By John Reichard, Jane Norman and Rebecca Adams, CQ HealthBeat
June 11, 2011 -- Health and Human Services (HHS) officials set the stage for the crucially important final phase of the health care law's implementation with the unveiling of two proposed exchange regulations that they say would provide states with considerable flexibility in developing their new insurance marketplaces.
The proposed regulations, anxiously awaited by states and insurers, represent another milestone toward full implementation of the law in 2014, when the exchanges will be up and running to serve individuals and small businesses. Not yet disclosed by HHS, however, are the details of the essential health benefits package that will be offered to consumers or how a federal fallback exchange would operate in states that don't set up their own new marketplaces.
In describing the rules throughout the day, HHS officials stressed that the proposal was designed to reduce administrative burdens on the states and duplication of efforts, and allow states to partner with the feds. "In this proposed rule, we aim to encourage state flexibility within the boundaries of the law," the exchange rule says.
"States can choose to develop an exchange in partnership with the federal government or develop these systems themselves,'' says an HHS statement. "This provides states more flexibility to focus their resources on designing the right exchanges for their local insurance markets."
HHS Secretary Kathleen Sebelius, other HHS officials and a group of small business leaders discussed the new rules at a morning news conference.
One 244-page proposal governs the establishment of exchanges and qualified health plans. The second 103-page rule is designed to minimize the impact on insurance companies of covering high-cost patients.
The overwhelming majority of states have yet to approve legislation setting up the framework for their exchanges.
Consumer advocates said the proposal will allow states to fashion exchanges with policyholders in mind.
"HHS today released a menu, not a recipe,'' said U.S. PIRG policy analyst Mike Russo. "State leaders should take the flexibility they've been given to design a strong, negotiating exchange on behalf of consumers."
The proposal is a mixed bag for insurers. Employers who elect to provide coverage to their workers through the exchange can pick the tier level of coverage they will offer. But employees will be able to choose which specific plan in that tier they want to enroll in. Insurers had wanted employers to have the option of deciding exactly which health plan their workers would have to enroll in.
Terry Gardiner, vice president at the Small Business Majority, a group friendly to the Obama administration, said at the news conference that states initially are focused on creating exchanges to serve individuals as distinct from small business. He said, however, that he expects all states will eventually have separate exchanges specifically for small businesses. He said that so far only one, New York, has discussed having a single exchange that would serve small business and individuals.
Some aspects of exchange operations are not addressed in the rules, including key aspects of how the federal government would run an exchange if a state opted not to create its own.
For example, Joel Ario, head of HHS' exchange office, said that no decision has been made yet on whether the federal government would play an active purchaser role, with the power to exclude an insurance plan from a particular federally run exchange if that company offered consumers a bad deal.
HHS officials emphasized that the federal government plans to help all 50 states manage these new marketplaces.
For example, Ario said a federal "data hub" will provide information to the states on whether any particular applicant is a U.S. citizen. The data hub also will give states information on tax credits that will be available to exchange customers.
An estimated 8.9 million people will enroll in exchanges in 2014; 23.4 million in 2018, according to Congressional Budget Office (CBO) estimates. CBO also estimated that most of them would be eligible for premium subsidies that are expected to average $4,600 per person in 2014.
Reaction to the exchange proposal was positive from from Democrats on the Hill.
"These rules are the next step in continuing to put individuals and small businesses, not insurance companies, in the driver's seat," said Finance Committee Chairman Max Baucus, D-Mont., one of the authors of the overhaul.
Sen. Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee and another author of the law, said he was pleased the administration had "released a proposed rule that will guide states' work in getting exchanges up and running—many states are already deeply engaged in this process."
Republicans have supported the concept of insurance exchanges but not in the context of a health overhaul they oppose.
Rep. Michael C. Burgess, R-Texas, a senior member of the Energy and Commerce Subcommittee on Health, said in a statement that the country didn't need or want the health law, or additional regulations. "The concept of an insurance exchange is not necessarily a bad idea," Burgess said. "However, states being compelled to establish exchanges and forced to comply with regulations that fit with the federal government's vision will not necessarily work for the states."
Exchange approval timing
Under the health care law (PL 111-148, PL 111-152), states must have their insurance exchanges ready for HHS approval by Jan. 1, 2013, so the new marketplaces can be operational by 2014.
However, the regulation gives states some leeway in that timetable by saying that HHS may issue a "conditional approval" because there will be systems development and contracting activities that occur in 2013 past the deadline.
"There are no absolute deadlines here," Ario said at the news conference.
The rule provides three options. States can be ready by the January 2013 deadline; they can get a conditional approval for their exchanges; or they can initially let the federal government run the exchange.
"The conditional approval would presume that the state's exchange would be operational by January 1, 2014 even if it cannot demonstrate complete readiness on January 1, 2013," says the regulation. "HHS would continue to work with and monitor the progress of states with conditional approval until a determination of full approval is made, or until the conditional approval is revoked."
Even if the state elects to let the federal government run its exchange, it can change its mind later and subsequently set up its own exchange as long as it gives HHS 12-month notice.
HHS officials say they are also considering and asking for comment on a proposed review process for the exchange plans that is similar to what's used for Medicaid and the Children's Health Insurance Plan, in that there would be 90 days available for review of the plan for approval, denial or to request comment. If more information is requested, states would have 90 days to approve or disapprove the plan.
Also in the proposed rule HHS says that states would have to notify HHS before "significant" changes are being made in an exchange plan and the plan would have to get written approval before it could proceed with those changes. The agency is considering using the state plan amendment process now in place for Medicaid and CHIP.
