In less than three years, millions of Americans will obtain health insurance, many for the first time, through a health exchange mandated by the Patient Protection and Affordable Care Act.

What is a health exchange? How will they operate? And most importantly, will they save you money?

The answers are beginning to crystallize as states invent their own versions of these new entities.

According to HealthCare.gov, a health exchange is a transparent and competitive insurance marketplace where individuals and small businesses can compare and buy affordable and qualified health insurance plans that meet certain benefit and cost requirements. Exchanges also will interface with state and federal programs, including Medicaid, to offer subsidies to qualifying individuals.

States face a Jan. 1, 2013, deadline to have a certified health exchange up and running, one year ahead of the individual mandate that requires most Americans to obtain health insurance. If a state is not ready, the federal government reserves the right to operate an exchange for them.

2 States, Different Exchanges

Only two states -- Massachusetts and Utah -- have functional exchanges so far, and they couldn't be more different.

Massachusetts has state-mandated health coverage and features two exchanges within its Health Connector: Commonwealth Care for those who qualify for government subsidies, and Commonwealth Choice, which offers affordable gold-silver-bronze coverage plans from nine competing carriers. The Health Connector is considered a prototype for Affordable Care Act exchanges.

"What Massachusetts does is, they put the participating insurance companies through a bid process once a year and the products have the exact same benefit," says Brian Carroll, CEO of Small Business Service Bureau, an administrator for Commonwealth Choice. "Like a travel site, when everybody has a ticket from Boston to Miami, you just compete on price."

The Utah Health Exchange, by contrast, serves as a Web portal where consumers can learn about and purchase health insurance online. It also enables employees of participating small businesses to select a health plan under their employer's policy that best suits their needs. Just one year old, the exchange is operated under the Governor's Office of Economic Development.

"We have four carriers participating as state providers, and we actually have 146 registered plan designs from those four carriers," says Patricia Conner, director of the Office of Consumer Health Services in Utah.

Anne Gauthier, senior program director of the National Academy for State Health Policy, a nonpartisan organization that helps states with health policy and practice, says most state plans will likely fall somewhere between these two models.

"Massachusetts tends toward exchange-heavy and Utah toward exchange-light," she says. "Every state's approach to policy goals will determine the structure and rules under which their exchange operates."

3 Ways to Structure an Exchange

Gauthier says states face three basic structural options:

  • Run the exchange as a state agency under the governor;
  • Run it as a quasi-public agency governed by a board (California has chosen this model); or
  • Run it as a state-established nonprofit.

States also can choose to participate in a regional health exchange under the Affordable Care Act, though Gauthier views this option as unlikely. "That makes sense in some ways, but it's challenging enough to make these decisions within one state, let alone across borders and political systems and environments," she says.

Nor will all states choose to run their exchanges through their Department of Insurance, which regulates insurance. "States that perceive their exchange as a purchasing market may feel it needs to be separate from regulation in order to do its job," Gauthier says.

Will exchanges have a physical presence such as a storefront? Probably yes, though not in the traditional sense. "Initially, I think we will see most states use their (insurance) agents and brokers as their partners to help get people into the exchange and purchase coverage," Gauthier says. In which case, you may have already walked into your state's future storefront.

Where Do Insurance Companies Fit In?

A major question facing all exchange planners is whether, and to what extent, to limit participation by insurance companies. Some view this as imperative, to simplify the choices for consumers and to drive down policy costs; others say the free market will do both naturally. The federal government is expected to define minimum benefit amounts in the near future.

"What I believe will happen in the end is, you'll have a more simplified product offering, which will save money," says Carroll. "Having government contracting does put downward pressure on the market."

Gauthier says some states may choose a wait-and-see approach.

"In most states, 40-some, these decisions are not yet made," she says. "Some states want any willing plan that is a qualified health plan to participate. Others are designing to limit participation because they believe that will drive quality and efficiency, and we'll figure out the details down the road. California, for example, has legislation that allows them to be selective but doesn't require that they be; it leaves those very important implementation details to the board to determine."

Will You Save Money?

Once the dust settles, will consumers save money on health insurance?

Conner says yes: "The whole purpose of the exchange is to provide some cost containment. By creating a competitive market with the insurance carriers, we're driving down that cost."

Carroll is optimistic as well. "I believe it will, but it will take time. It's very expensive for insurance companies to be managing too many different products. There are some opportunities to use the exchanges as a way to simplify their offerings," he says.

But Gauthier is cautious.

"It depends on what you mean by saving money. Many Americans who are currently middle class and are struggling to afford health insurance are going to be offered unprecedented levels of subsidies, so from the consumer's perspective, insurance will be more affordable.

"But unless we change the payment system and the way in which care is delivered, the costs are going to be unsustainable and health insurance will not be affordable. I think that the exchanges are a piece of the puzzle, but by no means can the exchanges themselves make insurance more affordable."