Everything You Ever Wanted to Know About Obamacare's State-Run Health Exchanges

The full implementation of the Patient Protection and Affordable Care Act, also known as Obamacare, is less than seven months away now. For many people, the confusion around what this bill will do, what it won't do, why it was implemented, and what the potential benefits and risks are remains as elusive as ever. With each passing poll from Gallup and various other sources, the only prevailing theme I can come up with is uncertainty.

So today, I thought it would make sense to take a closer look at the state health exchanges that are being created under the PPACA and see how they could positively and negatively affect you and the insurance sector in the coming months. If you have a question, we may certainly have the answer below...


Source: White House on Flickr

Why create a health exchange?
To fully understand the benefits and risks of state health exchanges, we first need to understand why they were created in the first place.

One of the primary goals of Obamacare is to ensure that as many people as possible have access to health insurance as an individual, through their employer, or via Medicare. Another primary objective is to keep the costs of health premiums from soaring. One way to accomplish both of these goals is by creating state-run exchanges where insurance companies can compete against one another on a level playing field with similar health offerings and transparent pricing. The thesis here is that consumers will be able to make smarter insurance purchasing decisions by being able to compare similar insurance packages with one another in a transparent setting.

How will these exchanges affect you?
The answer to this question is going to be different for everyone. If you're receiving health insurance through an employer or via government-run Medicaid or Medicare, you're probably not going to see too many drastic changes. If, however, you purchase health insurance for yourself, then there will almost certainly be changes to your coverage and/or pricing.

One of the new mandates of the PPACA is that it will create more encompassing minimum insurance policies. For people who purchased catastrophic insurance plans or bare-bones plans in the past, they could be in for quite the rate shock in January with a requirement of more encompassing policies. Conversely, people with preexisting conditions and/or those in need of premium health plans could see their costs fall as competition among insurers increases.

Who will run these exchanges?
The ultimate hope of the PPACA is to have the individual states set up and manage their own insurance exchanges. Admittedly, setting up an exchange isn't as simple as it sounds -- it'll require sophisticated software to display and store vast amounts of insurance policy data. In addition, politics plays a key role among state governors -- and suffice it to say that not all are in agreement that the PPACA is right for America. According to federal officials, just 17 states have opted to run their own exchanges with the remaining 33 to be run by the federal government.

What are the benefits of an exchange?
With transparent pricing and easy-to-understand price tiers (such as California's state exchange, which will feature bronze, silver, gold, and platinum packages), consumers should benefit as insurance companies are forced to openly compete against one another for new members. If one company fails to price its policies accordingly, it will lose business, plain and simple. In short, competition will promote innovation and lower premium prices.

What could go wrong?
While this sounds like a "happily ever after" plan, there are plenty of factors still left to be solved.

For instance, what if many of the national health insurers choose not to participate in many of the state exchanges? In May, California unveiled the participants in its state-run exchange. Of the 13 health-benefits providers, notably absent was UnitedHealth Group (NYSE: UNH  ) , Aetna (NYSE: AET  ) , and CIGNA (NYSE: CI  ) . Although these three insurers dominate the commercial side of the business and only maintain 7% of the cumulative individual insurance market in California, it seems rather ominous to me that they would pass on their chance to compete in California's huge patient pool. Furthermore, it points to the growing skepticism that many insurers (even the big ones) have about the upcoming implementation of Obamacare and the initiation of state exchanges.

If you think California was just an oddball example, you may want to think again. When the nation's biggest insurers were asked how many state exchanges they'd enter, UnitedHealth guided to a minimum of 10, but no more than 25. WellPoint (NYSE: WLP  ) , the company behind Blue Cross Blue Shield, is only entering the 14 states where it already currently operates. It's the same story for Aetna, which plans to enter just 14 states.

If these insurers choose not to compete in new states, then that could result in the bulk of health insurance underwriting falling into the hands of a select few parties in each state. Although the medical loss ratio will mandate that 80% of premiums collected be spent on health care services, we have seen time and again that pricing power ultimately lies with the health-benefits providers. Less competition could create fewer choices and less incentive to be price competitive.

How is this good for insurers?
Health exchanges are going to be great news for insurers that are focused on attracting the roughly 16 million people who will be covered by the Medicaid expansion. Insurers have been angling for the past two years to get a bigger piece of the government-run health care pie known as Medicare. Take WellPoint as an example, which purchased AMERIGROUP for $4.5 billion to become the nation's largest Medicaid-based insurer last year. Another example is CIGNA, which purchased HealthSpring in 2011 for $3.8 billion, a hefty 37% premium at the time. The point is that the margins on government-run Medicaid might not be anything to write home about, but the sheer strength in numbers is enough to make this is a very profitable venture for these two health-benefits providers.

How will exchanges hurt insurers?
One of the biggest detriments to insurers at the moment is the lack of knowledge most people have with regard to what Obamacare can do for them. In a March Kaiser Health Tracking Poll, a whopping 48% of people responded as "hearing nothing at all" as to whether their state was setting up a health exchange! How are insurers like WellPoint or CIGNA expected to gain new members if the people they're trying to attract have no clue where to go, or how their state's exchange is being run?

