How to Design a Health Insurance Exchange

Section 1311 of the ACA requires a state to establish an Health Insurance Exchanges for the individual and small group market.  How will states actually implement these Exchanges?  A brief from the National Academy of Social Insurance reviews some of the program parameters which States will have to establish.

What type of entity will the exchange be?

1. Option 1: Establish the Exchange within an existing executive branch agency, either as part of the Governor’s cabinet or subordinate to a cabinet-level agency.
2. Option 2: Create an Exchange as an independent executive branch agency with its own governing board, as was done in Massachusetts and more recently in California.
3. Option 3: Establish an Exchange as a nonprofit entity, separate from state government.

Not any insurance plan can be sold in the Exchange.  “The ACA requires that health plans sold in the Exchange meet certain criteria, including marketing, network adequacy, accreditation, and quality improvement requirements.   However, the ACA does not preclude a state from adopting additional standards for qualified health plans.”

Individuals with sufficiently low income will receive a subsidy to purchase health plans through the exchange.  Although subsidies are received as income tax credits, low-income individuals can receive these credits in advance if their prior year income is low income.  People who are ineligible due to high levels of income from previous years will only receive the subsidies as part of their tax return.  On the other hand, people who were poor in previous years and eligible for subsidies could in fact be ineligible if their income rises (this is the subject of a working paper by John Graves).  In these cases, the Exchange must develop a procedure to recoup the money from ex post ineligible individuals.

Is there a problem with adverse selection?

The answer is yes in the following three cases:

• Guaranteed Issue would eliminate medical underwriting,
• Marketing practices may target healthier individuals,
• Products offered outside the exchange could be less comprehensive and also lower cost, and thus attract healthier workers.

To fight this problem, the ACA includes provisions such as temporary federal reinsurance and risk corridor programs, market-wide risk pooling, and market-wide state risk adjustment

What consumer protections does the ACA mandate? First, there will likely be brokers and agents who provide services to help consumers pick plans.  In addition, Exchanges must establish a Navigator program, awarding grants to eligible entities to carry out education, enrollment and information dissemination activities. To further protect consumers, products offered in the Exchange must be licensed by state insurance regulators.  There are three options for Exchanges to set up a system for State Insurance regulation of Exchange health plans.

• Place all licensure and solvency requirements on the State Regulators,
• Split the licensure load between State Insurance regulators and the Exchange.
• Have insurance regulators ensure that plans meet licensure and solvency requirements (as they do now), but the Exchange would determine whether a plan meets all other ACA and Exchange requirements

Medicaid and the Exchange

How different will Medicaid and Exchange regulation be when Medicaid programs contract with HMOs?  The ACA aims to harmonize the two regulation schemes.  In fact, ACA includes provisions recommending common health plan certification standards on matters such as provider networks, coverage terms, and quality performance standards in order to promote health plan participation in both the Medicaid and Exchange markets.  “Finally, because recoupment of advance premium tax credits is anticipated in cases in which families undergo a change in income that affects the size of the credit to which they are entitled, the NASI options include provisions for the Exchange to assist consumers in reporting income changes that might affect the amount of subsidy, as well as in qualifying for any “safe harbor” against federal recoupment that might ultimately be recognized in federal rules.”