Patients' Choice Act: "Exchanges"

Yesterday, I wrote critically about the "auto-enrollment" feature that the federal government would require states to institute if it passed the Patients' Choice Act, a proposal by four outstanding Congressional Republicans. I concluded that the requirement would not be effective.

Another feature of the PCA is the requirement that states establish "exchanges", from which residents could buy health insurance. Once again, I believe that the proposal would be ineffective. Worse, it reflects a fundamental misunderstanding of the risk-pooling function of health insurance. (Unfortunately, it's the same misunderstanding that most people have.)
Congressman Ryan carefully distinguishes an "exchange" from a Massachusetts-style "connector" by the fact that participation in an exchange would be voluntary, whereas a "connector" requires every one to buy health insurance. Well, fair enough, but his Q&A's also show that the "exchanges" would not work as advertised, unfortunately.

First, let's note one of the reasons for the exchange: The Q&A states that "a single patient venturing into the individual market does not have the benefit of spreading risk (and costs) in a broader risk pool." This is almost completely untrue, as demonstrated by Professor Mark Pauly and colleagues (which I discussed in a recent briefing paper, especially pp. 30-31). And it would be even less true if the government reformed the tax code so that we could buy guaranteed renewable, health-status insurance, that lasted our whole lives (as described by Professor Cochrane.)

Second, the PCA promotes states' instituting "voluntary" exchanges, but health plans within the exchange will guarantee issue policies. I.e., people who are already sick will enter the exchanges to buy insurance and those who are healthy will avoid the exchanges. Obviously, this will result in death spirals within the exchanges.

The PCA anticipates that insurers within the exchanges will re-insure each other, as occurs in Switzerland and the Netherlands. However, participation in those countries is mandatory. There's no point re-insuring risk in the exchanges if only sick people buy policies via the exchanges!

The Patients' Choice Act is a serious, good-faith effort to reform health care with minimum government, but it needs a serious make-over.