Another factor to consider is that even if consumers have the information in front of them, will they be able to use it in a meaningful way to make smarter decisions? Many polls thus far demonstrate how few Americans are well-versed in what Obamacare could mean for them, so the prospect of the consumer making an educated choice isn't a certainty, either.

Don't discount the possibility, as well, that high levels of competition could make it too costly for insurers to enter certain markets. That could be the precise case why UnitedHealth, despite its size, chose to keep its feet out of the water in California.

When can I buy insurance on my state's exchange?
For those states that are ready, consumers will be able to begin buying health insurance from exchanges as early as Oct. 1, with the full implementation of the PPACA going into effect on Jan. 1.

Now you know
Hopefully you now have a better understanding of why the state-based health exchanges were formed, how they will benefit consumers, and what drawbacks might be present. Furthermore, understanding the reasoning, benefits, and risks behind the health exchanges is almost certain to give you a better understanding of the insurance sector and its major players. Ultimately, as long as health-benefits providers still control their own premium pricing, I don't feel that the sector will have too much to fear -- but that's just one man's opinion, of course.

Obamacare will undoubtedly have far-reaching effects. The Motley Fool's new free report, "Everything You Need to Know About Obamacare," lets you know how your health insurance, your taxes, and your portfolio will be affected. Click here to read more. 


Read/Post Comments (22) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2013, at 3:11 PM, sagehopper wrote:

    No thanks. Life is depressing enough at times without piling THIS indignity on myself. I knew from Day One that it would be a huge bucket of worms that only certain government groups and Congress can get anything out of. It used to be called "graft" and 'bribery". Now, it is called "Crafting a piece of legislation".

  • Report this Comment On June 04, 2013, at 3:43 PM, luckylady497 wrote:

    It makes sense that the most opposition is coming from insurance companies and health care industry as they will no longer be able to dictate our health care.

  • Report this Comment On June 04, 2013, at 3:47 PM, andiconda wrote:

    sagehopper, you know nothing about it, face it

  • Report this Comment On June 04, 2013, at 3:53 PM, mperiod wrote:

    Well at least someone is trying to actually publish an article simply laying out what the plan does as opposed to "Obamacare is going to triple your rates and kill your grandmother" or "Obamacare is going to make insurance free and make everyone live forever" type articles which dominate the debate. Sadly I'm pretty sure the view count for this will be a fraction of the opinion warped in opinion based on a prediction all disguised as fact type articles.

    "It's like these guys take pride in being ignorant."

  • Report this Comment On June 04, 2013, at 4:00 PM, DoubtingCharlie wrote:

    It is suprising that this article didn't mention that the insurers will be giving up their ability to choose who they insure. The unhealthy may be the majority who want coverage while healthier candidates may wait to insure themselves later. If this is the case then the insurers will be loaded with "adverse selection" which will scuttle their assumptions and rates causing catastrophic losses. Then insurers will withdraw and the gov't will be the ultimate insurer and we all know how well that's working with Medicare and Medicaid and Social Security. Maybe that was the original plan by the Obama Administration, Big Brother Medical Care run by bureaucrats.

  • Report this Comment On June 04, 2013, at 4:05 PM, ganji37 wrote:

    so WE were lied to ? sounds like it to me . why doesn't all these polotitians and our president have to use these plans also ??

  • Report this Comment On June 04, 2013, at 4:16 PM, TSP1973 wrote:

    I pay for Private Health Care and so do a lot of my other family members and my friends. We have seen the ill effects of Obamacare already. It was meant to save money, but in the end we are still paying two to three times higher!

  • Report this Comment On June 04, 2013, at 5:08 PM, littlegovtmom wrote:

    Thanks for the article, but I noticed that it's quite one-sided in favor of Obamacare. Sure, this gov't program may have good intentions and may actually do some good things. I don't like it because my agency is being taken away. If I don't comply with the gov't insurance then I have to pay even more money for private insurance. If I do comply, then my health care will be dictated by D.C. rather than my own knowledge and understanding of what is best for my family. I haven't taken the time to study Obamacare because neither Pres. Obama nor congress have any business controlling my health care. That is not their purpose or place.

  • Report this Comment On June 04, 2013, at 5:38 PM, fatboy46 wrote:

    I already know all I need to know about ObamaCare. It will totally ruin the healthcare industry. It will cost upwards of 3 TRILLION $$ (not the $784 Billion reported)- no one will be happy with it, except the 8-12 million that have no insurance now. Now that is politics in action. Screw it up for 320 million people in order to help 8-12 million (many of whom are illegals anyway) It is a start towards getting the Progressives out of office. but it will be painful for a long time.

  • Report this Comment On June 04, 2013, at 5:39 PM, madcolorado wrote:

    the prices on our states' exchange (or the preview of such) don't look very much like bargains.

    This article is pretty one sided. I want to see pricing examples. And I want to have the ability to change insurers within the new plan....not just "keep my current policy if I like it".

    Too much darkness in this transparency.

