California Governor Arnold Schwarzenegger seems likely to sign a law that has the health insurance industry very nervous and the Wall Street Journal editorial page very unhappy.

Is that a good thing? I think so.

The Affordable Care Act's most important institutional legacy will arguably be the new insurance "exchanges"--the regulated marketplaces where individuals and employees of small businesses can buy the same kind of affordable, comprehensive policies that employees of large businesses and government now get. The states have primary responsibility for this task: Between now and 2014, they have the opportunity to pass laws constructing exchanges within the guidelines the Act sets forth. Once the exchanges are ready to go, the states will run them, presumably via quasi-independent authorities. (If states opt not to do these things, the federal government will create and run the exchanges for them.)

California, which nearly passed its own universal health care scheme a few years ago, looks like it will be the first state to pass its enabling laws. And it appears to be doing it the right way.  The Affordable Care Act lays out a pretty clear vision for how the exchanges are supposed to work--the kind of information they'll publish, the sorts of policies they'll make available, the kinds of subsidies they'll offer, and so forth. But the law leaves states some wiggle room, particularly when it comes to the discretion states have over which carriers get to participate in the exchanges.

Under two bills that the California legislature passed and Schwarzenegger is apparently expected to sign, the state's exchange authority would have explicit permission to "contract with carriers so as to provide health care coverage choices that offer the optimal combination of choice, value, quality, and service.” That mandate, combined with the bills' other provisions, means the exchange authority would be able to negotiate pretty aggressively over price and quality, excluding plans that don't serve consumers well. That's more or less what corporate benefit departments and the managers of public employee programs, like the Federal Employee Health Benefits Program, do for their members.

A wide array of interest groups, including consumer advocates like Health Access and non-profit insurers like Kaiser Permanente, support the measure because they believe it will reward quality and help hold down the price of insurance--a verdict that a new market analysis from Citi seems to confirm: 

Limiting the number of companies that participate would seem give the exchange the power to negotiate more favorable terms with the plans as a basis for selection. In addition, the legislation appears to put significant focus on premium rates, with measures in place for premium rate reviews that will attempt to limit the magnitude of future rate increases.

Of course, not everybody is so happy about this idea. The Wall Street Journal today says the California bills would be a "pretext for imposing de facto price controls on the insurance industry" and chides the state for following the model of Massachusetts, which set up its own set of insurance exchanges before the Affordable Care Act passed. The Journal, along with other conservatives, would prefer "neutral clearinghouses" that "operate much like travel websites such as Expedia.com." 

The Journal is right about the resemblance to Massachusetts. And the resemblance is hardly coincidental. Among other things, Jon Kingsdale, who recently stepped down as director of the Massachusetts Connector Authority, reportedly served as a consultant to California's lawmakers.

But the Connector Authority has gotten high marks precisely because it manages insurance offerings aggressively. As Kingsdale explained in an interview earlier this year, simply allowing any plan that hits minimum standards to sell in the exchanges "would be like telling your grocery store they have to offer every single kind of bread baked by every single bakery. ... The exchanges would be nothing more than an automated Yellow Pages."

There's room for some disagreement over that argument, I realize. It depends on how much ability (and desire) to navigate multiple, complex health insurance options you think consumers really have. But it's worth noting that the state's for-profit insurers oppose the measure, strongly, because they fear it will force them to reduce premiums and live with lower profits. Citi agrees:

we think exchanges are bad for industry profitability. ... consumers will be choosing a plan based primarily on price and brand name recognition. If price is the most important variable, it’s hard to see how that wouldn’t put pressure on rates and reduce margins.

I'm not one of those people who thinks that anything bad for business is good for consumers. But health insurance is one of those markets where high profits and the public good frequently are at odds.