Implementing Health Reform: Health Insurance Exchanges

by Timothy Jost

Editor’s Note: Below, Timothy Jost continues his Health Affairs Blog series analyzing regulations implementing the Affordable Care Act. Health Affairs Blog will also offer additional perspectives on the newly released regulations governing the state health insurance exchanges established under the Affordable Care Act.

Yesterday, on July 11, 2011, the Department of Health and Human Services released its first set of proposed regulations governing the American Health Benefit Exchanges created by section 1311 of the Affordable Care Act.   Simultaneously, HHS released proposed regulations governing the reinsurance, risk corridor, and risk adjustment provisions of the statute and posted on the Healthcare.gov website a set of fact sheets answering questions about the new rule. The regulations will be available for public comment for 75 days from the formal publication date of July 15.

The preamble to the regulation requests comments on many issues that are not resolved by this set of proposed regulations.  This is only the first set of exchange regulations; more will follow.  But they give us a reasonably complete picture of HHS’s vision as to how the exchanges will function and are thus worthy of our careful attention.

Totaling 347 pages (244 for the exchange regulation and 103 for the risk regulation) this is the longest and most complex set of proposed regulations yet issued by HHS in the ACA insurance reform implementation process.  My analysis of the regulations will, therefore, be broken into three posts—this first post introducing the regulation and dealing with the exchanges themselves; a second post analyzing the provisions of the regulations addressing qualified health plans (QHPs) and health insurance issuers; and a third post analyzing the reinsurance, risk corridor and reinsurance regulations.  Even in three posts it will not be possible to describe the regulations in detail.  Rather I will seek to describe their broad outlines and illuminate key choices made in the regulations.

The Exchanges in Health Reform

The Exchange is the centerpiece of the ACA reforms.  When the American Health Benefit Exchanges for individuals and Small Business Health Options Program (SHOP) exchanges are fully in place, they will provide access to health insurance for 24 million Americans. The exchanges will be primarily markets where individuals and employees of small businesses will be able to shop for a range of affordable health insurance choices.  They will also, however, be the place where lower and middle-income uninsured Americans will go to apply for premium assistance tax credits and cost-sharing reduction subsidies to make health insurance affordable. They will sponsor navigator programs to educate and inform health insurance consumers and to facilitate health insurance purchasing. Finally, they will play a regulatory role, requiring the QHPs they offer to meet certain quality and information disclosure requirements and reviewing QHP premiums and performance.

Although the proposed regulations are long and complex, indeed intricate, they can also fairly be described as simple and straightforward.  Wherever possible, HHS made choices that will simplify rather than complicate the operation of the exchanges. The regulations can thus also be described as practical, sensible, and functional.  The Senate version of the ACA which became law (in contrast to the House version which did not) creates the exchanges at the state rather than the federal level.

The proposed regulations attempt to offer the states maximum flexibility within the constraints of the law and of good governance, attempting to lure the states into taking responsibility for the exchanges in lieu of a federal exchange, the fall back alternative provided for in section 1321 of the ACA.  As of this month, ten states have adopted exchange legislation, four more have passed legislation stating an intention to establish an exchange, and in six states governors are considering establishing exchanges without legislation.

But half the states have yet to take steps toward establishing exchanges.  While the proposed regulations recognize that the federal government may need to take responsibility for operating the exchanges in these states, they also leave the door open for states that are lagging behind to catch up or to partner with the federal government in exchange operation.  The preamble asserts that the proposed regulation attempts to reconcile the need for national consistency with a commitment to state flexibility, but it is clear that flexibility has the upper hand.  HHS really wants the states to take charge of the exchanges.

Definitions

The proposed regulation begins with a definition section.  The definitions are largely taken from the ACA itself, from the Public Health Services Act which the ACA amends, and from previous rules, and are largely uncontroversial.  One distinction this section seeks to clarify is that between an “issuer,” that is an insurer or carrier; and a “health plan,” a discrete combination of benefits and cost-sharing offered by an issuer.  The definition section also distinguishes between “benefit year,” meaning calendar year, the period of coverage for individuals; and “plan year”—any consecutive 12-month period—the period of coverage for groups.

General Standards for the Establishment of Exchanges

The next subpart addresses the general standards for the establishment of state exchanges.  Under the ACA, HHS must assess by January 1, 2013, whether a state will have an exchange operational by January 1, 2014, and put in place a federal exchange in states that will fail to meet this goal. It is becoming increasingly apparent, however, that many states will not be close to establishing an exchange by January 1, 2013.  The proposed regulation, therefore, provides for “conditional” approval on 2013 of state exchanges that are making progress toward operational readiness but are not yet fully ready for operation.  States may also elect after 2014 to begin operation of an exchange or to cease operation of their exchange and cede responsibility to the federal government.

