California recently released the rates for Covered California, their insurance exchange. Everybody is pleasantly surprised at how low they are (except Republicans).

The unsubsidized Silver plan is $272 for a $2000 deductible. It’s shocking because everybody expected prices along the lines of employer plans–which is on average $437 a month in California*.

As I said earlier, that doesn’t make a huge difference for consumers; your premium is a percentage of your income, as is your deductible. Most people will be paying around $110 (or getting a $5000-deductible plan for free). Under 3% of the public will be paying $272.

What the low premium does is save the federal government a ton of money and make Obamacare more likely to “bend the cost curve” (take that, Elmendorf!). It also makes it more likely that large companies will want to buy on California’s exchange**, if they can get better deals than negotiating directly with insurers.

If Ohio’s prices are released and the Silver Plan is closer to $400, then our Clearinghouse Exchange is probably to blame.


Ohio is establishing a “clearinghouse exchange”, wherein any plan that meets the Obamacare standards will be offered. Since 214 plans were submitted for review, there will be 214 plans on the exchange***. This is intended to drive down costs the way that Travelocity does: people will pick the less expensive plans on the list.

There’s not much evidence that this will do anything; after all, similar websites already exist.

California, on the other hand, has an “active purchaser exchange”. In an active purchaser exchange, it’s actually the exchange that’s insuring you, and they bid out administration of your insurance. This drives down costs a few ways.

Competitive bidding. This works a lot like managed care for Medicaid. Before managed care, Medicaid paid a flat rate to providers for every service an enrollee received. This fee-for-service system had fairly lousy customer service, and cost growth was driven by the relative health of enrollees.

Under managed care, insurers submits bids to the state to administer benefit plans to Medicaid enrollees. The state picks the lowest three bids; a high bid means that company will be shut out of the market entirely. The onus is then on the managed care corporation to keep costs below their bid.

In our clearinghouse exchange, insurers will have little incentive to lower rates. Since 80% of exchange enrollees will be paying a flat subsidized rate, you can target that market segment and inflate costs.

Lower payments. In health insurance, too much competition drives up costs. The primary value-added by an insurance company is to negotiate low prices from doctors. The more customers that are represented by an insurer, the more leverage they have with doctors.

In Ohio’s exchange, 17 separate collective bargaining units won’t be able to bargain the way that California’s active purchaser will. California’s payments will probably be in the neighborhood of Medicaid and Medicare rates, which are around 60% of private payments.

Since health insurance is just an aggregate of all health expenditures, a 40% reduction in payments means a 40% reduction in premiums. In fact, a really canny exchange will combine the Medicaid and exchange risk pools and bargaining powers.

The long view. Did you notice how insurance companies stayed silent during the birth control fight, even though they were forced to stop charging co-pays? That’s because no co-pay birth control reduces longterm insurance costs by reducing high-risk pregnancies.

In the past, insurance companies assumed that customers would change carriers within a couple years, so they weren’t excited to reduce longterm costs. That unintended pregnancy was probably going to be covered by some other insurance company.

On the exchange, the risk pool is combined across companies. Anthem will be paying for that pregnancy one way or another, so they want to make sure it’s an inexpensive low-risk pregnancy. In 40 years, they’ll be on the hook for your diabetes treatment, so they’ll save money by giving you a gym membership.

An active purchaser exchange will be able to introduce these benefits more quickly by selecting only the plans that offer them. This is a non-legislative, market-based approach to promote environmental safety and healthy eating: if it lowers longterm health costs, the exchange can put it in insurance plans.


Most of the effects of these differences are medium-term savings, so there may not be much of a difference in the original prices. That would be fantastic, because it would mean that California’s and Oregon’s prices will be available in Ohio.

If Ohio’s prices are closer to $400, then having a clearinghouse exchange will be the main reason. And Mary Taylor is the person responsible for Ohio’s clearinghouse exchange.


* Deductible information isn’t on this chart, so it isn’t apples-to-apples. But if I were Mary Taylor, I’d say “Obamacare lowered rates by 38%!”

** This would require an act of Congress, probably. It may be an executive waiver.

*** Not really. A lot of them will be rejected by HHS for failing to meet minimum standards. But, there will be a lot more plans than California’s 39.