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Ario: Dozen 'Pace Car' States in Line for Bigger Insurance Exchange Grants

By John Reichard, CQ HealthBeat Editor

January 19, 2011 -- Oregon, Washington, California, Maryland, Massachusetts, and other states—a dozen or so in total—will be able to apply later this month for relatively large federal grants to establish insurance exchanges under the health law, said the lead federal official in charge of the new marketplace implementation effort.

Because they are moving faster and on a larger scale to create exchanges, these "pace car" states initially will be eligible for larger grants than other states, explained Joel Ario, director of the Office of Exchanges in the Center for Consumer Information and Insurance Oversight. The center is now an office within the Centers for Medicare and Medicaid Services (CMS).

The "funding opportunity announcement" expected later this month will invite all states to apply for "establishment" grants, another HHS official said; it's just that a dozen or so will be able to get more money initially.

Ario suggested that other states falling into the pace car category are clustered in New England and might also include Minnesota.

The health law (PL 111-148, PL 111-152) provides that states get grants to plan exchanges and establishment grants to get them up and running to meet the January 2014 deadline requiring them to offer coverage to the uninsured and small businesses.

Forty-eight states and the District of Columbia have received million-dollar planning grants. Federal officials previously indicated that they would begin offering establishment grants to states in February or March.

Ario said Minnesota likely will apply this week for a planning grant, leaving Alaska as the only state not to do so. Minnesota also is likely to fall into the pace car category, he said. Former Gov. Tim Pawlenty is staking a possible presidential bid on his opposition to the overhaul, but Minnesota's new governor, Democrat Mark Dayton, is a supporter of the measure.

Ario said other states are moving more incrementally on exchanges. "Frankly, that is where most states are today," he said. They will receive more money later as the costs of creating exchanges become larger, Ario suggested. In the end all the states are supposed to have their costs of establishing exchanges covered by the federal government, provided that those costs meet certain federal benchmarks, he said.

His remarks on exchanges came in a speech to the National Congress on Health Insurance Reform, sponsored by the health policy research publication Health Affairs. Ario elaborated on his statements in an interview with HealthBeat.

The official said states will have to decide in about a year whether they will create their own exchanges or let the federal government do it. States moving more incrementally seem the likeliest candidates for letting the federal government run the show, but Ario gave no indication of how many states might choose to do that.

He said governors with the biggest concerns about the law are motivated to set up their exchanges to avoid the involvement of the federal government. Mississippi Gov. Haley Barbour, a staunch Republican, is working on state legislation to authorize Mississippi to create its own exchange, Ario said. "I think that is the way this is going to play out," he said.

A Taste for Cost Control

Some state exchanges appear on track toward becoming more active purchasers of health care in order to bring down health costs.

An audience member from Rhode Island asked whether state exchanges could get involved in cost control from the start rather than waiting to get other functions operating smoothly first; Ario said the health law allows that flexibility. Maryland, Oregon, and Rhode Island are interested in that route, he said. "They are looking more aggressively from the get-go on the exchange potential" for controlling costs, he said.

For example, states can set up exchanges to require that at least 20 percent of participating insurers' payments to doctors and hospitals be made on a basis other than fee-for-service, he said. In other words, states can begin experimenting with requiring insurers to pay based on the outcomes of treatment rather than on the volume of services – to start using some of the cost-control tools large private employers do, Ario said.

States under the law can choose to be "market organizers" that stick to telling the public about available plans without excluding plans that aren't a good deal. But Ario said that in the long run he thinks exchanges will play a role like Medicare and Medicaid in adopting cost-control strategies.

Minimum Standards

The law also provides for basic minimum standards that exchanges must meet, a website to pick plans, ratings of the quality plans and regulations on quality improvement. "Risk adjustment" also will be part of the regulatory scheme—in other words, adjustments to pay plans more if they have sicker enrollees and plans less if their enrollees are relatively healthy.

Risk adjustment is no panacea, Ario cautioned. "The more you know about risk adjustment, the less confident you are" that it can prevent insurers from competing by avoiding risks, he said. But "it can make a big difference," Ario added. He predicted that the federal government will develop a model of risk adjustment and that a debate will ensue with insurers over whether the model is a "floor" that sets a minimum that states can go beyond, or whether it should be a uniform requirement for all exchanges.

Weaning insurers away from their longtime tactic of avoiding bad risks is going to be a huge challenge.

"Some people say it's within the carriers' DNA, it's not going to be easy to remove it but we're going to do everything we need to make if difficult" for carriers to compete by cherry-picking good insurance risks, Ario said.

It's an open question how many states will be up to the complex tasks of operating insurance exchanges. A number of states have said they need much more guidance from the federal government on how to establish exchanges. Ario said a proposed rule will be out in late spring "with all the details on how this will be regulated from the federal side."

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