The Affordable Care Act allows for multiple states to jointlyoperate health exchanges. Linda J. Blumberg, writing for forthe Urban Institute, says there are four reasons why states shouldtake this route:

1. Administrative economies of scale could besignificant.

Exchanges will need to develop subsidy administration andeligibility protocols, consumer ombudsman services, plan comparisonmaterials and other new programs and functions in order to organizehealth insurance markets and make them operate more competitively.It might make sense, for example, for several small states to jointogether and undertake these tasks in common. Within multi-stateexchanges, however, it would be important for each state’sdepartment of insurance to retain its regulatory jurisdiction andauthority.

2. Regional exchanges might also make sense in largemetropolitan areas that cross state boundaries.

Residents may reside in one jurisdiction but work and obtainhealth insurance in another. Today, in advance of health reform,insurers make adjustments in order to do business in suchareas.

For example, two Blue Cross Blue Shield (BCBS) plans operate inKansas—Kansas BCBS and Kansas City BCBS. Kansas BCBS operatesstatewide except for the Kansas City metro area. Kansas City BCBSsells coverage only in the metro area and is licensed in bothKansas and Missouri. To the extent these two states have differentrules governing health insurance, Kansas City BCBS follows the morestringent rule for all of its policies. In the context of healthreform that provides for individual and employer mandates, it willbe important to adopt structures that facilitate the purchase ofcoverage, making health insurance as affordable, efficient, andadministratively simple as possible. For firms whose workers residein different jurisdictions, regional exchanges could simplifycoverage choices, the administration of subsidies, enforcement ofmandates, and other key reform changes.

3. States might establish multi-state exchanges topromote pooling across state lines.

States jointly operating an exchange could choose to haveinsurers set identical prices for products sold in both states.However, whether risk pooling across state lines might occur woulddepend on the rating areas for health insurance that statesestablish. As discussed above, it seems unlikely that a lower-coststate would agree to pool risks and costs with a higher-cost state.Under the law, states will establish geographic rating areas forhealth insurance, subject to federal approval. Therefore, forexample, even though Kansas and Missouri might decide to jointlyoperate a single exchange for their residents, if the cost ofcoverage across these two states is very dissimilar, they mightdecide to maintain distinct rating areas within the exchange forKansas and Missouri and might even maintain substate ratingareas.

4. Multi-state exchanges could create thenecessary critical mass of insured persons to establish stable riskpools by combining markets in small populationstates.

The minimum size for a credible risk pool is generally perceivedto be about 100,000 lives. Thus, multi-state exchanges could beparticularly useful for sparsely populated regions of the UnitedStates. Buettgens, Holahan and Carroll (2011) estimate theenrollment in state non-group health insurance exchanges under theACA, based upon 2011 population estimates.

For example, they estimate enrollment in the non-group healthinsurance exchanges of Vermont, the District of Columbia, NorthDakota, South Dakota, Wyoming, Alaska and Hawaii at 48,000, 49,000,76,000, 82,000, 58,000, 61,000 and 64,000, respectively.Theoretically, at least, these states could participate inexchanges jointly with other states in order to establish morefinancially sound pools.

However, obstacles could occur that would prevent cross-stateexchanges from achieving such critical mass. For example, tooperate in a multi-state exchange and operate everywhere within it,insurers would need to develop and maintain provider networks thatreached broadly across the participating states. A Wyoming insurermay be unable to establish a robust provider network in Idaho, forexample. In addition, introducing additional plans into smallpopulation areas could further fragment existing risk pools,particularly in the absence of effective risk adjustment