Significant changes would include altering a key function of exchange operations, changing a time frame for crucial functions or making changes to the exchange governance structure, state laws or regulations, information technology systems, the Qualified Health Plan certification process or the process for enrollment in a QHP.
The separate proposed reg that deals with lessening the impact on insurers of covering high-risk patients includes three components that would encourage insurers to cover these sicker patients just as they would healthy patients.
Those elements are: a risk-adjustment formula that would pay insurers higher rates for sicker patients; a three-year reinsurance program that would set up a nonprofit that would pass through temporary payments for insurers that cover patients with high medical claims, and a risk corridor program that would operate through 2016. That would give insurers whose claims are at least 3 percent higher than projected more federal funding, while giving insurers whose costs are at least 3 percent less than projected fewer federal dollars.
Governing the exchanges
New details are provided in the regulation on the entities that will run the state exchanges. At a minimum, they must be incorporated under the law of one or more states and have demonstrated experience on a state or regional basis in the individual and group markets and in benefits coverage.
Governance of the insurance exchange can include representatives of the insurance industry, however a majority of the members of the exchange board must be consumer representatives. While the rule allows for either a state agency or a not-for-profit organization to manage the exchange, it prohibits insurance companies from operating the marketplaces.
"We note that there may be ways in which an exchange and the federal government can work in partnership to carry out certain activities," says the rule. Sharing of information and ideas is expected in a federal-state partnership, and the rule asks for comments on how that could best work.
Even while contracting with outside entities, the exchange remains responsible for meeting all federal requirements related to the contract, the regulation notes. "We invite comment on the extent to which we should place conflict of interest requirements on contracted entities," it adds.
If the exchange is an independent state agency or not-for-profit entity established by the state, it must have a clearly defined governing board meeting certain minimum requirements and must submit detailed information on its accountability structure. That structure would be administered under formal, publicly adopted charters or bylaws, ensuring public transparency. Exchange boards are to have regular public meetings with advance notice provided to the public.
The majority of members of the boards should be individuals who support the interests of consumers and small businesses and so a majority of voting members cannot represent health insurers, brokers or anyone licensed to sell insurance, the regulation says. Comment is invited on the extent to which people with conflicts of interest should be further specified and on the types of members who might have conflicts of interest.
A majority of members of the governing board are to have experience in health benefits administration, health care finance, health plan purchasing, health care delivery system administration, public health, or health policy issues related to the small group and individual markets and the uninsured.
HHS says it considered additional ways to regulate the governing structure of exchanges but "we propose to afford states discretion to select and appoint members of their exchange boards" as long as they meet those minimum federal standards, the agency says.
Each exchange also has to have a set of guiding principles including its ethical and conflict of interest standards. Those must be publicly posted, along with disclosure of board members' financial interests.
Timothy Jost, a Washington and Lee University law professor who serves as a consumer representative for the National Association of Insurance Commissioners, expressed concern about the exchange board governance provisions. Jost said he is worried that insurers will have too much influence over exchanges and that they should be excluded from exchange board.
Exchange models
In the proposal, HHS says it received many comments about whether exchanges should be able to accept any willing plan or incorporate the components of an active purchasing model, such as price negotiation.
"Of these comments, many recommended that at a minimum, HHS should not require the exchanges to accept all eligible plans," says the agency. "In contrast, advocates of the any-willing plan approach noted that state insurance departments already review and approve rates and regulate insurer solvency, and that negotiation would result in de facto premium price controls for the entire market, reduce consumer choice and competition, and result in duplicative regulatory structures."
In response, HHS says, it is providing states with "discretion" on the issue. That means an exchange may use an "any qualified plan" strategy, certifying all plans as qualified health plans as long as they meet minimum federal certification standards in the regulation.
Alternately, an exchange could require competitive bidding or selective contracting and pick the plans ranked highest in terms of certain exchange criteria. "With competitive bidding, an exchange may be able to achieve additional value and quality objectives by limiting participation and through plan competition," HHS suggests.
An exchange could also choose to negotiate with insurers on a case-by-case basis, asking for amendments in proposed plans.
"To enhance competition and preserve consumer choice, all health plans that meet these new standards should be allowed to offer coverage in the exchanges,'' America's Health Insurance Plans said in its statement on the exchange regulations.
The proposal also covers at length how and when enrollment into the exchanges will work. The initial open enrollment period begins Oct. 1, 2013, and extends through Feb. 28, 2014. For applications received or before Dec. 22, 2013, the exchange must ensure a coverage effective date of Jan. 1, 2014. After that, the date of enrollment depends on when the application is received but coverage will begin on the first day of a month.
Then, for benefit years beginning on or after Jan. 1, 2015, the annual open enrollment period begins Oct. 15 and extends through Dec. 7. There also must be special enrollment periods when qualified people—including those with life changes such as marriages or job shifts—can enroll or switch plans.
Also spelled out are the roles of navigators, the public or private entities that help individuals and small businesses sign up for insurance and conduct outreach and education about the exchanges. Insurance brokers and agents have been worried about how their traditional roles will fit in with those of the navigators.
The rule says that navigators must have knowledge of the market, but can't be health insurance issuers or receive any consideration, directly or indirectly, from insurers.
States may also allow insurance agents and brokers to enroll individuals and small businesses in plans and assist individuals in applying for premium tax credits and cost-sharing reductions. Exchanges can also provide information about agents and brokers on their Web sites "for the convenience of consumers," the proposal says.
The new proposed regulation likely will undergo a lively debate as soon as July 16, when the National Governors Association will have a session on it featuring HHS official Steven Larsen, director of the Office of Oversight at the Office of Consumer Information and Insurance Oversight.
