by sharon silow-carroll, diana rodin, tom dehner and jaimie bern1
A central feature of the federal health reform legislation is the creation of “health insurance exchanges.” The exchanges, which will be operational in 2014, are envisioned as insurance marketplaces where individuals and small businesses can compare and shop for health plans, and determine and receive premium subsidies for which they are eligible. States have the option of developing and hosting their own exchanges, or letting the federal government establish and manage exchanges for them. states that choose to implement exchanges will be able to tailor the exchanges to the particular strengths and circumstances of their states. however, they will face a multitude of decisions regarding their governance, design, marketing, management, technology, and other factors.
Reading: What is a state insurance exchange
This statement in action focuses on two critical issues: the role of exchanges in selecting plans for inclusion and in avoiding adverse selection. In the Ask the Expert column, Timothy Jost, J.D., professor of law at Washington and Lee University School of Law and author of a Commonwealth Fund report and other analysis of insurance exchanges, answers questions about how states should evaluate their options in these areas the snapshots describe three states that are at the forefront of implementing or legislating exchanges: massachusetts and utah, which are the only states to implement statewide insurance exchanges, and california, which was the first state to pass exchange legislation after the Affordable Care Act was enacted.2
what is an insurance exchange? per initial November 2010 guidance to states on exchanges from the department of health and human services:
“an exchange is a mechanism for organizing the health insurance marketplace to help consumers and small businesses shop for coverage in a way that makes it easy to compare available plan options based on price, benefits, and costs.” services, and quality. By bringing people together, reducing transaction costs, and increasing transparency, exchanges create more efficient and competitive markets for individuals and small employers.”
Combined with insurance market reforms, the exchanges are intended to make individual and small group insurance markets easier to navigate by allowing side-by-side comparisons of health plan benefits and costs. they are also intended to encourage competition among health plans and thus make coverage more affordable. Exchange administrators will facilitate enrollment in health plans and determine, in cooperation with state Medicaid and children’s health insurance program agencies, eligibility for public programs or federal tax subsidies. Although the exchanges will serve both individuals and small groups, they will be the exclusive market for people who are eligible for federal premiums and cost-sharing subsidies based on their household income.
To promote transparency, competition and efficiency, the federal reform requires exchanges to undertake certain functions, such as certifying whether health plans are qualified to participate and coordinating with the corresponding state and federal agencies (Annex 1).
Annex 1. Required Functions of Insurance Exchanges
- provide an individual and small group insurance exchange portal, or a combined portal
- present plan options in a standardized way (i.e. platinum, gold, silver and bronze)
- provide electronic resources (eg cost calculators) and free telephone support to users of exchange web portals
- manage the waiver process for the individual mandate requirement
- determine eligibility and enroll applicants in public programs
- determine eligibility for new tax credits and cost-sharing reductions (if applicants’ household income is 100-400% of the federal poverty level)
- facilitate advance payments of premium tax credits by the treasury department to insurers
- determine if employer-sponsored insurance is “affordable,” meaning less than 9.5% of household income
- receive and process “free choice” vouchers for employees who have unaffordable employer-sponsored insurance
- operate a consumer assistance program
- report user and employer data to the treasury department
- generate enough income to be self-sufficient by 2015
- fact sheet on health insurance exchange grants on the hhs healthcare.gov website
- exchange model legislation developed by the national association of insurance commissioners
- state coverage initiatives health reform web page on exchanges
- exchange implementation schedule for states
- “Health Insurance Exchanges and the Affordable Care Act: Eight Tough Questions” Timothy Stoltzfus Jost, The Commonwealth Fund, September 2010
- resources from the national academy for state health policy on state exchange implementation
- letter from hhs secretary sebelius to states regarding interchange design flexibility, 24 Feb 2011
source: Patient Protection and Affordable Care Act
In addition to these requirements, the legislation leaves considerable flexibility to states that choose to operate their own exchanges, including: determining their governance and organizational structure, funding them, and executing operational requirements to meet federal standards.3 These These decisions and how they are put into operation will largely determine whether an exchange is successful in offering affordable choices between health plans for individuals and small businesses. Additionally, states have significant flexibility in two key policy areas: how selective an exchange will be in qualifying plans and how it will avoid adverse selection, or disproportionate enrollment of high-risk, high-cost individuals, resulting in an increase in costs. and premiums, which will shape how the exchange engages with and participates in a state’s largest health care market.
