What is the Health Insurance Exchange?

One of the most confusing aspects of the health care debate for me has been trying to understand what the health insurance exchanges will actually do. I understand the basic definition: The exchange is a government-regulated marketplace of insurance plans with different tiers, or levels of coverage, offered to individuals without health care or to small companies. Presumably, the presence of government-regulated exchanges will, like any functioning market, bring prices down so that personal and employer-provided insurance is both comprehensive (ie cannot legally skimp out on necessary care or otherwise abuse customers) and competitive (ie enough demand will force insurance companies to cut prices to compete). But what will the health insurance exchange actually look like? It'll look like this:

That's the online comparison tool for insurance plans on the federal employees' website. David Herszenhorn of the New York Times Prescriptions blog says this website is "perhaps the closest example of what such an exchange might look like."

What's so great about an insurance exchange? First off, you can see from the chart above how easy it is to compare plans. Since plans on the exchange will be transparent, high-quality and "tiered" from the cheapest plan to the one with the most coverage, reformers hope that it will turn the insurance market into something more closely resembling a real marketplace where competition for buyers brings down the price of insurance. Second since it's a marketplace of government-regulated plans, each plan has to clear a high bar set by the feds. That means "preventive and primary care, emergency services, hospitalization, physician services, outpatient services, day surgery" ... in other words, pretty comprehensive coverage even at the most basic levels.

But will it work? The Center on Budget and Policy Priorities says there are some musts: "Setting minimum standards for benefits, limiting the number of and variation between plans, and requiring each insurer to cover a broad group of people with varying levels of health costs would create a strong framework for the benefits available within an exchange." That all makes sense to me. Make the rules tight and the comparisons easy, and you've got a decent exchange.

But even if the exchange is designed well, it falls to consumers to make prudent choices about their insurance. Comparing insurance is different than, say, comparing specs and prices for computers.  We have a good idea about how much memory we'll need on our hard drives. We don't know, however, when we'll get sick or how. So someone could buy a health care plan that's very affordable when he's healthy and rotten when he's sick. If he gets sick, the out-of-pocket expenses could be ruinous, no matter how transparent and fair the exchange was. Even a perfect exchange, then, would be more like a vitamin than a panacea for our health care cost crisis.