Regulating to Promote Competition in Designing Health Insurance Exchanges

Many of the most contentious issues in the debate over health reform concerned the performance and competitiveness of private health insurance including abusive and unfair practices such as denying coverage to individuals with pre-existing conditions; the impact of dominant insurers serving individual and small group markets; and purportedly excessive profits of the insurance industry and lavish salaries of their executives. A key component of the Affordable Care Act for implementing and overseeing reforms directed at these problems is the establishment of market-making entities, health insurance exchanges. These state-run entities will certify insurers’ compliance with regulations, monitor their performance, and take on myriad administrative functions. But equally important is the role of exchanges in designing efficient markets for the purchase and sale of insurance. This article focuses on the somewhat overlooked, but crucially important role the exchanges can play in promoting competition in both insurance and provider markets. Despite the extensive federal regulatory regime established under the ACA, the Act leaves much to the discretion of the states. The complex array of interrelated choices inherent in designing exchanges poses a challenge for states seeking to maximize competition among insurers. Moreover, many other policy choices facing the states will significantly affect competition. This article takes the normative position that because making competition effective in insurance and provider markets is essential to the success of health reform, state legislatures establishing health exchanges should incorporate competition-promoting regulation in their designs. However, finding the best means of advancing competition is not a straightforward undertaking. Variations in markets, cultures, and state regulations will necessitate individualized approaches. This article examines some of the alternatives available to states and offers some generalized suggestions for dealing with core impediments to competition and using regulation where possible to deal with the serious problem of provider market concentration. In designing exchanges and structuring insurance markets, states can take a number of steps to promote competition. They can reduce opportunities for adverse selection, encourage new entry by insurers, enhance and exercise exchange leverage, and facilitate effective comparative shopping by individuals and employers. All are worthy undertakings and, in most markets, probably essential to ensure meaningful competition among plans. Moreover, exchanges can play a vital role in promoting competition at the provider level, the locus of the most significant obstacles to well-functioning health care markets. This advice comes with some caveats, however. Legislation and regulations need to be carefully calibrated to the market conditions in the state and entail calculated guesses about the behavior of carriers in response to the new regulatory regime. Further, much is asked of exchanges. Exchanges are expected to assume a wide variety of roles: gatekeeper, regulator, consumer guardian, promoter, market facilitator, evaluator, and informed shopper. These multiple responsibilities will likely generate conflicting impulses that can weaken exchanges’ resolve to promote competition.