Health Insurance Exchanges and the Affordable Care Act: Eight Difficult Issues

September 30, 2010

Authors: Timothy Stoltzfus Jost, J.D.
Contact: Timothy Stoltzfus Jost, J.D., Robert L. Willett Family Professor of Law, Washington and Lee University School of Law, JostT@wlu.edu
Editor: Joris Stuyck

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Overview

The state-level health insurance exchanges to be created under the Affordable Care Act (ACA) are expected to play a major role in the purchase and sale of health insurance when they become fully operational in 2014. This report focuses on eight of the most difficult issues that the states and the federal government face in implementing the exchanges: governance of the exchanges; avoidance of adverse selection; making self-funded plans compatible with exchanges; making exchanges attractive to employers; exchanges' use of their regulatory authority; determining the information that exchanges must make available to consumers and employers; the exchanges' role in making eligibility determinations for premium tax credits and cost-sharing reduction payments and their relationship with public insurance programs; and reducing administrative costs. The report also examines how the ACA handles those issues, and makes concrete recommendations as to how those issues should be addressed.

Executive Summary

This is the second report in a series examining the implementation of the health insurance exchange provisions of the Patient Protection and Affordable Care Act of 2010. The author analyzes eight of the most difficult issues that the states and federal government face in implementing the exchanges—which are expected to play a major role in the purchase and sale of health insurance once they become fully operational in 2014—and offers recommendations for addressing them.

1. How should exchanges be governed? Should they be run by a state agency or by a nonprofit entity?
In each state, the exchange should be placed within an independent agency, which should be explicitly exempted, as necessary, from specific state administrative law or government operations requirements. The governing board of the exchange could include representatives of state agencies with which the exchanges must work, interested parties, and persons with relevant expertise. Management, on the other hand, should be apolitical and professional. Exchanges should outsource those services for which competitive markets exist and for which performance can be readily monitored.

2. The most significant problem that exchanges have grappled with historically has been adverse selection. What should be done to avoid adverse selection against and within exchanges?
To the extent possible, state regulation of the individual and small-group market should be identical outside and inside the exchange. Some states may be able to eliminate the market outside the exchange. To discourage adverse selection both against and within the exchange, HHS should design a sophisticated but practical risk-adjustment system allowing states to adjust risk among participating and nonparticipating insurers.

3. Opening the exchanges to large employer plans, and in particular to formerly self-insured employee benefit plans, poses a significant threat to the exchanges. What must be done to make self-insured plans compatible with exchanges?
In defining "self-insured" status, the U.S. Department of Labor and Department of the Treasury should clarify that only employers who are capable of bearing—and do, in fact, bear—the substantial risk of the cost of health care for their group can be self-insured. States should consider extending the requirements of the Affordable Care Act to large plans and to grandfathered plans that qualify for exchange coverage.

4. Exchanges must attract employers as well as individual enrollees if they are to succeed. What can be done to make exchanges attractive to employers?
Exchanges should offer employers the possibility of an aggregated bill covering the premiums of all employees. The exchange should assume the task of allocating premiums among the various insurers and plans chosen by individual employees. Employers should be able either to pay a fixed percentage of the premium for a specified level of coverage, with the employee covering the remainder of the premium, or to charge employees a premium share based on category and richness of coverage and, if desired, on tobacco use and involvement in wellness incentive programs. Employers could also offer greater support to lower-income employees.

5. The Affordable Care Act requires the exchanges to certify health plans that meet certain requirements for participation in the exchange. How should exchanges exercise this regulatory authority?
Exchanges must use their certification power to ensure that health plans meet the statutory requirements for qualification and that plans do not impose unreasonable premium increases on their members. Legislation authorizing state exchanges should under no circumstances require exchanges to admit all insurers in the market, but should at least give exchanges the option of being an active purchaser. Exchanges should decide whether to take a more inclusive or exclusive approach to insurer participation based on the conditions in their own state and local markets. Exchanges should use their regulatory authority to lower prices and increase value to the extent that the competitive conditions in their markets allow. Exchanges should also standardize and limit the range of plan choices available within each tier to stimulate competition based on price and value.

6. The Affordable Care Act requires the exchanges to make both descriptive and evaluative information available to consumers. How should the exchanges fulfill this responsibility?
Exchanges should make information describing the benefits and limitations of available health insurance plans readily and easily accessible. To permit informed selection of an appropriate health plan through the exchange Internet portal, health plans should be contractually bound by information they disclose on their Web sites. Exchanges should develop rating systems that permit accurate comparison of the value of competing health plans, and satisfaction-survey programs that pay particular attention to the opinions of plan members who have serious health problems or financial problems related to their health needs. When conducting their evaluations, exchanges should be attentive to the opinions of both employers and individuals.

7. Exchanges play a central role in making eligibility determinations for premium tax credits and cost-sharing reduction payments and for the Medicaid and Children's Health Insurance Programs. How should eligibility determinations work under the Affordable Care Act?
Although the Affordable Care Act includes extensive provisions for determining eligibility for premium tax credits, cost-sharing reductions, Medicaid, and CHIP, the allocation of responsibility for making such determinations remains unclear and contradictory. The statute should be implemented in such a way as to permit an individual to apply initially either to the exchange or to the state Medicaid agency. Either entity must then ascertain that the individual is signed up for the appropriate program. The exchange and the Medicaid and CHIP programs should facilitate electronic applications that minimize the need for paper documentation. Interim assistance should be readily available in cases where eligibility cannot immediately be determined. The reconciliation requirements of the statute should be interpreted so as not to defeat the purpose of providing assistance to those who need it. Exchanges should see it as their responsibility to ensure the continued enrollment of eligible individuals and families for tax credits or public programs, rather than holding individuals responsible for continually having to work at maintaining their own eligibility.

8. Exchanges must find ways to hold down administrative costs and must identify funding sources if they are to succeed. What can exchanges do to reduce administrative costs and attract funding?
Exchanges should develop a variety of revenue sources to fund their work, including an assessment on all insurers in the market. Exchanges should seek opportunities to lower administrative costs both for insurers and for employers. State enabling legislation should neither require nor bar the use of agents and brokers for the purchase of insurance from the exchange. Agent and broker commissions should be rationalized, however, and should be consistent regardless of which health plan is being sold and whether it is inside or outside the exchange.

Citation

T. S. Jost, Health Insurance Exchanges and the Affordable Care Act: Eight Difficult Issues, The Commonwealth Fund, September 2010.