John Lynch

The Supreme Court’s landmark decision on June 28th of this year solidified the constitutionality of possibly the most controversial pieces of legislation ever passed by the Obama administration. The Patient Protection and Affordable Care Act (PPACA), signed into law on March 23rd, 2010 (NCSL), can be described as a fundamental restructuring of the health insurance system in the United States, one that implements significant changes at the individual, state, and federal levels. But while the questions regarding the constitutionality of PPACA have been definitively resolved, disagreement has arisen over how the law should be implements, especially among groups that previously asserted that the law was wholly unconstitutional.

While the passage of the law means that the 17.1% of Americans that are uninsured must seek coverage or pay a penalty or a tax (Mendes), an even greater responsibility is assigned to the states themselves. By January 1, 2014, all 50 states are required to establish what PPACA describes as a “health insurance exchange,” a virtual marketplace where individuals can shop for different private coverage plans (approved by the federal government) from different companies (NCSL).  The federal government will create federally controlled exchanges in states that fail to meet this deadline. While these exchanges would make it easier for consumers to compare benefits and costs, establishing such a marketplace puts an additional financial burden on state governments already plagued by the financial woes of the continuing economic slump.

New Hampshire today faces the challenge of PPACA to create a health insurance exchange in under 2 years. But is it in the best interest of the state to go forward with the construction of its own exchange? This difficult question must take into account the unique demographics of New Hampshire, as well as a comprehensive cost-benefit analysis between the possible courses of action.

The Options

New Hampshire, as well as the other 49 states, can choose one of two possible courses of action in response to PPACA’s mandate to create a health insurance exchange:

–        Create and fund a state controlled exchange by the mandated deadline;

–        Do nothing until the deadline and allow the national government to step in and create a federally controlled exchange.

Here, it is important to realize that no matter the course of action taken, some form of a health insurance exchange will be established in New Hampshire under PPACA. The choice that must be made is whether that exchange will be controlled by the state or federal government.

Given that every state has a unique political, economic, and social climate, the best course of action will vary between states. Recent controversy in the New York Senate over health care exchanges demonstrates the link between political and ideological support for the bill: NY Senate Democrats ardently support the establishment of a statewide health insurance exchange, touting the possibilities of universal access and lower costs. Senate Republicans have taking the opposing view, pointing out the unnecessary and inefficient government intrusions in a large section of the private sector (Campbell). Elsewhere, the populous and liberal leaning state of California had already begun establishing a health care exchange even before the June Supreme Court ruling (Wood). In contrast, the sparsely populated and more conservative state of Alaska has opted to simply wait until the deadline and allow the federal government to establish its own exchange in this state (Rosen).

Thus, we must consider all major demographic factors in order to make a sound judgment as to which course of action New Hampshire should pursue.

Evaluating the New Hampshire Health Insurance Exchange

The benefits touted by the Obama administration in favor of health insurance exchanges are primarily economic. Such an exchange fosters competition and grants greater accessibility to health care for individuals, and presumably covers costs incurred by patients without insurance. In addition, plans sold on the health insurance exchanges are purchasable by all people, even those with pre-existing conditions. Ultimately, the promised result of establishing health insurance exchanges is that the price of coverage and indeed overall health care goes down.

In a time of economic uncertainty, such a financial incentive would be a boon to not only individuals, but businesses that provide health care to their employees. The less money that people have to spend on health care, the more their disposable income will grow, effectively creating a stimulant for the national economy. In addition, these exchanges would bring us closer to universal coverage of Americans, which would allow for a healthier society.

While the establishment of health care exchanges has these amazing benefits attached, one major question mark of creating an exchange of course is that these benefits are not guaranteed. It is extremely difficult to estimate the projected savings from establishing an exchange, given that few states have actually completed the creation of an exchange. Also, the magnitude of these savings depends on the statewide demand for health insurance, the number of insurance companies in the state, and what the national government deems as qualifying insurance plans. Equally difficult is assessing the cost of establishing these exchanges within the time frame allotted by the federal government and the cost of keeping these exchanges operational for the same reasons stated above.

