Texas, Florida, California and N. Carolinea can tell us Why Health Care Exchanges Won't Work.

Health care exchanges don't work. It is not the answer to reform, but a way out for lawmakers. Cappy McGarr, the president of a private equity firm, who was the chairman of the Texas Insurance Purchasing Alliance from 1993 to 1995, recently wrote about one BIG failure in the BIG state of Texas in the NY Times:

Back in the 1990s, I was the founding chairman of Texas’ state-run purchasing alliance — an exchange, essentially — which ultimately failed. There are lessons to be learned from that experience, as well as the similar failures of other states to create useful exchanges.
The Texas Insurance Purchasing Alliance, created by the Texas Legislature in 1993 ... pooled small employers into purchasing groups large enough to obtain the lower wholesale insurance rates that big companies get. Initially, the alliance worked exactly as planned. Sixty-three percent of the businesses that participated were able to offer their employees health coverage for the first time. The alliance offered small businesses a low-cost, nonprofit option: our administrative arrangements did away with the high marketing costs that insurers pass on to small businesses. And we didn’t charge higher rates to firms with older or less healthy workers. This in turn led other insurers, outside the alliance, to lower their prices. We did all this not by creating a government bureaucracy, but by relying on the private sector.

Nevertheless, six years after the program got off the ground, it folded. Many factors contributed to our failure ... restriction it put on the size of eligible companies proved unpopular ... the governor who helped create the alliance, Ann Richards, was replaced in 1995 by George W. Bush, who did not consider it a priority.

Most important, though, our exchange failed ... because it never attained a large enough market share to exert significant clout in the Texas insurance market. Private insurance companies, which could offer small-business policies both inside and outside the exchange, cherry-picked relentlessly, signing up all the small businesses with generally healthy employees and offloading the bad risks — companies with older or sicker employees — onto the exchange ... as a result ... premiums we offered rose significantly. Insurance on the exchange was no longer a bargain, and employers began backing away. Insurance companies, too, began leaving the alliance.

Florida and North Carolina were also unsuccessful and California shut its doors in 2006. All these state exchanges failed for the same reason: cherry-picking by insurers outside the exchange.

If Congress now creates new exchanges it must ... accept everyone and have to charge everyone the same rates regardless of health status.

It would be smarter for Congress to revisit the idea of creating a public plan that could provide an attractive choice for consumers and real competition for private insurers, to give them the incentive to offer good coverage at affordable prices.