Another Failure in the Making

From time to time we have chronicled the various failures of the Affordable Care Act (ObamaCare), and they are many.

First was the CLASS Act, which even the administration said could not be implemented. Then there were the federal high-risk pools, and the small business tax credit, and the subsidy for employers offering early retiree coverage, and the CO-OP idea, and the Medical Loss Ratio restrictions.

Even a simple idea like requiring insurance contracts to be written in plain English was doomed to failure.

But now comes what is likely the biggest failure to date — the Health Insurance Exchange idea. (I say biggest failure to date, because the individual mandate, which will be universally ignored, hasn’t come online yet.)

Robert Pear reports in the New York Times that only 13 states have told the Feds they intend to set up exchanges, and completed applications have to be submitted by November 16 of this year!

If a state fails to set up its own exchange in time, the Feds will set one up instead. But Mr. Pear writes that there is absolutely no information available on what the Feds might be doing to make this happen. He writes, “States have done their work in public, but planning for the federal exchanges has been done almost entirely behind closed doors.”

The Feds know the value of good advertising and have “invited advertising agencies to devise an elaborate ‘outreach and education campaign’ to publicize the federal exchanges and their potential benefits for consumers.” But federal officials “have refused even to divulge the ‘request for proposals’ circulated to advertising agencies.”

Even if the Feds are able to set up exchanges in all the states that have refused, they will be in for a rude awakening when they discover the ACA prohibited federal exchanges from offering the same premium subsidies available to state exchanges. There has been a furious debate over this issue on the Health Affairs Blog, between Timothy Jost of Washington and Lee University and Michael Cannon and Jonathan Adler of the Cato Institute. Cannon and Adler clearly have the stronger side of this argument.

But no matter — like everything about the ACA — this idea is poorly conceived, poorly written, and will be poorly implemented. It is another case of throwing Jello on the wall and hoping it will stick. It will not stick.

The idea of online comparison shopping is attractive. In fact, has been doing it for many years and they provide a wonderful service showing what was available in every zip code. But the Exchanges as envisioned in the ACA have little to do with that.

For some reason Congress decided instead to create a new bureaucracy in each state that would not only provide a marketplace for health insurance options, but define the products, regulate the companies and distribute the subsidies. But why?

  • Why does each state need its own Exchange? Is the market so very different in North and South Dakota that a single Exchange wouldn’t work for both? The New York City area is a tri-state market, why not have a single exchange for that market?
  • Why do we need a new regulatory agency? Every state already has a Department of Insurance that is expert at regulating insurance companies. They have on staff attorneys, actuaries, accountants, customer services, and enforcement personnel that are very good at seizing insolvent insurers when needed. Why should all this be replicated in each state? Why not give the existing departments the responsibility for enforcing whatever regulations the politicians develop?
  • Why create a new state agency to distribute federal subsidies? Whether an individual is eligible for a subsidy is a federal decision, and the IRS is already assigned the responsibility of enforcing the mandate. Why shouldn’t the IRS be distributing the subsidies, especially since these subsidies are based on reported income?
  • Finally, once you have the regulations and subsidies in place, what added value does a new state agency bring to the shopping for coverage? Are state agencies adept at web site development? What is the expertise here?

But many billions of dollars are being spent on creating these agencies that will end up being at best redundant and more likely clumsy and amateurish. But Congress just seems to love creating new bureaucracies.

Meanwhile, if I were a betting man (and I am), I would put a sizable wager on this proposition: the new health care exchanges will be so poorly organized and managed that very few, if any, insurers will choose to participate after the first year and even fewer citizens will bother to enroll. They will be no more successful than all of the other provisions we’ve looked at in the past.

Comments (13)

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  1. Otis says:

    They were warned about these failures.

  2. Steve says:

    Not having many insurers participate in the exchanges in the first year is going to be problem.

    I predict that way too many people will try to get on Medicaid than what some states can handle.