Health Plan Selection: How Active Should Exchanges Be? One of the biggest questions in developing insurance exchanges is how aggressive you should be in defining standards and selecting plans. who qualify for participation. States will need to carefully consider, and some will likely define in legislation, how much authority the exchange should have to set standards for qualified plans.
as tim jost points out, the affordable care act allows an exchange to certify a health plan only if it “determines that making such health plan available through such exchange is in the interest of qualified individuals and qualified employers in the state or states in which the exchange operates.” 4 Exchanges must also require plans to provide justifications for premium increases and take this information into account when determining whether to certify. they will present standardized information about plans to allow consumers to compare their options and will publicly rate plans based on factors such as quality of care, cost and customer service. however, the reform law also restricts the regulatory function of the exchanges in several ways, including the prohibition of imposing price controls or the exclusion of plans to use the fee-for-service payment methodology.
Within these parameters, states must decide whether their exchanges will require insurance plans to compete and essentially “bid” to participate, with the exchange choosing some plans and excluding others, or whether each plan meeting a minimum set of specifications must be included.
In states that require or allow an exchange to be selective in terms of the plans it certifies, the exchange will need to determine the basis on which to make those selections. Some have referred to this approach as the exchange being an “active buyer” on behalf of individuals and small employers, with the explicit goal of maximizing value for consumers by selecting only the highest performing plans. It is important to note, however, that states do not necessarily focus on the overall performance of health plans in terms of cost and quality. some may prioritize lowering premium costs and therefore focus their offers on price. other states may want to certify only those plans that score high on health care quality measures, and still others may seek to advance strategic goals such as instituting limited networks or promoting innovations in payment reform. states can take a blended approach assigning values relative to price, quality, and other strategic priorities.
Regardless of the values on which to base health plan selection, states generally must consider how selective an exchange should be, if at all. in particular, they should consider:
jost suggests that exchanges can start by being less selective and gradually move towards a more active buying model, encouraging the participation of both customers and insurers to create a coveted market. Decisions about an exchange’s buying role dovetail with its responsibilities to provide consumers with easy-to-use comparisons of plan benefits and costs, quality ratings, and other information. for example, states could use their rating systems to help define explicit cutoff points for allowing (or excluding) plans in the marketplace.
The two existing state exchanges, in Massachusetts and Utah, have taken different approaches to selecting plans for listing. department of health and human services secretary kathleen sebelius recently reiterated in a letter to governors that “states have the option of allowing all insurers to participate in the exchanges (the utah model), or they can be buyers more assets by shaping available options (the massachusetts model) the massachusetts connector, the state’s insurance exchange, accepts competitive bids to participate in commonwealth choice, which offers unsubsidized commercial insurance selected plans receive the “seal of approval” of the Connector and are offered on the Exchange. A core component of the Seal of Approval process is validating that plans meet minimum benefit standards and are standardized across all benefit levels. The Connector also accepts competitive offers for the separate subsidized program, commonwealth care.
utah plays a much more limited role in your exchange. State administrators see their exchange first and foremost as a technical platform, through which the state contracts with private companies that own and run the software. the state’s foreign exchange budget is very modest; their role is to monitor, provide some basic requirements, and help expand the exchange. While Utah collects and plans to monitor data on the quality and cost of care provided through participating health plans, it has not turned down any providers and believes the private insurance marketplace is “working” for the people of Utah. .
Under the Affordable Care Act, new federal rules will define the minimum essential benefits that all insurance plans must offer (unless they are excluded or “exempt” plans) and will require plans to be associated with benefit levels standardized that are defined by relative actuarial values. as a result, all exchanges will have to confirm compliance with these new federal rules to some degree. states have the option of requiring coverage for specific additional benefits.
Avoid Adverse Selection“The biggest threat exchanges face is adverse selection,” according to Jost.5 Adverse selection refers to the disproportionate enrollment of high-risk, high-cost individuals, resulting in increased costs and premiums. this could be because lower risk individuals and employers who have more affordable options elsewhere are leaving the exchange, leading to further escalation of risk, costs and premiums, essentially creating a high risk pool or, in the extreme, a “death”. spiral” of rapidly escalating costs.
Adverse selection could occur at the health plan level within an exchange, if certain health plans attract more expensive individuals than others. or it could go against the exchange as a whole, if predominantly high-risk individuals and groups enroll in the exchange while younger, healthier individuals and groups buy coverage in individual or small group markets outside of it. This type of adverse selection at the market level would derive mainly from the existence of different rules for health plans on and off the exchange. If no-trade plans are allowed more flexibility in benefit design and rate setting, those plans could offer lower prices to attract lower-risk individuals.