  • Report this Comment On June 04, 2013, at 5:44 PM, eunterbrink wrote:

    How are the people that are not working and have no income other than link cards and state aide going to get this insurance?'

    They already get medical care for nothing.

    I know of two unwed mothers who had their babies at hospitals here and didn't have to pay. Also know of someone who was in hospital for 4 days and never had to pay anything. I was in Dr. office the other day and young woman came in for her appointment - no medical cards (nothing) no insurance no $ as she forgot her wallet and they said take a seat will call you soon for your appointment.

  • Report this Comment On June 04, 2013, at 5:51 PM, beancrisp wrote:

    I challenge anyone to logically explain how Obamacare is consistent with individual liberty.

  • Report this Comment On June 04, 2013, at 6:27 PM, johnmr12 wrote:

    They didn't answer my question. I have no insurance, and I do not plan on getting any. How does the federal govt plan on getting my money? I was told that they are not allowed to withdraw it from my bank account.

  • Report this Comment On June 04, 2013, at 6:48 PM, obumhead wrote:

    I felt like this was a fluffier Job for Obama,and his B S

    obamacare what the heck do they think we are Morons this is Bad and will cause us only pain and money

  • Report this Comment On June 04, 2013, at 6:54 PM, obumhead wrote:

    @Johnmr12,They will withhold your tax return or deduct it from your tax return and you know what happens when you go against the IRS they come Full charging at you and can Seize your house,banking account,Car and any other personal property of yours.

  • Report this Comment On June 04, 2013, at 7:00 PM, obumhead wrote:

    @ beancrisp, I hear you on that I to would like to hear how it's consistent with individual liberty.and how they can legally make us do this,I think we all need to call our senators and make them not fund obamacare obama can make it a law but they can make it work if congress will not fund it.

  • Report this Comment On June 04, 2013, at 7:01 PM, kmichaelf wrote:

    Should have stuck to the word "free" health care. I would expect strings attached. I checked on a $99 a month policy in my state. Had a $10,000 deductible and no childbirth care unless complications. Fines in one state were almost the price of the policy, or more as you got older. It might get complicated if people sign and lapse, to avoid a fine. This fools view.

  • Report this Comment On June 04, 2013, at 7:03 PM, obumhead wrote:

    This article wasted my time and the only thing that made it worth reading was the comments on how it will sc re w us all and everyone is not buying in to this commie c r a p !

  • Report this Comment On June 04, 2013, at 7:55 PM, yesihunt2 wrote:

    "Don't worry, I'm from the Government and I'm here to help"

  • Report this Comment On June 05, 2013, at 12:00 AM, rico10101 wrote:

    This article is indeed lacking in information. As of May 10, only 16 states and DC have committed to setting up state run state exchanges. SIXTEEN! So, for those you you in one of those sixteen states, this article might help. Seven states conditionally approve of partnership exchanges with the federal government. We have no idea what that is going to even look like. As of May 10, 27 states (mt, nd, wy, ut, az, sd, ne, ks, ok, tx, wi, mo, la, in, tn, ms, al, ga, fl, sc, nc, va, oh, pa, me, ak...missing one) are going with federally run exchanges. There is no information what these federally run exchanges in these 27 states are going to be. Go back and rewrite your article telling us 27 states what we have to look forward to.

  • Report this Comment On June 05, 2013, at 7:05 PM, Makikijoe wrote:

    The law's provision requiring health insurers to extend dependent coverage up to age 26 for young adults on their parents' plans went into effect in September 2010 and has helped provide coverage to 1.2 million young adults. The overwhelming majority of American people can continue with their current coverage and will not be forced to change.

    There will be newly-created insurance exchanges and subsidies for lower- and moderate-income families beginning in 2014. This could provide coverage for more than 6 million uninsured young adults.

    The New Health Care Act will protect many people from medical debt The Act's elimination of lifetime limits on health insurance coverage, effective later this year, could go a long way to helping people who purchase health insurance on the individual market, or through their college or university, avoid medical debt in the event of a serious injury or illness.

    Insurance companies will be prohibited from arbitrarily “dropping” patients for minor and petty “pre-existing” conditions. They can no longer charge a fee for an annual check-up either. Thank you President Obama. For you who are worried about too much government control, you have been hoodwinked by the conservatives. The government SHOULD have the right to mandate that certain things in be included in ALL health care policies.

    Otherwise, cheapskate companies would be selling policies that, although attractively priced, , in reality cover only very little when a person actually gets sick.

    The new law is a big step forward and we should all thank the Democrats in Congress who wouldn’t accept the inadequate GOP alternative plans that Republicans offered back in 2009 when the law was being written. Those puny plans would not have helped anywhere near as many people as the new health care law will help.

  • Report this Comment On June 05, 2013, at 7:21 PM, Makikijoe wrote:

    On Tuesday, Golden State small businesses and their employees got some great news: two of the state’s largest insurers will have to give them over $36 million in insurance rebates because of an Obamacare consumer protection.

    The health law forces insurers to spend at least 80 percent of the premiums they charge on paying for actual medical services, rather than administrative overhead or profits. That means more money for ordinary consumers — and less for profitable insurance companies.

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