  3. Devon Herrick says:

    The concept of a one-stop-shop where people can go to compare and shop for health insurance seems relatively simple. That the government has made it so complicated is an indicator that the idea is bound to fail. The website,, has the best health insurance exchange. Why is this not the model?

  4. Jack McHugh says:

    This assumes these exchanges will even be operational in just 14 months, when they are required to start enrolling citizens. The word is “exchange” is really a misnomer, what these entities will really is “Departments of Obamacare Subsidy Administration,” and making that happen is a monstrously huge and complex information technology project that hasn’t even begun in most places! And we all know how large government IT projects always come in on time and below budget. :rolleyes:

    That’s a joke – they usually come in years late and often double or triple the projected cost.

    Bottom line: It ain’t gonna happen by October 2014, or 2015 or maybe even 2016, even if Obama is reelected and Congress cooperates 100 percent. There has probably never been a larger or more complex government IT project, and it is the nature of such projects to creak, groan and often enough fail outright.

  5. Kyle says:

    Wasn’t transparency clearly written on the side of Obama’s soapbox during his first campaign?

  6. Krystal says:

    Actually the carriers are required to offer plans in teh exchanges. If they do business in the USA they must offer the three tiers of plans in the exchanges. So citizens may not use the exchanges but the plans will still be there.

  7. Bill says:

    I agree with Devon that the concept of one stop shopping is great. But the exchanges also have to deal with the tax credits and subsidies and information regarding whether individuals are eligible to purchase insurance under the exchange. All this is very complicated compress and I worry about this becoming a big beauracratic mess. Less like the fantastic e-health insurance .com and more like the DMV!

  8. nolirswann says:

    So, once again government imposes on the private sector what it cannot do itself. Sort of like making cars for sale but with no dealerships. Go figure!

  9. Julie Jennings says:

    Greg, as you know, we are living the nightmare in Massachusetts. So you making a bet on this is almost like insider trading! The Connector has been successful primarily in signing people up for individual subsidized insurance. They have had 3 dismal attempts at serving the employer market and in each attempt, employers have failed to find value in purchasing through the Connector. The Connector serves as another distribution model for employer health insurance in a market where products were already available and readily accessible. How is the incredible cost of creating, advertising and operating the Connector justified in any business model?

    Our legislature wants to see this model succeed at all costs. They just passed legislation to CREATE value by way of wellness subsidies ONLY available to employers purchasing insurance through the Connector.
    How is that for a level playing field? What if the government opened a car dealership in every state and offered 3 of the 30+ models made by the auto maker, sold at the same price as the auto dealers, and then surprisingly couldn’t compete against the auto dealers, so they pass a law for the government to subsidize the price of the cars on the government lot??

  10. Bob Hertz says:

    The subsidies are everything. Without subsidies, a person making $30,000 a year cannot afford any health plan other than a huge deductible policy (and then he/she cannot afford the deductible either.)

    The lack of subsidies was a main reason why the federal high risk program failed. The tax credit for small businesses had utterly pathetic subsidies, or a version of same, so that federal program failed also.

    If there are subsidies, then even the current health insurance industry would work for the whole nation.
    Without subsidies, even the most efficient exchange will not reach beyond a few younger affluent people.

  11. Greg Scandlen says:

    Bob Hertz,

    I certainly agree that subsidies are important. However, subsidies can be dangerous if we subsidize the wrong things or we have to borrow money to pay the subsidy. The way we currently subsidize health care is wasteful and regressive, so I would not want to simply pile more subsidies on top of the ones we already have.

  12. Bob Hertz says:

    I am defining subsidy as the equivalent of cash on hand to buy the insurance policy.

    By that definition, no one under 65 gets any subsidy today. Those who are unemployed, self-employed, or work in a low-benefits industry like food service get zero. Even a well-paid employee with good benefits gets no help in paying his share of premiums.

    I am not saying that the subsidies will work, or that they are affordable to the nation. I am frankly rather ashamed at some senior citizens who recoil at giving anyone besides themselves a real subsidy.

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