States must receive approval of an exchange plan, submitted in accordance with a template that HHS will provide, and must receive approval of any significant changes in that plan.  The HHS approval process would function much like that now used for Medicaid or CHIP state plans.  The approval standards are based on the exchange requirements in the ACA, but one standard is added—to operate exchanges states must also be prepared to operate the ACA reinsurance program.

Under the ACA, states may operate the exchanges through a government entity (either an existing agency or a new independent entity) or through a nonprofit. The proposed regulation recognizes the nonprofit alternative, but the preamble also notes that some of the functions of an exchange are governmental in nature and the governing body of a nonprofit exchange must be appointed and overseen by the state.

Exchanges may contract with other entities, including state Medicaid agencies but not including insurers, to carry out some of their functions.  The preamble of the proposed regulation also expresses the willingness of HHS to partner with exchanges to carry out certain exchange functions and to share information and ideas with them.

The proposed regulation, in accordance with the ACA, allows states to have separate governing boards for the individual and SHOP exchanges.  The preamble asserts, however, that there are operational advantages to having a single board and the regulation requires coordination and information sharing in states that have separate exchanges.

One of the most controversial issues surrounding exchanges is the potential role of insurers and of others (such as agents and brokers) with a financial interest in the sale of insurance in exchange governance.  The industry has argued that insurers, agents, and brokers should have a seat at the table because of their experience in health care finance.  Consumers, however, have argued that the role of the exchanges is to oversee insurance markets, and those who profit from the sale of insurance should have no role in exchange governance.

The proposed rule strikes a compromise of sorts, providing that a majority of voting governing board members must not have a financial conflict of interest, but also that a majority of voting members must have experience relevant to health care financing or delivery or public health or health policy.  Exchanges must have conflict of interest, ethics, and transparency standards and board members must disclose financial conflicts of interest. Exchange boards must also meet in public with public notice and opportunity for public comment.

This provision is a disappointment to consumer advocates.  Even in a voting minority, insurer representatives may dominate a board.  It is also hard to imagine conflict of interest standards that have integrity that would not keep them from voting, even from being present for the discussion of, most of the important issues that exchanges will deal with.  But even the Massachusetts connector has a broker on its board, and eliminating conflicts was apparently too heavy a lift for HHS.  Insurers and brokers have succeeded in getting seats on the boards of a number of other states’ exchanges as well. HHS was not, apparently, willing to face the states down on this issue.

Exchanges may not establish rules that conflict with federal law, but the federal rules are not to be interpreted as preempting state laws that do not prevent the application of federal law.  Exchanges may not discriminate on the basis of race, color, national origin, disability, age, sex, or gender identity or sexual orientation.

Exchanges are supposed to consult regularly with stakeholders, including educated health care consumers, insurance brokers, and health care providers.  States may participate in regional exchanges or operate multiple in-state subsidiary exchanges, but if they operate separate individual and SHOP exchanges, the geographic areas covered by the exchanges must be coextensive.  Exchanges may be funded through user fees assessed against issuers or through other funding generated by the states (which could include general revenue funds or provider taxes), but can receive no federal funding after January 1, 2015.

General Functions of an Exchange

The subpart dealing with the general functions of exchanges tracks the requirements found in the ACA.  Some of the most difficult issues here—including premium assistance application and eligibility determination, enrollee satisfaction survey, and plan assessment and rating requirements—were put off for future rulemakings. Curiously, the proposed rule requires exchanges to handle eligibility appeals, a function assigned to the federal agencies under the ACA.   The preamble raises but does not resolve the problem of coordination between exchange and health insurance issuer call centers.

A controversial issue addressed by this subpart is the identity and role of navigators.  Navigators are entities that perform educational and outreach functions for exchanges and facilitate enrollment in QHPs.  In some states, agents and brokers have contended that all navigators must be licensed agents and brokers.  The proposed rule clarifies that states must permit at least one category of entities to serve as navigators in addition to agents and brokers.

The proposed rule also provides that navigators “may not have a conflict of interest during the term as Navigator,” which would seem to preclude brokers and agents from serving as navigators if they independently market the products of QHP issuers. The preamble, however, states that, although navigators cannot receive consideration form issuers for enrolling individuals or employers in QHPs, they can receive compensation for enrolling individuals and employers outside of the exchange.  This seems to be a contradiction and should be resolved, one would hope in favor of eliminating conflicts.  Federal funding may not be used to pay navigators for their exchange functions, but if navigators assist with Medicaid or CHIP functions, federal administrative funding may be available.

Exchange notices must be in plain language and provide meaningful access to persons with limited English proficiency and effective access for the disabled.   Exchange community outreach programs and navigators must also effectively serve these populations.

