How much will the healthcare exchange save insurance companies?

The short answer? It's almost impossible to tell at this point. Each state is still in the planning process of setting up their exchanges, and there's still debate whether the whole law will be thrown out by the Supreme Court.

Whatever insurance companies do not spend on health costs, they use for administrative purposes and profits. One of the key aspects of the Affordable Care Act is to make insurance companies raise their Medical Loss Ratios, or how much they spend on health costs. Also, each state will create an "exchange" that allows individuals to log on and look at each insurance plan all in one place.

Now the details of how these exchanges will be run is still pretty blurry, because each state decides how they want to set them up. Part of the goal is to reduce the marketing costs for insurance companies, since they'll have smaller administrative budgets.

For smaller companies, a lot of the marketing costs go to healthcare brokers; specialists who help groups or businesses navigate through the complexities of the insurance market and find the best plan for them. The "ideal" exchange would reduce the need for brokers, since all the comparisons (price, quality, medical coverages, etc.) will be on the website.

I asked Zeke Emanuel, one of the architects of health care reform, about this issue. (He was speaking at GMU today.) He thinks that brokers will still be around in the short-run. Businesses and large groups will still want the best information about what health plans are out there, and will use brokers to find that information. Of course, I'm sure there's concern for brokers to steer groups away from the exchange, since they are a competitive public good.

But marketing costs for small companies might not go down so quickly. When patients first go onto the exchange, there could be an advantage to having name recognition (i.e. being Blue Cross/Blue Shield) when being compared to other companies. Large companies may have enough marketing funds leftover to have an advantage over smaller companies in the exchange.

Another point: each exchange is being financed by a special tax put on the insurance companies involved. I can't imagine that a tax would cost more than current marketing/broker costs. Apart from a website and maintenance, and exchange should only include administrative costs. An ideal exchange would be one that reduces as most transaction costs, and provide near perfect information. State governments need to be keeping this in mind when they set up these markets.


Of course, this will all be looked at more closely when some of the data starts to come back.