Will States Be Ready and Willing to Implement Health Benefit Exchanges?

By Robert A. Holden, Esq., Senior Vice President

The United States Department of Health and Human Services (HHS) issued a Notice of Proposed Rulemaking July 11, setting out guidelines for the creation of State Health Benefit Exchanges under the Patient Protection and Affordable Care Act (PPACA) as well as a process for federal approval of those exchanges. Comments on the proposed rules will be due in late September 2011, fifteen months prior to the statutory January 1, 2013 deadline for federal approval of state exchanges.

For states that have been waiting on these federal guidelines, this does not leave much time to authorize and establish a new regulatory entity to govern access to individual and small group health insurance. This is, in some sense, anticipated by the new rules. As proposed, HHS could grant conditional approval to states that cannot meet the January 2013 deadline for full approval, but that are proceeding toward the PPACA’s January 2014 operational deadline for exchanges. This is still a tall order for states not already well down the road to full implementation, and the federal rules anticipate granting approval to states for new exchanges after the 2014 deadline, outlining a transitional period from a federally run exchange.

Where Are The States On Implementation?

A number of states did not wait for the federal rules to begin implementation. Prior to the enactment of the PPACA, Utah and Massachusetts were operating health insurance exchanges that have now become the models for subsequent exchanges. Last legislative session, California became the first state to adopt legislation authorizing the creation of a new state health benefit exchange pursuant to the PPACA. This session, eleven other states have passed legislation authorizing the creation of a new entity to govern a state exchange. Because these states understood that federal rules could preempt their legislative directives, these laws have been very broadly conceived with little specificity in areas not clearly outlined in the PPACA. This strategy worked, as the new federal rules do not appear to have preempted any of the exchange authorization policies adopted by these states.

Federal Flexibility and State Exchange Creation

The Notice of Proposed Rulemaking reflects federal flexibility in the options for a state to organize the governance of its exchange, either as an independent public entity, a separate state agency, or as part of an existing state agency. Of the states that have already passed legislation, most have opted to create an independent public entity. California, Colorado, Connecticut, Hawaii, Maryland, Massachusetts, Nevada, Oregon, Vermont and Washington have all placed governance of their exchanges into independent entities. The exceptions are North Dakota and West Virginia, which have authorized governance within the Department of Insurance, and Utah, which has its exchange within the Office of Consumer Health Services.

Beyond governance, the Notice of Proposed Rulemaking recognizes both the “active purchasing” model typified by the Massachusetts as well as the “any-willing plan” model associated with Utah. Both models address how plans would be certified as available through the exchange. In an active purchasing state, the exchange would select a limited number of plans to contract with for provision of services through the exchange. Under the any-willing model, all plans that met federal requirements could be admitted to the exchange. Interestingly, post – PPACA state legislation has been mostly silent on the type of exchange states would develop. While California, Connecticut, Hawaii, Maryland, Oregon and Washington have been proceeding down the active purchasing route, they are not required to by state law. Similarly, North Dakota, Virginia and West Virginia are expected to follow Utah’s example, but did not specify this in their legislation. The only state legislature to direct its exchange was Colorado, which has forbidden its exchange from pursuing an active purchasing model.

The new state exchange entities will fill in the gaps left by the state legislatures, and have been granted room by the federal rules to determine not only the standards for health plans as far as marketing requirements and network adequacy, but will also serve to make decisions as far as premium stability is concerned. The federal guidelines leave to the states whether they will engage in a reinsurance program, or a risk adjustment program to manage the risk to their exchange markets as higher cost enrollees come online in 2014. States will also have the flexibility to create multiple state regional exchanges, but also to quilt together intra-state exchanges covering smaller areas, so long as the entire state is covered.

Federal Exchanges

The question for those states that have not already passed authorizing legislation and are in the process of establishing governance for their exchanges remains: how quickly will they be able to come online? At a minimum two states, Louisiana and Oklahoma, will rely on a federal exchange. There will also be a temporary reliance on federal exchanges for those states that are not ready by the 2014 deadline, which may be a majority of states. Now that the federal rules have been proposed, current state interim discussions and the 2012 legislative session will be the last opportunity for states to begin charting their own way before the imposition of a federal exchange. This poses a number of questions. What will the federal exchange look like? How will it incorporate state Medicaid enrollment information? Will there be regional or a unitary federal exchange?

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