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Big Exchange Regulation a Good Bet to Bring Big Disappointment

By John Reichard, CQ HealthBeat Editor

June 21, 2011 -- One thing seems quite certain: Health and Human Services officials aren't going to make anybody happy when sometime around the July Fourth weekend they release a proposed regulation that will spell out what states must do to create health insurances exchanges.

That's because the data-crunching tasks involved are so complex, the design issues so controversial, and the timelines so tight that at some point advocates for states, consumers, and insurers seem certain to toss their Federal Registers in disgust.

But if HHS officials can spread out the pain evenly among the stakeholders and keep plodding ahead despite the complexity involved, they may ultimately prevail.

The big job right now is how to get exchanges off the drawing board in the face of the fine details about which plans can participate and the decisions state regulators will have to make about changing rules for insurance plans outside the exchanges. Many states are at a loss to figure out how to handle the complex data functions involved and are hoping that the proposed regulation will help them plot the path forward.

Consider the tasks exchange operators will have to perform. They will have to determine if a customer is an American citizen. They will have to decide how much money customers make and if it's appropriate to enroll them in Medicaid or a private plan. They'll have to determine if an individual is eligible for a subsidy and, if so, how much. They'll have to pay plans. And they have to do it fast, because if the enrollment process is slow and cumbersome, if subsidy amounts are wrong, and if they're slow to pay plans, there will many complaints.

The job will require the swift exchange of data between states, the Treasury Department, the Department of Homeland Security, health plans, and to the extent they participate, small employers. With states already under budget pressures, such challenges will strain their resources.

States must act quickly given that most must pass legislation next year to create exchanges—relatively few did so this year—in time to meet the Jan. 1, 2013, deadline states have to convince HHS officials that they have a viable exchange in the works that can be open for business by Jan. 1, 2014, as they are required to do under the health law (PL 111-148, PL 111-152).

States Want Timelines, Details on Options

David Quam, federal relations director for the National Governors Association (NGA), emphasized in a recent interview that states are anxious to see the proposal. "First and foremost, the states are looking for clarity" about the task ahead, he said. "We're looking for the reg to come out so that states can evaluate exactly where they are heading. Because without full information, it's hard to make good decisions.

"The states are very cognizant of the timeline and the time pressure they are under to get the exchanges set up," he said. "Decisions have to be made. One of the things we're going to be looking for in this reg is clarity with regard to timelines—what's expected when. And if all decisions aren't made with this reg, when are decisions going to be made, so the states know how to plan and when they have to make decisions,. because the clock is ticking."

States are "going to be looking frankly as this comes out to continue a conversation about the exchanges with HHS," Quam added. "As a matter of fact, at the upcoming NGA meeting in mid-July, our HHS committee session is going to be on exchanges. I'm hopeful that the reg is out before then because that's going to be a really robust conversation. In Utah where some of the details are out, governors are taking a very hard look at what the reg means. They can look at some of the details, identify any issues there, and then have a much clearer picture of the decisions they have to make."

Quam stopped short of saying states wouldn't make the Jan. 1, 2014, deadline. "But it's all the steps between now and then that can make or break this for a state moving ahead," he said. "Having this reg come out starts the dominos falling as to where a state is going to land at the end of the day."

But beyond the issue of the mechanics of assembling exchanges, health system stakeholders are looking for a wide variety of policy issues to be addressed in the proposed regulation. Perhaps the most important is, what happens if a state decides not to create an exchange, opting instead to let the federal government create and manage the new insurance marketplace.

"It's critical to know what the options are," Quam said. "This [proposed] reg is really going to help shed some light on what the issues are" in having a federal or state-run exchange. Governors "need to know what the federal option looks like to know what has to be done at the state level."

Design Issues Critical for Consumers

Washington and Lee University law professor Timothy Jost says flexibility is the watchword. "I think probably what most states want to see is maximum flexibility—it seems to be the key word—and as much funding as possible," he said. Jost added, half-jokingly, that states would like to see "as little accountability" as possible. "That might be overstating it. But I think that the states would like to be able to fit the exchange to their particular market and their particular politics."

But that may work at cross-purposes with the needs of consumers.

"From a consumer point of view, I think there are a number of issues that we're concerned about," Jost said. "One issue right up front is governance, and I think there the key concern is that the exchange be independent and basically not be run by the insurers and the people who market health insurance, that it be run in the interest of consumers. So I would be hoping that there would be strong conflict of provisions in the regulations to discourage exchanges where you have the insurers running their own market."

