California was the first state to create its own health insurance exchange after the passage of the Affordable Care Act. Because of its front-runner status and the sheer size of its coverage expansion, California's choices will have implications for other states as they address difficult issues, including minimizing adverse selection, promoting cost-conscious consumer choice, and seamlessly coordinating with public programs. California took advantage of the flexibility in the federal health reform law to create an exchange that will function as an active purchaser in the marketplace; take significant steps to combat adverse selection both against and within the exchange, including requiring all insurers to sell all tiers of products and making exchange participation a condition of selling catastrophic plans; and allow community-based health plans to develop commercial offerings for the exchange. This brief examines these decisions, which will provide a roadmap for other states as they set up their exchanges.