n engl j med 361;12 nejm.org september 17, 2009 PERSPECTIVE 1135 Health Insurance exchanges — making the markets work HEALTH CARE 2009 Health Insurance Exchanges — Making the Markets Work Richard G. Frank, Ph.D., and Richard J. Zeckhauser, Ph.D. A mericans purchase health insurance in various ways. Some buy individual policies. For them, medical underwriting is common, and preexisting conditions can preclude, limit, or dramatically increase the cost of coverage. Many buy insurance through small employers, which typically offer little or no choice of plan. Their premiums tend to be higher than those of consum- ers purchasing through large employers, which can bargain effectively on prices. Large em- ployers usually offer a modest selection of high-quality plans at competitive prices. Medicare re- cipients can join traditional Medi- care and then choose drug cov- erage from any of dozens of stand-alone prescription-drug plans (PDPs) or join Medicare- Advantage and choose among numerous private health plans. Given that plan choices are difficult to make and that large purchasers can whittle down pric- es, a reformed health care sys- tem is likely to employ health insurance exchanges to stand be- tween consumers and insurers. The Massachusetts Health Insur- ance Connector, in operation since 2007, runs the best-known such organization. Exchanges focus on the pur- chase of insurance for individu- als, households, and groups of small employers — all of which will be more likely to obtain coverage if it is made more af- fordable or more available, and certainly if it is made mandatory. Exchanges mimic some functions that are performed by large em- ployers as purchasers, including assembling, organizing, and dis- seminating information about competing health plans; enacting policies that promote risk pool- ing; specifying benefit packages; negotiating premiums; limiting the number and types of plans that may be marketed; and struc- turing the enrollment and plan- selection process. They thus seek to extend to all consumers the benefits of having a large em- ployer purchase one’s insurance. The rationale for an exchange is that consumers are rarely well equipped to deal with markets offering large numbers of com- plex, expensive, hard-to-evaluate products — products that, as in the case of health insurance poli- cies, may nonetheless be critical to their well-being. Consumers facing complex, high-stakes choic- es are prone to predictable errors. 1 They are likely to lack the skill and time to make choices based on a careful assessment of the relative costs and quality of com- peting health plans, tending in- stead to choose on the basis of anecdotal information, such as their friends’ experiences. An ef- fective intermediary could sub- stantially improve their choices — and thereby promote competi- tion and thus enhance quality and efficiency. The exchange concept has stirred great excitement and has broad support. But there is dis- agreement on how exchanges should function, beginning with the question of how much help consumers need in order to make markets work efficiently. One prominent approach would have exchanges adopt a traffic- cop role similar to that played by the Centers for Medicare and Medicaid Services in running the MedicareAdvantage program and the Part D prescription-drug ben- efit. In those programs, any sup- plier who meets some qualifica- tion standard is admitted. The number of sellers is not limited. Plans retain considerable control over the specifics of their of- ferings (formulary design, cost- sharing provisions) and over their premiums. Consumers are given information and some tools (Web- based comparison programs and plan summaries) to assist them in evaluating choices. Still, con- sumers are confronted with a multitude of plans, each with numerous provisions. Faced with too many options that vary in sub- tle but possibly important ways, consumers usually just stick with their current choice or follow the lead of a friend or relative. Consider the example of a senior citizen in a Boston sub- urb who is seeking a Medicare PDP. The graph shows the price variation within a single county. The consumer can choose among 47 PDPs, 23 of which have a quality rating of at least 3.5 stars out of 5 and are classified as ei- ther identical or actuarially equiv- alent to the Part D standard plan. Thus, on average, the coverage offered by these plans is similar. The most expensive of the 23 plans charges a premium that is 2.4 times that of the least ex- pensive plan. Presumably, people who choose the more expensive The New England Journal of Medicine Downloaded from www.nejm.org at HARVARD UNIVERSITY on October 21, 2010. For personal use only. No other uses without permission. Copyright © 2009 Massachusetts Medical Society. All rights reserved.