When the federal insurance exchange for the Affordable Care Act failed so spectacularly when it was introduced, the Barack Obama administration's supporters claimed that the failure was really the fault of Republicans. After all, red states had mostly declined to build exchanges, forcing the federal government to do it for them. As a result, the federal government was confronted with one of the largest information-technology projects it had ever attempted. And because the legislation had just assumed that the states would mostly build their own exchanges, using the federal government only as a fallback, the law didn't include enough funding for the feds to tackle the job. They were forced to rely on a series of funding workarounds, piggybacking the build on existing contracts and borrowing personnel and office space from other programs. It was no wonder that the federal exchanges struggled even as state exchanges were doing fine.
In the ensuing months, however, we've learned that the state exchanges aren't doing fine. Some of them, to be sure, are performing much better than the federal exchange. But the Official Blog Spouse points out that months after the federal exchange finally limped into production, about half the state-run exchanges "remain dysfunctional, disabled, or severely underperforming." This, even though we have spent almost twice as much on building exchanges for 14 states and the District of Columbia as we did on the federal exchange, which covers the residents of the other states.
If the red states had built their own exchanges, many of them would likely also suffer the same problems -- or worse ones, given that red-state governors lacked the enthusiasm of their blue-state counterparts. Naturally, this raises some questions. What if the administration's supporters who complained about red-state intransigence had it backward? What if the mistake was allowing states to do a job that we should have left to the federal government?
There are some powerful arguments in favor of this proposition. Building a bespoke IT project from scratch takes a lot of planning resources and a lot of management. That kind of IT-management expertise is hard to come by in the private sector, where companies pay enormous sums for top talent; it's very difficult at the federal level; and it may be nearly impossible for cash-strapped states, especially small states. Indeed, for small states, it arguably never made sense to even try to build an exchange, because the cost per user is so high. Hawaii has only signed up a few thousand people in its exchange after getting $205 million in federal grants.
The federal government, by contrast, only had to build most of the exchange once. To be sure, there were local systems that had to be hooked into, and that made things more complicated. But as we can see from the spectacular failure in places such as Oregon, having only one Medicaid system to deal with doesn't necessarily mean you'll succeed.
So should Congress have simply had the federal government build the exchanges and be done with it?
Actually, no. The architecture of the law allowed for some failures. But it also enshrined two important principles for failing well: experimentation and diversification.
Allowing for state exchanges means allowing for different approaches. Want to integrate the exchange with your other welfare systems? You can do that. Want to put your Medicaid users on the exchange? You could try that, too. Yes, this means that there will be duplication of efforts -- but socialists used to make the same complaint about market economies. In fact, they were right: Capitalist economies do have a lot of "wasteful competition." But they are still more efficient, and more productive, than a centrally planned system where we have one kind of bakery that manufactures a single type of bread. More room for experimentation means more room for improvement.
The other reason that it was better to leave the option for state exchanges is a basic principle of portfolio management: diversification. To put it in folksy terms: Don't put all your eggs in one basket. When the federal exchange was down, New York and California were still able to sign people up.
Does that mean that the states that chose to join the federal exchange made a mistake? Not necessarily. In the case of small states, it obviously made sense to join the federal exchange; Wyoming and Montana and Delaware just don't have enough people to make a state exchange cost-effective. And even in the case of large states, it's entirely possible to favor experimentation while recognizing that your state simply doesn't have the managerial or technical capacity to launch an exchange in three years. After all, a lot of states that tried clearly didn't. Those states can always build their own exchanges later, if the system survives.
In fact, this suggests that, arguably, the law didn't go far enough. The federal government could have given states more freedom to experiment: with minimum coverage requirements, with pricing, even with not having an electronic exchange at all. While "having a website just like Kayak where you can buy insurance" certainly sounds great, it's hardly necessary. Massachusetts signed people up for years using paper applications for anyone who needed a subsidy. That's what Oregon resorted to when their exchange broke. More freedom to experiment, rather than less, might have given us more options -- and fewer failures at the outset.
Megan McArdle writes about economics, business and public policy
for Bloomberg View. Follow her on Twitter at @asymmetricinfo.
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