Fortunately, we can look to the state of Massachusetts for an example of a relatively successful health insurance exchange and draw inferences about the possible benefits of establishing a state run exchange in New Hampshire. Created in 2006, the Massachusetts health insurance exchange succeeded in bringing the number of uninsured people down to a mere 2% of the 6.6 million residents, from 10% before the law was implemented (Romney). However, the cost of maintaining this exchange has rise to $32 billion in 2011 (Kliff), resulting in over $9,000 in health care spending per capita (compared to $6,800 nationwide) (Kaiser Health). New Hampshire has a population of only 1.3 million, with 10% uninsured as well, and 10% living in poverty (compared to poverty rates of 15% in Massachusetts and 21% nationwide).

Because a substantial portion of health insurance exchanges involve fixed administrative costs (State of Delaware), New Hampshire’s lower population may not translate to a proportionally lower cost than Massachusetts’s exchange expenses. In addition, Massachusetts’s program was aimed primarily at those with lower income, but New Hampshire’s lower poverty rate diminishes the impact of this provision.

Finally, with a budget deficit of close to $3 billion (Sunshine Review), New Hampshire can hardly afford to make wayward investments in an expensive program whose benefits are far from guaranteed.  It would appear that the cost of a New Hampshire health insurance exchange definitively outweighs the benefits, and that this option may not be the best course of action.

Letting the deadline pass

As of now, this is the option that the New Hampshire government has chosen to take. On June 18 of this year, Governor John Lynch signed HB 1297 into law (Kaiser Health), prohibiting a state sponsored a health insurance exchange, instead opting to allow the federal government to step in and create its own exchange. Politically this was the favorable choice: opposition from members of the executive council and the citizenry (a plurality of which oppose PPACA) made creation of a state run health insurance exchange politically unwise, if not altogether impossible.

Establishment of a federally controlled health insurance exchange carries much of the same benefits as a state controlled one. Individuals will still be able to shop and compare different plans from different insurance companies at competitive prices. Nobody will be excluded because of pre-existing conditions, and everyone will have access to health care.  The major benefit of course is that New Hampshire does not need to spend its own resources to create this exchange. Passing the PPACA deadline means that the national government assumes total responsibility.

No doubt Uncle Sam does not provide free lunch.  It is difficult to estimate the potential savings from deferring responsibility from the government.  Also, federal control comes with its own set of drawbacks and limitations. For example, the plans sold on the exchange would be determined by the federal government, which has few if any incentives to cater specifically to the health care needs of New Hampshire residents. This situation could result in a New Hampshire health care exchange that attracts few consumers, ultimately defeating the original purpose of these exchanges.

But taking into account the small size of New Hampshire and the fact that most residents are already covered, it is perhaps logical to let the federal government handle the establishment of an exchange and have the state government focus on other legislative issues.  The federal government intrusion will likely not sit well with the right-leaning populace, 49% of which opposed the original PPACA legislation in its entirety, while only 38% fully supported it (Smith). Nevertheless, given that New Hampshire’s health care market is smaller relatively to other states, intrusion from the federal government is less likely to have a dramatic impact than in a larger state such a California, which has over 10 times the number of health care providers and obviously a much larger population in need of health care (Kaiser Health).


Given the political, economic, and demographic situation of New Hampshire, Governor Lynch has made the expedient decision in deferring the responsibility of creating a health care exchange to the federal government. Although he initially supported creating a state run exchange, the political atmosphere in Manchester led him to the inevitable about face.  Although the precise dollar amounts are impossible to predict, economically, the costs for the state appear to outweigh the benefits.  Indeed, New Hampshire stands favorably to the national average both in terms of the percentage in poverty and uninsured. There is no pressing incentive for the state to establish a health insurance exchange compliant with PPACA deadline.   Only time will tell how the inevitable bureaucracy from Washington DC will affect the granite state in a federally run system.

Khoo Teck Puat Hospital, Singapore. Source:

In America, the discussion over healthcare often bifurcates between advocates of government and market-based healthcare. Empirically, European-style government healthcare systems, as well as Medicare, are more equitable, cost-efficient, and sustainable than our own, presumably “free market” health insurers (Fox Health). However, America’s healthcare system is actually anything but free market. American government expends more than 56% of total healthcare costs through Medicare, Medicaid, the VA, and other programs (Selden and Sing). The American government healthcare system actually spends more per person than any other, and so in some sense is the most socialist (Council on Foreign Relations).  The nominally “private” health insurance industry, which lobbies vituperatively against government healthcare, is subsidized by $300 billion in tax deductions, three times larger than any other deduction (Tax Policy Center). The for-profit health insurance industry emerged in response to these deductions in the 1960’s; it was not produced by, and does not compete in, natural market conditions. Is there an actual, broadly market alternative?

