Imagine a perfectly competitive, high-functioning and appropriately-regulated market—the kind near and dear to the heart of your econ 101 professor. Now, imagine the exact opposite and you'd have a decent approximation of how the health insurance market functions in America.

From adverse selection to asymmetric information, pretty much anything that can go wrong to make a market malfunction, does go wrong in the market for health insurance. This market failure isn't just about economic theory—it's about 46-million Americans for whom health insurance has become inaccessible for reasons of cost or previous medical history and for the millions more who go to bed each night worrying they could be next.

To address these concerns, many health reform proposals would create a new health insurance marketplace or "exchange" (sometimes called a "connector") that would ensure that health insurance is accessible and affordable for all. While an appealing idea to many, there remains many tough questions and challenges to setting up an insurance exchange. How would such an exchange be organized? Who would it serve? How would it be governed? What roles would insurers, employers, consumers, and governments play in the new marketplace?

To answer these questions, the New America's health policy program gathered experts from across the field for a policy discussion, moderated by our colleague Julie Barnes, on Capitol Hill on Monday.

Rick Curtis, the president of the Institute for Health Policy Solutions, began the discussion by laying out the goals and purposes of an exchange. He argued the basic purpose of an exchange was to organize the health insurance market so people can get access to coverage and make an informed choice, without having to deal with all of the complexities and rules of today's system. The ultimate goal of an exchange, he said, was to maximize the amount of competition and choice among plans based on value and cost effectiveness while minimizing competition based on risk selection and cherry picking, as is often the case in today's individual market.

DeAnn Friedholm of Consumers Union followed Curtis with a discussion of the current insurance market from the perspective of individual consumers. Noting how overwhelming the individual market for insurance can be, she argued the goal of an exchange should be to provide consumers with "structured choice" and reduce "frivolous variation." People have to understand what they're buying, Friedholm said. She suggested insurance plans should come with a sort of "nutrition label" that would provide consumers with all vital information—premiums, deductibles, co-pays, maybe even expected out-of-pocket costs for certain illness. The information would have to be easy to understand and compare so that consumers could make truly informed decisions.

Sara Horowitz, the executive director of the Freelancers Union, emphasized the role that associations like hers could play as "trusted advisors," helping their members navigate an exchange. Already, the Freelancers Union operates like a mini exchange offering health insurance plans to its membership of independent and self-employed workers. By banding together, these individuals can have some of the same clout in the insurance market that larger employers enjoy.

Helen Darling of the National Business Group on Health said that one thing that was absolutely essential to making an exchange work was an individual requirement to purchase insurance. Of course, if you're going to require individuals to purchase insurance, you must make sure it is affordable, understandable and delivers the highest value care.

Darling, whose group represents large employers, argued that an exchange must have some national standards or rules, so large employers aren't trying to comply with 50 different sets of regulations. However, Alissa Fox, a senior vice president at the Blue Cross Blue Shield Association, argued exchanges should build off existing state infrastructure to prevent overlap and duplication that raise costs. She agreed with Darling that for insurance markets to work all individuals must participate, but said that simply creating bigger risk pools wouldn't necessarily lead to savings unless reformers specifically address the problems of cost.

Finally, Len Nichols, the director of New America's Health Policy Program, addressed the question of whether private health plans should be forced to compete with a "public" health insurance option. The details of this issue will be laid out in a forthcoming policy paper from New America, but here's a brief summary of the public plan debate, as Nichols sees it:

Proponents of a public plan support the idea for a variety of reasons. Some see it as a backdoor to a single-payer health care system. Others question the financial incentives of managers in private plans to deny care. Still others see the purchasing power of a public plan as a way to set prices and control health care costs.

The flip side: opponents of the public plan worry it will lead to single-payer health care. Others are concerned that differential payment rates between a public plan that could pay a lower rate for services than its private competitors would lead providers to raise the prices they charge the private insurers, which would shift costs onto the private sector. Finally, as Nichols noted, there are some who are philosophically opposed to the expansion of government, but that was more a question of ideology than policy.

The solution, Nichols suggested, was a public plan based on two principles:

• First, the public plan's administrators need to be accountable to an entity other than the one identified to govern the marketplace.
• Second, all rules have to apply to all plans. The public plan cannot be Medicare nor can it leverage participation in Medicare. Already there is an existing model of this kind of plan in some 30 states which have self-funded, self-managed plans for state employees.

The goal was to create a public plan that satisfied the concerns of both sides. However, as Nichols noted, more must be done to control costs by building an information system through which best practice information can flow and by incentivizing payments so we pay people for doing the right thing and not just more of something.