The health care reform bill that was passed last year means that Michigan, like all states, is required to set up something called a “health insurance exchange.” This past week, the state Senate passed a bill to begin the process of developing that exchange, which is a fancy way to describe a website where people without health insurance can shop for coverage. In response, Scott Hagerstrom, head of a statewide organization called “Americans for Prosperity of Michigan,” likened the bill to a “declaration of war on the Tea Party.”

That’s insane. The word “insane” is a hallmark of lazy writing, but sometimes simplicity is important. “Insane” is the only word that adequately describes Hagerstrom’s position. In order to understand why, however, you have to also understand something about how health insurance works in the United States.

There are two health care markets in this country: One for everyone who is offered a health insurance policy by their employer and one for everyone else. If you’re fortunate enough to have a job, and luckier still to have a job that provides benefits, then there are three separate decisions that determine what sort of care you will ultimately receive when you need it. First, health insurance companies negotiate with physicians and hospitals to determine which providers will be in their benefit network. Second, employers negotiate with insurers and choose one of them to provide coverage to their employees. Third, individual employees will sometimes have the ability to choose between different kinds and amounts of coverage, albeit only from whatever insurance company their employer has already signed a contract with.

What’s important to keep in mind is that “choice” in the American system is largely illusory even though our system relies on the private market to a much larger degree than do most other wealthy countries. The market for insurance is dominated in most states by only a few firms, meaning they can act as a cartel and impose prices for coverage that are higher than they would otherwise be. Employers can try to pick the cheapest insurer from that limited set of options, but that means changing which doctors their employees are allowed to see.

As bad as all of that is, life in the other group is even worse. If you’re self-employed, or work multiple part-time jobs that don’t provide health benefits, then you’re faced with two dismal options. One is to buy coverage “at retail” from insurance companies. However, the insurance companies know that people who are unemployed or working the sort of labor-intensive job that doesn’t come with benefits are likely to be less healthy than other people, meaning that coverage under these circumstances is much more expensive than it would otherwise be.

The other option is to pay out of your own pocket for expenses as they arise. What you may not realize, however, is that everyone — from your pharmacist to your doctor to your hospital — actually has two sets of prices that describe everything they do. One figure is what they bill to insurance companies, with whom they’ve already agreed on a set list of prices. The other is the “list price” that they charge to anyone without insurance. This second price is much higher — 10 times higher or more — because most patients who are charged the list price are too poor to ever pay anyway. Hospitals gamble that once in 100 times they’ll catch someone who doesn’t have coverage but does have a steady paycheck, and by gouging those patients they can make back some of their expense in treating the poorest of the poor. If you ever happen to meet this description, you are extremely likely to go bankrupt.

The exchanges are meant to help this second group, if only very slightly, by introducing competition that makes their health care market less broken. I don’t think it will work, though the reasons why are a separate column. If nothing else, it is the sort of market-based, pro-small business proposal that the likes of Hagerstrom should find thrilling. It’s also a reform that is needed more in our state than anywhere else. With such high unemployment, Michiganders are more likely than most Americans to find themselves in the broken market I described above.

So where did Hagerstrom find a “declaration of war” in all of this? Not in the proposal itself, so it must be in the name of the president who helped design it. There’s a word for that sort of reaction: insane.

Neill Mohammad can be reached at neilla@umich.edu.

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