Jost adds that it's essential to keep exchanges from being a magnet for bad insurance risks without offsetting good risks.

"We've had a lot of exchanges before that have gone bad," he says. "The exchange ended up with the bad risks, and it eventually ended up being a high-risk pool, and it's not going to be viable if that's the way it works. There are quite a few protections built into the Affordable Care Act, but anything that can be done beyond that to discourage risk selection outside the exchange will be beneficial." He said it would be helpful if the proposed regulation encourages states to regulate the non-exchange market in a way that supports the exchange by not pulling good risks out.

A major concern for consumers is what the minimum benefit requirements will be in the exchanges.

Matt Salo, executive director of the National Association of Medicaid Directors, said that's not expected to be a part of the proposed regulation. HHS is expected to release a benefits package proposed rule this fall.

"But it's clearly important" to states in figuring out what they want to set out in exchange legislation, he said. For example, if the federal government requires a relatively lean set of benefits to be offered in the exchanges and a state wants a richer set of benefits, the state will be on the hook for the cost of the added coverage, Salo said.

Insurers Keeping an Eye on Minimum Standards

HHS officials have already let it be known that it will be up to states to decide whether they want exchanges to be "active purchasers" with the power to exclude health plans that offer consumers lousy deals or to function more like a bulletin board that posts a wide variety of plan offerings, provided that they meet certain basis minimum standards.

Robert Zirkelbach, spokesman for America's Health Insurance Plans, said it's those minimums that insurers are going to be watching for: How demanding will HHS be in deciding what is a qualifying health plan? Other important insurer issues are how HHS proposes to handle "risk adjustment," or the shifting of premium revenues from plans that get a large proportion of good risks to plans that get large numbers of bad risks.

Risk adjustment is supposed to remove the incentive that plans now have to enroll only good risks, but it's never been attempted on the level that would occur as the exchanges enroll millions of Americans. And like states, insurers are eager to know how federal officials will run exchanges and what demands they will make on participating plans.


Asked whether he thinks HHS will get the exchange regs right from the consumer point of view, Jost expressed some pessimism. His comments echo that of other consumer representatives who praised the initial consumer protections issued six months after the overhaul became law but were more critical of later regulations, such as those governing the review of insurance rates.

"I'm increasingly discouraged about the federal government," he said. "I feel like they started out very, very strong with the initial set of regulations that were put out, and I feel like in the last six months there's been a lot of backpedaling."

"Joel Ario, who's in charge of the exchange part of CCIIO [the Center for Medicare and Medicaid Services Center for Consumer Information and Insurance Oversight), is a great guy who's a strong consumer advocate and I am confident he will do everything he can to get strong regulations out. But I also feel like we're heading into an election and at this point the administration is trying not to cause trouble and I'm getting discouraged about the extent to which they're willing to take on controversial issues and do the right thing."

With many governors and state legislators hostile to the health law, the administration risks a new round of heavy criticism if it doesn't give state officials the flexibility they want to run the exchanges. But in many states with governors and legislatures friendly to insurers and insurance brokers, to them flexibility may mean more industry influence over exchanges than consumer advocates want.

But a managed care consultant who requested anonymity says it's news to him that the Obama administration is moving in his industry's direction. "Never once in all the industry discussions I've been in have heard 'Isn't it great HHS is listening to us?'" the consultant quipped.

He predicted that HHS will find ways to be tough on the industry without making itself a big political target.

For example, he predicted that the proposed regulation won't get into detail about how the federal officials will run exchanges if the states choose not to do so.

Details would make the administration "too much of a target," he said, adding that it will find a lower profile way to get into details. "They could do all that in the context of subregulatory guidance, because that's the way CMS operates," he said. They do it all the time."

The consultant said that given all the data burdens involved in operating exchanges he doubted they will open as scheduled on Jan. 1, 2014. In addition to all the other data chores exchange operators will have, they will have to risk adjust premium payment to plans, he said, adding that if premiums for the exchanges are not risk adjusted up front, "then there would have to be all kinds of reconciliation down the road. That would be chaos."

The consultant noted that at a recent AHIP meeting in San Francisco, one of the speakers asked a roomful of some 700 hundred audience members how many thought that all 50 states would have their exchanges ready to go by January 1, 2014. No one raised their hand, he said.

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