With a politically charged Supreme Court review this summer, we can expect a renewed frenzy over Obamacare. Like the dark prince, Beelzebub, the Patient Protection and Affordable Care Act is a creature known by many names. And while there is much about the polarizing new law and its enactment process that deserves criticism, many of the most important and interesting parts of the law remain poorly understood.
The exchange system — the network of state-administered markets that the act creates —is the central component of Obamacare, and it provides surprising insight into the law’s approach to state rights, consumer choice and regulated markets.
The exchange system is like an imaginary supermarket that only sells health insurance. To be sold on the exchange, an insurance plan must clearly display its “nutritional facts” to make comparison shopping easier. Each plan must also abide by basic quality standards designed to ensure that every plan sold on the exchange provides an adequate range of coverage for the price. For instance, plans on the exchange must spend at least 80 percent of premiums on health care, instead of things like executive pay, marketing or corporate jets. The exchange excludes plans that deny coverage for pre-existing conditions and puts limits on plans that try to charge more for riskier customers.
In addition to federal regulation, each state can adjust the rules of its own exchange and offer a state-level “public option” to compete on the exchange. With a federal blessing, states can even band together to create regional exchanges. Under the Act, a state can opt out of the exchange system entirely, if it can create an alternative health insurance program that achieves equal or better coverage for the same cost.
But why would any self-respecting insurance company want to play by these new rules and participate in the exchanges? Because only plans on the exchange are eligible to receive the new federal health insurance subsidies.
For those who do not receive coverage through their employer and spend more than 10 percent of their income on health care costs, Obamacare provides a tax credit sufficient to bring those costs below 10 percent — provided one’s health insurance is purchased on the exchange. By 2019, $113 billion in subsidies will be up for grabs each year on the exchanges, according to CBO estimates. Only by competing with the other plans on the exchange can insurance companies hope to get their hands on those juicy federal dollars.
The exchange system is a true capitalist’s solution to the health insurance problem. It creates a regulated marketplace where for-profit, nonprofit and public insurance providers alike compete on the merits for customers who can easily compare the costs and benefits of each plan. And the exchange system gives states the flexibility to experiment with alternatives, while challenging them to compete with one another.
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