Promoting Healthy Competition in Health Insurance Exchanges: Options and Trade-offs

Originally published as NIHCR Policy Analysis No. 6 by the National Institute for Health Care Reform (NIHCR). NIHCR was affiliated with the Center for Studying Health System Change (HSC), a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Promoting Healthy Competition in Health Insurance Exchanges: Options and Trade-offs

Under the Affordable Care Act, new federal rules were set to reshape the nongroup and small-group health insurance markets, including a requirement for state-based health insurance exchanges where individuals and small businesses could shop for coverage. This policy analysis examined the design choices that would determine whether exchanges fostered genuine competition among health plans on price and quality, or simply served as a new enrollment platform without meaningful competitive pressure.

Exchange Design and Market Competition

The analysis explored several key design decisions facing state policymakers as they established their exchanges. A central question was whether exchanges should function as open marketplaces where any qualified plan could participate (a 'clearinghouse' model) or as active purchasers that negotiated with plans, set standards above the federal minimum, and limited the number of participating insurers (a 'selective contracting' model). Each approach carried trade-offs. Open marketplaces would maximize consumer choice but could lead to market fragmentation and adverse selection if healthier individuals gravitated toward certain plans. Active purchasing could produce lower premiums through negotiation but might reduce choice and face political resistance from excluded insurers.

Other design elements addressed in the analysis included how plans would be displayed and compared on the exchange platform, whether standardized benefit packages would be required to facilitate apples-to-apples comparisons, how risk adjustment mechanisms would compensate plans that enrolled sicker populations, and what role navigators and brokers would play in helping consumers make informed choices. The analysis drew on experience from the Federal Employees Health Benefits Program, California's CalPERS, Massachusetts' Commonwealth Health Insurance Connector, and other existing purchasing arrangements to illustrate how different design choices had played out in practice.

Balancing Choice, Cost, and Quality

The report emphasized that there was no single correct approach to exchange design -- the right balance between choice, cost containment, and quality improvement would depend on each state's existing market structure, the number of competing insurers, the degree of provider consolidation, and the state's regulatory capacity. States with concentrated insurance markets might need active purchasing to create competitive pressure, while states with many competing plans might benefit from a more open approach. Whatever model states chose, the analysis argued that exchanges would need strong risk adjustment, transparent quality reporting, and consumer decision-support tools to fulfill their potential as engines of value-based competition in health insurance.

Sources and Further Reading

This Policy Analysis was published by the National Institute for Health Care Reform (NIHCR). It drew on experience from existing purchasing arrangements including the Federal Employees Health Benefits Program, California's CalPERS, and the Massachusetts Commonwealth Health Insurance Connector. The analysis was informed by a broader body of research on health insurance market competition, risk adjustment, and exchange design under the Affordable Care Act.