Under the ACA, exchanges must allow individuals to pay premiums directly to QHPs.  This would not seem to preclude exchanges from allowing payment through the exchange.  Importantly, the proposed rule requires exchanges to aggregate premium bills for employers and allows employers to make a single payment to the exchange. It is difficult to see how the exchanges could work otherwise, and this will make the SHOP exchanges much more attractive to employers.

The proposed rule includes a number of provisions dealing with privacy and information security. Although exchanges are generally required to comply with HIPAA data security standards, it is not clear that all exchanges will be covered by the HIPAA information privacy standards.  Exchanges must comply with laws governing privacy of Medicaid, CHIP, and tax data, and with HIPAA where it applies. Otherwise they are encouraged to comply with Fair Information Practice Principles in the collection, use, disclosure, and disposal of personally-identifiable information.

Enrollment of Individuals in QHPs

The next subpart of the proposed rule deals with enrollment of individuals in QHPs. Exchanges will not enroll individuals in QHPs, but will rather accept applications and transmit the information to the QHPs for enrollment.  It is hoped that this will be a real-time process, but initially the proposed regulation only requires that it be “timely.”

A single streamlined application will be developed for exchanges to use for collecting information for QHP enrollment, premium and cost-sharing reduction payment eligibility, and Medicaid and CHIP, and where applicable, basic health plan eligibility.  The application can be filed by the applicant, the applicant’s representative, or someone acting for the applicant and can be filed on paper, over the Internet, by telephone, by mail, or in person.

Limitation of open and special enrollment periods to avoid adverse selection is a high priority for insurers.  The proposed rule strikes a balance, permitting long enough open enrollment periods and sufficient exceptions for special enrollment periods to protect individuals, but limiting them sufficiently to discourage adverse selection.  Applications will be accepted during an initial open enrollment period between October 1, 2013 and February 28, 2014, and thereafter during an annual open enrollment period between October 15 and December 7.  Sixty day special enrollment periods will be provided under  a number of specified circumstances, including loss of employment-related coverage; the gaining of a new dependent through marriage, birth, adoption, or placement for adoption; a change in QHP caused by a QHP’s material breach of contract or decertification; eligibility for a premium tax credit; or a move.  In most instances other than birth, adoption, or placement for adoption, coverage will not be effective until the following month, or if a plan is selected late in the month, in the second succeeding month.  An individual who changes plans during a special enrollment period must remain at the same plan tier.

SHOP Exchanges

The final subpart dealing with exchange responsibilities addresses the functioning of a SHOP exchange.  This section clarifies an issue that has been debated since the adoption of the ACA:  although the basic model of the SHOP exchange, which must be available everywhere, is that the employer picks the plan tier and the employee picks the QHP, exchanges can also make available alternative models, including one in which an employer picks a single plan, allow employees to choose from multiple tiers, or pick specific plans in each of several tiers.  The rule does not address minimum participation requirements but the preamble requests comments on this issue.

SHOP exchanges must meet all the requirements that apply to individual exchanges except for those that deal with considerations unique to individuals (such as premium tax credit responsibilities).  SHOP QHPs are only allowed to change rates at a uniform time—monthly, quarterly, or annually as specified by the exchange.  QHPs cannot change rates for an employer during a plan year.  Exchanges are encouraged, but not required, to provide calculators that allow employees to calculate their premium share for particular plans after the employer contribution to aid employee choice.

SHOP exchanges enroll small employers, or, if a state elects after 2015, large employers.  Small employers have 100 or fewer employees, or at the election of a state prior to 2016, 50 or fewer employees.  Part-time as well as full-time employees are included in the count.  Employers must have at least one employee to qualify, so sole proprietors do not qualify.

Qualified employers can either offer coverage to their employees only through the SHOP exchange that covers their principle place of business or through multiple SHOP exchanges covering the primary workplaces of their employees.  Detailed proposed rules provide for enrollment of employers and employees in the SHOP exchange.  As noted above, employers enroll for a plan year, which need not be a calendar year.  At the end of a plan year, there will be an open enrollment period during which employees can change plans, but if an employee does not elect to change plans, the employee will remain in the plan elected in the previous year.

Virtually nothing is said in the proposed rule about the nature of the federal exchange.  It is clear, however, as I have said, that HHS really wants the states to run the exchanges, and will go far to work with them to make this happen. HHS cannot, however, change the terms of the statute and insofar as many states object to the ACA for political reasons, continues to face a difficult task in getting them on board.  There will be a federal exchange and HHS will have to tell us what it will look like.

My next blog post will discuss QHP and issuer requirements under the exchange regulation, followed by a final post on the reinsurance, risk corridor, and risk adjustment regulation.