Why the Utah Health Exchange is No Model for Health Reform

The Utah Health Exchange is the model some conservatives believe can be used to push back against Obamacare. Witness the Wall Street Journal (July 16) soundly rejecting regulatory guidance on what the Administration is now calling "Affordable Insurance Exchanges," but encouraging governors to get on the exchange bandwagon, in the hope they can build free-market exchanges that will blunt Obamacare's worst effects.

The evidence? "Utah built a pilot exchange on this model in 2009, though the results so far are mixed and the rules are still being fine-tuned." That calls for a closer look, but one can understand why Utah's exchange might be tempting. It was established by state government, not the feds. It consumes no subsidies, and it is voluntary.

The Exchange launched in August 2009, with 136 businesses enrolling their employees. By December 2009, however, only 13 groups remained. The reason for the initial failure was a classic death spiral of anti-selection. Because carriers had greater underwriting latitude outside the exchange than inside, firms with sicker employees gravitated to the exchange and those with healthier employees stayed out. Premiums spun upwards, out of control.

Legislative amendments passed in March 2010 forced carriers to use the same underwriting both inside and outside the exchange. The new rules took effect in September 2010 and the new exchange began coverage last January, having enrolled groups for a quarter of a year before the re-launch. In January 2011, the new Utah Health Exchange covered 41 businesses including 1,042 employees and dependents. At the end of June, according to a recently published update, the count was 112 businesses including 2,793 employees and dependents. By August, the exchange forecasts covering 157 employers including 4,059 lives.

One could say that enrolment grew by 289 percent in a year. But a full 100,000 of Utah's uninsured are employed by small businesses, according to the Utah Small Business Coalition. And according to the Utah Health Exchange's report, 16 percent of the businesses enrolled in the exchange did not previously offer coverage (or, the incidence of crowding out of traditional small-group coverage was 84 percent). Of the 4,059 covered lives in the exchange, 1,424 are employees and 2,635 dependents. We can reasonably conclude that 228 of the previously uninsured 100,000 employees of small businesses have received coverage through the exchange. Clearly, the exchange has had effectively zero impact on the uninsured employees of Utah's small businesses.

Utah has a population of 2.8 million, of which 1.1 million have full-time jobs, of which about 200,000 work in firms of fewer than 20 employees and 540,000 work in firms of fewer than 500 employees. The Utah Health Exchange defines small businesses as those with up to 50 employees. So, let's say about 300,000 Utahans work for such businesses. The exchange covers 1,424 of them, an utterly trivial proportion of the exchange's target market.

The results of the Utah Health Exchange are not "mixed" but basically non-existent. If a venture capitalist was funding the Exchange, it would certainly be shuttered on its first anniversary. Advocates of repealing Obamacare and replacing it with reforms that put the people, not the government, in charge of our health dollars should not be distracted by this sideshow. Instead, they need to demand wholesale tax reform, so individuals can use their own pre-tax dollars for health insurance that serves their own needs, not their employers.

(This article was also published in PRI's Capital Ideas series.  Another version was earlier posted on John Goodman's Health Policy Blog, but I forgot to cross-post it here!)