Yes. While government always plays a role in healthcare, in Singapore, a tiny, wealthy city-state in Southeast Asia, Government purchases less than 40% of healthcare (WHO). The plurality of healthcare spending comes from private medical savings accounts rather than either government or subsidized insurance, indicating a primary healthcare market mechanism. This system is radically more cost-efficient even than European Social-Democratic Systems or Medicare, while also providing universal care. In Singapore, a minuscule 3.9% of GDP is spent on healthcare, about a third of the European average, and less than a quarter of America’s. Government healthcare spending is a little more than 1.5% of GDP (Ibid). If America could reproduce this cost-efficiency, the US government would spend less than $240 billion a year on healthcare, or around a fifth of its current spending. Still, in Singapore everyone is covered and life expectancy is seven years longer than in America.

How does Singapore’s market-model healthcare system work?

In addition to a system of government subsidized public hospitals and government cost-oversight, Singapore’s healthcare model rests on the “three M’s” – Medisave, Medishield, and Medifund. Medishield is universal national catastrophic government insurance. Medifund, funded solely by dividends from a government seed investment, provides care for the needy and destitute. Medisave is a mandated system of private Medical Savings Accounts that is a part of Singapore’s Central Provident Fund. The Central Provident Fund is a government-run mandated savings system in which Singaporeans set aside approximately one third of their yearly income (CPF Board).

“Medisave,” between 6.5% and 9% of a citizen’s income, is devoted solely to medical expenses. In Singapore, private households purchase most healthcare services out of pocket from these accounts, which is the key to the market system.

Without government welfare guarantees, households must save a large percentage of their income in anticipation of potential adversity. The Central Provident Fund, including Medisave, forces households to secure these savings. Interestingly, mandated savings is therefore not a market distortion, but a means to preserve pre-Government market conditions without abandoning Government welfare guarantees that are needed in a modern society.

The Medisave System then restores a normal supply-demand market that drags down costs, and is the Singapore market-model’s key component.

Although this may seem callous at first, in a private market, “supply” or cost of services cannot exceed the “demand,” or amount of money private customers are willing and able to spend on those services. Governments and Health Insurance Companies have exponentially more money than private households paying out of pocket. In a hand-to-hand market, doctors and hospitals can only charge private households so much before households run out of money. This places a natural limit on healthcare costs in a normal market. In Singapore, prices have dropped accordingly. Singapore’s healthcare services are so low that the city-state has become one of the world’s leading Medical Tourism destinations (Chanel News Asia).

Fortunately, Singapore’s government provides “patches” that also guarantee that no one slips through the cracks in the Medisave system, as noted through Medishield and Medifund. It also ensures price transparency by mandating its health vendors post their actual, pre-insurance, prices in order to receive licenses. Singapore’s government carefully monitors for fraud and abuse of the system, and then imposes draconian punishments for infractions.

What would America have to do to replicate Singapore’s market-model healthcare system? First, like Singapore, we would have to mandate national savings in a variation of a Government-run Central Provident Fund that includes mandated Medical Savings Accounts. Second, we would have to remove the government tax deductions that create and sustain the parastatal health insurance industry. Third, the government would have to systematically subsidize and monitor hospitals so they function more like Singapore’s inexpensive public hospitals. Fourth, American government insurance – Medicare, Medicaid, FEHB, and such – would have to be re-organized into versions of Singapore’s “Medishield” and “Medifund.”

America’s government healthcare is now primarily means-tested, either by age or income (US Department of Health and Human Services). American versions of “Medishield” and “Medifund” would provide everyone with coverage, but this coverage would only kick in once normal market mechanisms were exhausted. This would re-capture a normal supply-demand market while ensuring no one “slipped through the cracks.”

An American market-model healthcare system like Singapore’s may seem Utopian at the moment, but this Utopianism stems from Political Opposition from inefficient rent-seekers rather than the infeasibility of the project itself. Our current system’s cost-trajectory is Utopian; it is unsustainable unless we fix it. American businesses should seriously consider advocating for a Singapore-style market-system, which would radically reduce their costs and improve their ease of doing business. Those interested in an effective market-model healthcare system should stop defending our broken, government-created system, and start carefully examining what actually works