The idea of a health insurance exchange–those markets for comparison shopping for coverage outlined in the Congressional health reform bills–is not new. Several states, including California, Florida, North Carolina, and Texas have tried them in the past. In every case they failed.
Does that mean that the idea of an insurance exchange is a bad one? Not at all. But it does make it rather important for us to look at the failed examples and learn from their mistakes. According to Cappy McGarr, who was the founding chairman of the purchasing alliance in Texas, the fatal flaw in every case was inadequate market share. Because private insurers could offer small business products inside and outside of the exchange, they were able to engage in the practice of cherry-picking. Enrolling younger, healthier people in inexpensive plans outside of the exchange and leaving older, sicker people in the exchange plans. The risk pooling mechanism breaks down and the exchanges crumble.
What’s the solution? Just like you have to have an individual mandate to purchase insurance if you get rid of pre-existing condition exclusions to avoid cherry-picking, you have to require all insurers to participate in the exchange–at least effectively. You can do this by requiring them all to participate in it literally, or you can simply require them to offer coverage to everyone using community rating, so that everyone pays the same price. That way, no one gets left out or dumped on the exchange. And history teaches that that’s the only way for an exchange to remain viable.