Cherry-picking the healthy - Why successful methods ultimately failed.

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The Texas Insurance Purchasing Alliance, created by the Texas Legislature in 1993, was meant to help small businesses, which often cannot afford coverage for their employees.
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Our system pooled small employers into purchasing groups large enough to obtain the lower wholesale insurance rates that big companies get.
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Initially, the alliance worked exactly as planned. Sixty-three percent of the businesses that participated were able to offer their employees health coverage for the first time. The alliance offered small businesses a low-cost, nonprofit option: our administrative arrangements did away with the high marketing costs that insurers pass on to small businesses.
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And we didn’t charge higher rates to firms with older or less healthy workers. This in turn led other insurers, outside the alliance, to lower their prices. We did all this not by creating a government bureaucracy, but by relying on the private sector.
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Most important, though, our exchange failed not because it wasn’t needed, and not because the concept wasn’t sound, but because it never attained a large enough market share to exert significant clout in the Texas insurance market.
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Private insurance companies, which could offer small-business policies both inside and outside the exchange, cherry-picked relentlessly, signing up all the small businesses with generally healthy employees and offloading the bad risks — companies with older or sicker employees — onto the exchange.
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But as a result, our exchange was overwhelmed with people who had high health care costs, and too few healthy people to share the risk. The premiums we offered rose significantly.
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Texas wasn’t the only state to see its insurance exchange fail. Florida and North Carolina were also unsuccessful. And California, which had the first exchange (established in 1992) and the largest market, shut its doors in 2006. All these state exchanges failed for the same reason: cherry-picking by insurers outside the exchange.

http://www.nytimes.com/2009/10/06/opinion/06mcgarr.html?ref=opinion

A doctor On Countdown explained this, and said that any healthcare plan will fail if this happens.

Once it begins to fail, people will point to that and say that this is proof that the government can't run a large healthcare option.

However, the article points out that the plans that failed weren't using a government run option.

The insurance companies will always make obscene profits and torpedo other models using this method. If they can continue to cherry-pick, nothing will ever really be accomplished.

The Baucus bill does this for them by putting high risk people into a pool. It also proposes making older people pay more.