keep health insurance costs low.  When tried in the past, insurance bought through the exchanges has proven to cost more than private insurance.