VII. Key Issues: Regulation & Reform >> C. Health Reform >> Proposed Insurance Market Reforms >> Health Insurance Exchanges
What is a Health Insurance Exchange?
Until the Affordable Care Act was enacted in 2010, no Health Insurance Exchange (HIX) existed under current federal law, although in some ways, the Federal Employee Health Benefits Program operates like an exchange for its 8 million members, and useful lessons for the operation of an exchange can be drawn from it (Bovbjerg). The concept also is similar in some ways to the Massachusetts Connector, as described below for illustrative purposes (Senate Finance Committee: 4-5).
- Connector Role. In 2006, Massachusetts created the Health Insurance Connector Authority, to serve as an intermediary that assists individuals in acquiring health insurance. In this role, the Connector manages two programs:
- Commonwealth Care offers from a handful of health insurers a government-subsidized plan at three benefit levels to individuals up to 300 percent of the federal poverty level (FPL) who are not otherwise eligible for traditional Medicaid or other coverage (e.g., Medicare, employer-based coverage).
- Commonwealth Choice offers from six insurers an unsubsidized selection of four benefit tiers (gold, silver, bronze, and young adult) to individuals and small groups.
- Administration. The Connector is governed by a Board of Directors having, under state law, numerous responsibilities, including:
- Determining eligibility for and administering tax credits through the Commonwealth Care program;
- Awarding a seal of approval to qualified health plans offered through this program;
- Developing regulations defining what constitutes “creditable coverage” for purposes of meeting the state’s individual and employer mandates;
- Constructing an affordability schedule to determine if residents have access to “affordable” coverage (and may therefore be subject to tax penalties if they are uninsured); and
- Developing a system for processing appeals related to eligibility decisions for the Commonwealth Care program and the individual responsibility requirement.
What Are the Options in Designing An Exchange?
The Senate Finance Committee is considering the following (Senate Finance Committee: 5-7)
- Plan Participation. All state-licensed private insurers in the non-group and small group markets, along with the public health insurance plan (PHIP) if applicable, whether operating nationally, regionally, statewide, or locally would be required to participate in the HIX. Private insurers would also be permitted to sell these policies directly to purchasers.
- Small Employer Participation in the HIX. Micro-groups (2-10 employees) may purchase insurance through the HIX immediately. The remainder of small employers may purchase through the HIX once the federal rating rules are fully phased in by their state, but they would have to pick only one of the four benefit levels (lowest, low, medium or high) for their contribution level. HIX(s) would be required to provide information on and facilitate enrollment in all plans offered by any issuer in an area. Individuals and small businesses may choose to either purchase plans through the exchange or go directly to an insurer or agent to purchase a plan, but all plans regardless of the point of sale must meet new rating and benefit requirements. Individual tax credits will only be available
to those purchasing through the HIX; likewise, the tax exclusion for employer-provided health insurance allowed under current law would continue to apply in a case where the small business opts to purchase through the HIX. The small group health insurance policy would be deemed a “group health plan.”
- Establishment of Exchange. The Secretary of HHS would establish an HIX that enables an individual to receive state-specific information (e.g., regarding plan choices and provider networks). The Secretary could contract with a private entity to operate the HIX.
