Should States Establish Obamacare Insurance Exchanges?

Obamacare expects states to do much of the law’s dirty work, including establishing “exchanges” to limit the health-insurance choices of many of their residents. Some advocates of consumer-driven health care believe that states can outwit Obamacare by establishing exchanges that are market-friendly. If only it were so. States would do best by simply ignoring Obamacare’s insurance exchanges and dedicating themselves to the defeat of this law.

To be sure, the letter of the law prescribes “flexibility” in structuring exchanges, and some believe that it is possible to design an exchange that increases consumer choice. Two states, Massachusetts and Utah, already have exchanges, and some claim that the Utah Health Exchange is a consumer-friendly model that can blunt the most harmful consequences of Obamacare. Pre-Obamacare, exchanges were suggested as a way to get around the major government failure in American health care: Congress’s grant of monopoly control of our pre-tax health dollars to our employers.

The Utah Health Exchange allows spouses to aggregate defined contributions from different employers. For example, suppose a husband’s employer contributes $300 per month to the exchange for health insurance. His wife works for another employer which does the same. The household has $600 to spend on a family policy that they, not their employers, choose. The husband and wife can then decide which of their employers to affiliate with, satisfying federal regulations for group coverage. So far, so good. However, enthusiasm for the Utah Health Exchange must be tempered.

This “premium aggregator” has never been tested: It won’t go into effect until next January. Indeed, reports from only a few months ago describe the exchange as a disappointment. Although 20 businesses enrolled on the first day of operations in August 2009, and 136 businesses in total signed up, only 13 remained enrolled by last December. Even if the new, improved Utah Health Exchange has figured out a way to increase consumers’ choices, it is unlikely that such choices will survive the Obamacare take-over.

Official sources — such as the chief actuary of the Centers for Medicare and Medicaid Servcies and the Congressional Budget Office — estimate that about half a trillion federal dollars will flow into Obamacare exchanges between 2014 and 2019, and these estimates probably underestimate the true costs of the subsidies. The CBO estimates that 3 million of the 24 million people who will enter the exchanges in 2019 will come from the 162 million who would have otherwise enjoyed employer-based benefits. The actual number will be far greater. Independent analysis concludes that anyone who earns less than $80,000 annually will be dumped into an exchange.

This fire hose of subsidies explains why it is far more likely that Obamacare will corrupt Utah than that Utah will manage to redeem Obamacare. President Obama and HHS secretary Kathleen Sebelius want to eliminate private choice of health insurance in favor of a government monopoly. Once the subsidies start flowing, Secretary Sebelius will be able to impose whatever restrictive regulations she wants.

States establishing exchanges will also find that they are very expensive to operate. The Utah Health Exchange only costs about half a million dollars annually, but it has just been a pilot with a dozen businesses participating. Massachusetts’ Commonwealth Connector spent more than $26.6 million on vendors and contractors in 2009, and $3.4 million on employee compensation. This comprises fully 3.5 percent of the money that businesses and enrollees paid into the exchange.

The House of Representatives will soon be controlled by a majority committed to repealing Obamacare, and which will attempt to take away Secretary Sebelius’ checkbook. States establishing Obamacare exchanges are making a one-way, lose-lose bet. If Obamacare persists, exchanges will become bloated administrative nightmares. If Obamacare is defeated, states will have wasted time and energy that should have been directed towards that effort. Obamacare is President Obama’s problem. Don’t make it your state’s, too.

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