For exchanges to fulfill their intended purpose of providing high-quality, affordable coverage options, protections against both types of adverse selection are needed. the Affordable Care Act contains many such protections; the law:
Despite these substantial structural protections, some risk of adverse selection against exchanges remains. for example, insurers may choose to sell plans off exchanges only and offer less expensive options (for example, plans with high cost-sharing or catastrophic plans), thereby attracting younger, healthier populations. In addition, health plans in existence at the time of the passage of the Affordable Care Act (March 2010) are protected and therefore exempt from some rules and from inclusion in combined risk groups. low-risk individuals may disproportionately retain these no-trade plans.7
States have the following options to supplement the above provisions to further level the playing field and minimize adverse selection against their trades:
California, the first state to enact legislation for an exchange after the passage of the Affordable Care Act, experienced adverse selection in a buying pool similar to a previous exchange. to avoid similar problems, its new legislation requires all plans that offer coverage on the exchange to offer all five benefit levels mandated by federal law (platinum, gold, silver, bronze, and catastrophic) and to sell the same products outside of the exchange. .
in the 2010 pilot of the utah health exchange, the state and participating health plans quickly realized they needed parity to avoid adverse selection and adjusted prices to be the same inside and outside the exchange . The legislation standardized rating practices and required health plans to establish a single risk group for their products both on and off the market, which is also a requirement of federal health reform legislation. The Utah Exchange also has a prospective and retrospective risk adjustment for health plans within the Exchange, whereby plans that enroll sicker people get a larger share of total premiums to offset their higher costs.
the massachusetts health connector has many requirements to reduce adverse selection, most of which are included in the affordable care act. for example, state law requires individuals to purchase coverage, limits subsidized coverage to the exchange, requires the same products on and off the exchange, and pools health plan risk for enrollees on the exchange and the foreign market.
Protection against adverse selection within the new state exchanges will also be addressed by the Affordable Care Act’s risk adjustment and reinsurance policies. in the early years (2014-16), an assessment of insurers will help pay reinsured high-risk individuals. in later years, a risk-adjustment mechanism developed by the federal government and implemented by the states should shift funding from health plans with lower-risk enrollees to plans with higher-risk, more expensive enrollees. It will be critical for states and exchanges to monitor markets for signs of adverse selection and make adjustments to their risk adjustment mechanisms and/or rules and requirements regarding on- and off-exchange health plans.
Exchanges are required timeline and resources to be operational by January 1, 2014, so most states are actively planning and seeking federal funding for their development and implementation. the department of health and human services (hhs) made two announcements offering grants to states to support their planning and implementation work, in september 2010 and january 2011. in february 2011, hhs announced grant awards for “innovators “Early Markets” to seven states or consortia that are showing leadership in developing the information technology capabilities that state exchanges will need. most states are taking advantage of federal planning funds and there are likely to be more opportunities as implementation progresses.
by january 2013, the hhs secretary will check to see if each state will be ready to open its bag on time. if a state chooses not to run its own exchange, or is deemed unprepared to do so, the secretary will assume responsibility for its exchange functions, although it is not yet clear how this will work.
So far, hhs has published initial guidance on exchanges and the national association of insurance commissioners has developed model legislation on which states can base exchange laws that many of them will likely develop this year. since the start of many state legislative sessions in early 2011, activity to develop foreign exchange legislation has accelerated and become widespread. states expect further policy guidance from hhs on a number of key issues. the package of essential health benefits that plans will need to cover is a critical factor in state planning efforts and will likely be defined by the end of 2011. also this year, hhs will develop a methodology for state exchanges to use to assess value of health plans, taking into account their cost, quality, member risk, efficiency and actuarial value. Annex 2 provides links to resources designed to help states develop health insurance exchanges.
Document 2: Resources for States in Developing Health Insurance Exchanges
1 The authors would like to thank Timothy Jost, J.D., Professor, Washington and Lee University School of Law, and Elliot Wicks, Ph.D., Health Economist at Health Management Partners, for their assistance and input. to this post.
2 other state legislatures, including in texas and washington, are developing or considering legislation to establish exchanges.
3 With respect to exchange governance, jost outlines three options: states can establish a non-profit entity to manage an exchange, house it in an existing government agency, or establish it as an independent public entity. For a fuller discussion of governance issues, see “Health Insurance Exchanges and the Affordable Care Act: Eight Tough Issues,” Timothy Stoltzfus Jost, The Commonwealth Fund, September 2010, pp. 2-7.
4 t. yes Jost, “Health Insurance Exchanges and the Affordable Care Act: Eight Tough Issues,” The Commonwealth Fund, September 2010, p. 8.
6 states may require individual and small group populations to be combined into one risk group.
7 so-called “mini-med” plans will be phased out with the launch of the exchanges in 2014, though some insurers and employers have recently received one-year waivers to help maintain some form of coverage for employees until trading options become available and yearly limits are completely prohibited in 2014.