- Functions Performed by Secretary. The Secretary of HHS would be responsible for the following:
- After consultation with state insurance commissioners, develop a standard enrollment application for eligible individuals and small businesses seeking health insurance through the Exchange (both an electronic and paper version);
- Provide a standardized format for presenting insurance options, including benefits, premiums, and provider networks (allowing for customized information so that individuals could sort by factors such as ZIP code or providers);
- Develop standardized marketing requirements modeled after Medicare Advantage (to protect beneficiaries from unscrupulous marketing practices, CMS regulates the marketing activities of Medicare Advantage plans). For example, marketing rules prohibit most unsolicited door-to-door and outbound sales calls to beneficiaries;
- Maintain call center support for customer service that includes multilingual assistance –the center would have the ability to mail relevant information to residents based on their inquiry and ZIP code;
- Enable consumers to enroll in health care plans in local hospitals, schools, Departments of Motor Vehicles, local Social Security offices, emergency rooms, and any other offices designated by the state;
- Establish rate schedules for broker commissions (also now done by CMS for Medicare Advantage plans);
- Establish a Web portal that directs individuals and small businesses to available insurance options in their state, provides a tax credit calculator so individuals and small businesses can determine their true cost of coverage, informs individuals of eligibility for public programs, and presents standardized information related to insurance options, including quality ratings;
- Establish a plan for publicizing the existence of the HIX; and
- Establish procedures (e.g., through SSA, IRS or state Medicaid offices) for enabling:
- enrollment of individuals and small businesses;
- eligibility determinations for low-income tax credits;
- appeals of eligibility decisions for tax credits;
- appeals procedures for enforcement actions taken by the Department of the Treasury under the individual responsibility requirement; and
- upon request of a resident who has sought health insurance coverage through the HIX, annual certification attesting that, for the purposes of enforcing the individual coverage requirement, no health benefit plan which meets the definition of creditable coverage was deemed affordable by the Exchange for that individual—and maintain a list of individuals for whom certificates have been granted.
- Exchange Related Functions Performed by State Insurance Commissioners. State Insurance Commissioners would:
- Establish procedures for review of plans to be offered through the Exchange;
- Develop criteria for determining that certain health benefit plans no longer be made available;
- Review all plans available by any issuer in an area to ensure they meet the new benefit and rating requirements and
- Develop a plan to decertify and remove the seal of approval from certain health benefit plans.
- Establishment of Multiple Exchanges. Another option would be to establish multiple, competing exchanges. The Secretary would still establish a national HIXthat enables the review of state-specific information and could contract with a private entity to operate the HIX. Additionally, the Secretary would be required to accept and approve applications from private entities that demonstrate to the satisfaction of the Secretary that they have the capacity and expertise to carry out the required functions of an HIX and have submitted a suitable proposal to the Secretary. Multiple HIXs may be permitted to operate in the same geographic area; however, insurance carriers could not operate as HIXs or selectively participate in one of the multiple HIXs. The Secretary could limit the number of approved HIXs to three in an area (in addition to the one national Exchange) for the first five years, if the Secretary determines appropriate.
- Funding for Operation of the Exchange. The HIX would receive initial federal start-up funding but then would be self-sustaining through premium assessments.
- Equilibria in Health Exchanges: Adverse Selection vs. Reclassification Risk Handel, B., Hendely, I., and Michael D. Whinston, M.D., August 21, 2013. Abstract: This paper studies regulated health insurance markets known as exchanges, motivated by their inclusion in the Affordable Care Act (ACA).
- We use detailed health plan choice and utilization data to model individual-level projected health risk and risk preferences. We combine the estimated joint distribution of risk and risk preferences with a model of competitive insurance markets to predict outcomes under different regulations that govern insurers’ ability to use health status information in pricing.
- We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk.
- We find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest coverage (Bronze) health plan permitted. Although adverse selection can be attenuated by allowing (partial) pricing of health status, our estimated risk preferences imply that this would create a welfare loss from reclassification risk that is substantially larger than the gains from increasing within-year coverage, provided that consumers can borrow when young to smooth consumption or that age-based pricing is allowed. We extend the analysis to investigate some related issues, including (i) age-based pricing regulation (ii) exchange participation if the individual mandate is unenforceable and (iii) insurer risk-adjustment transfers.
- Randall R. Bovbjerg. Lessons for Health Reform from the Federal Employees Health Benefits Program. Urban Institute, August 12, 2009. [Abstract (html)][Full Text (pdf)]
- Senate Finance Committee. Description of Policy Options. Expanding Health Care Coverage: Proposals to Provide Affordable Coverage to All Americans. May 14, 2009.
- Consumer Reports. Health Plan Rankings. Consumer Reports provides ratings of private HMO/PPO plans, Medicare Advantage plans and Medicaid plans based on National Committee for Quality Assurance ratings and consumer satisfaction surveys (subscriber content).