Major healthcare legislation became federal law last year. One half of the $1 trillion cost of the legislation will be spent on taxpayer-funded subsidies to purchase health insurance in new state health insurance exchanges.

Eligibility for the subsidy will be based on an income of 133 percent to 400 percent of the federal poverty level.

For a family of four, 400 percent of the poverty level is currently $88,000, which will increase to $96,000 by 2016.

Obviously, under the new federal reform subsidies will go to upper middle class people as well as the poor.

The law requires state exchanges to offer four levels of benefit plans plus a high-deductable, catastrophic plan for young adults.

It forces each state to either set up its own exchange or participate in a regional, multi-state program.

If a state does not establish an exchange, the federal government will force people living in that state into a federal program.

It is estimated that nationally over 100 million people earn between 133 percent and 400 percent of the poverty level and would be eligible for subsidies in an exchange.

A former director of the non-partisan Congressional Budget Office believes an additional 40 million people may be forced into the exchanges after their employers drop employee health insurance because of high costs.

These additional people will put a considerably bigger burden on taxpayers than the Administration’s original cost estimate of $1 trillion.

Even so, designing an insurance exchange offers each state, like Washington, the opportunity to reform healthcare delivery by starting with a “clean slate” and moving toward a patient-oriented, consumer-driven system.

The exchange can be a transparent, information-based market where individuals and small groups can select the plan most appropriate to their needs.

States can use the exchange as a mechanism to combine all existing state government insurance plans, such as Medicaid and Basic Health, into one administrative program.

Done right, the exchange should be easy to use and should promote decreased healthcare costs.

Insurance rates and benefit levels should be set by the insurance market and not by government regulations.

The administration of the exchange should be done through a non-political, independent board, not by a politicized bureaucracy.

Under the federal legislation, “essential benefit” plans must meet federal requirements, but the state exchanges should also offer an array of “mandate-free” or “mandate-light” insurance plans that satisfy market needs.

Any subsidies in the exchange should flow to and be controlled by the patient, not by insurance executives or government officials.

Tax credits or deductions to purchase health insurance could also be offered in an exchange.

So far two states have set up exchanges. Utah has an information-based clearinghouse that serves as an electronic insurance broker.

Overhead costs are low, consumers have wide choices and enrollment is growing in this new exchange.

Utah’s approach is clearly popular with state residents. Massachusetts took a different approach.

Starting in 2006 it created a much more restrictive, top-down exchange.

The uninsured rate in the state dropped from 10 percent to 3 percent, which greatly increased demand for healthcare.

The provider supply was not expanded. Consequently, access to healthcare in Massachusetts has dramatically decreased and costs to state taxpayers have exploded.

Although the new federal healthcare legislation includes hundreds of new mandates and regulations, states like Washington now have an opportunity to overhaul their existing programs, start fresh and establish a meaningful patient-directed, market-oriented healthcare system.

The alternative is to submit to more government regulation and central planning with the attendant bureaucratic inefficiencies which will not increase access or decrease costs to patients.

Dr. Roger Stark is a retired surgeon and a healthcare policy analyst with Washington Policy Center.