Policy Documents

Policy Tip Sheet - State Health Insurance Exchanges

September 30, 2011


The Patient Protection and Affordable Care Act (PPACA), sometimes referred to as "Obamacare," requires states to establish and operate health insurance exchanges by 2014. States that create their own exchange must comply with federal requirements, and the exchange must be approved by the secretary of the Department of Health and Human Services. If a state opts not to create its own exchange, PPACA provides that the federal government will implement one for the state.

To date, 11 states have begun the process of establishing an exchange. Many others have resisted moving forward. One reason for the hesitancy is that states have been presented with only draft rules for exchanges, and the draft rules do not include the most critical elements. If a state moves forward with implementing an exchange, it could invest valuable time and taxpayer dollars in developing a system only to discover it does not comply with final federal regulations.

States are also hesitating because implementing an exchange gives an appearance of legitimacy to the law, potentially deterring courts from ordering its repeal and undermining the credibility of the legislators fighting its constitutionality.

Finally, states are hesitating because of the expected high costs they will bear upon implementing an exchange. Federal funding for exchanges is expected to run out by 2014, making state spending increases inevitable.

Policy analysts warn the federal government's rules are not likely to consider high-deductible insurance plans to be "creditable coverage."


Some states already have experimented with health insurance exchanges, and their experience shows exchanges rarely succeed in providing consumer-centered, cost-efficient health care. The complex rules and requirements of PPACA suggest exchanges implemented to comply with that law will be no more successful.

States will have no more control over PPACA exchanges that are state-crafted than they would over a federal exchange. The federal government, by law, has complete authority to oversee and approve all exchanges. Ultimately, all "state" exchanges will become federal exchanges.

State officials should resist setting up health insurance exchanges.

Policy Message:

Point 1: Several states already have sent exchange models to Washington, only for them to be rejected by HHS.
Point 2: Financial assistance from the federal government will end by 2014, forcing states to try and find ways to compensate, increasing state spending.

Point 3: By implementing exchanges, states are lending credibility to PPACA and undermining the lawsuits against it.

Point 4: Millions of hard-working Americans are likely to be dropped from their existing health insurance plans.

Point 5: There is no such thing as a "state" exchange under PPACA.

Policy Facts:

1: Control over health insurance exchanges will reside with the federal government, not the states.1, 3

2: The current draft rules from the federal government include 811 separate references to mandates and requirements.4

3: At least 20 exchanges have been created in the United States. All have failed to produce low cost and consumer-driven health care.2

4: Massachusetts spent more than $29.4 million in 2009 alone on the Commonwealth Connector, not including the high administrative costs.1

5: Utah learned that health insurance was more costly inside the exchange than in the private market.3


1. "State Insurance Exchanges: The Case Against Implementation." The Heartland Institute. <http://heartland.org/policy-documents/state-insurance-exchanges-case-against-implementation>

2. "Lessons From Utah Health Insurance Exchange." Low Cost Health Insurance. <http://www.californiahealthplans.com/blog/2010/10/lessons-from-the-utah-health-insuance-exchange/>

3. "Should Michigan Create a Health Insurance Exchange?" Mackinac Center. <http://www.mackinac.org/15237>

4. Goodman, John C. "347 Pages of Regulations; 811 References to Mandates." Health Care Policy and Reform Insights. <http://healthblog.ncpa.org/347-pages-of-regulations-811-references-to-mandates