Patient Protection and Affordable Care Act: American Health Benefit Exchanges and CO-OPs – Competition and Coverage
June 22, 2010
Yani R. Contreras- Miami
Thomas F. "Tom" Morante- Miami
Exchanges
One of the potentially most far-reaching elements of the Patient Protection and Affordable Care Act (the “Act”) is the creation of American Health Benefit Exchanges (“Exchanges”), which are essentially designed as a marketplace for health insurance coverage. While it is too early to tell how these new insurance Exchanges will operate and whether the Exchanges will change the delivery of health care in a profound way – particularly given that implementing regulations have yet to be promulgated – it nonetheless would appear that states, insurers, regulators and other players in the industry will be impacted by the creation of the Exchanges.
An American Health Benefit Exchange is a government-regulated marketplace of insurance plans affording different levels of coverage through qualified plans to be offered, in a first stage,1 to individuals without health care or to small companies and their employees who desire health insurance. It is envisioned that the presence of government-regulated Exchanges may create an orderly functioning market so that personal and employer-provided insurance is both comprehensive and competitively priced.
Under the Act, each state is required to establish Exchanges, either as a governmental agency or as a nonprofit entity that offer only “qualified health plans.” The Exchanges would facilitate the purchase of qualified health plans for individuals and also would provide for the establishment of Small Business Health Options Program (SHOP) Exchanges in each state. The SHOP Exchanges initially would assist employers having fewer than 100 employees with enrolling their employees in qualified health plans. Starting in 2017, the Exchanges will allow employers with more than 100 employees to participate.
The Exchanges will be open to those who currently purchase insurance in the individual market. This group will include, for example, early retirees (pre-Medicare eligible retirees), the self-employed, individuals whose employers do not provide insurance, or those who cannot afford their employer’s insurance. The SHOP Exchange will be open to the self-employed individual and the employees of firms with 100 or fewer employees.
An Exchange may operate in more than one state. Each state in which the Exchange plans to operate must agree to permit multistate operation. And, the Department of Health and Human Services (HHS) must approve the planned multistate operation of the Exchange.2 If a state fails to establish an Exchange by 2014, HHS will establish an Exchange in the state either directly or through an agreement with a not-for-profit entity.
According to the Act, HHS will establish procedures under which a state may allow agents or brokers to: (1) enroll individuals in any qualified plan offered through an Exchange; and (2) assist individuals in applying for premium tax credits and cost-sharing reductions for plans sold through an Exchange.
Exchanges will be required to implement procedures for the certification of qualified health plans; the Exchanges themselves will perform the certification. Any health plan participating in the Exchange must be a “qualified plan” and provide coverage for essential benefits. As provided in Section 1302 of the Act, “qualified plans” are classified into four groups based on the average of costs covered by the insurer: (1) Bronze level3; (2) Silver level4; (3) Gold level5; and (4) Platinum level.6
In addition, each Exchange is required to maintain a website through which enrollees will be able to obtain standardized comparative information about the health plans available through the Exchange. Regulations to be issued will specify the criteria for the certification of health plans as “qualified plans,” but at minimum it is understood that these qualified plans will:
- meet marketing requirements
- ensure sufficient choice of providers on an in-network and out-of-network basis
- include essential community providers that serve predominantly low income and medically-underserved individuals
- implement quality improvement strategies
- utilize uniform enrollment forms, etc.
HHS will develop a rating system that will rate qualified health plans offered through an Exchange on the basis of the relative quality and price. The Exchange will include the quality rating in the information provided to individuals and employers through an Internet portal. This is different from the enrollee satisfaction survey system that will evaluate the level of enrollee satisfaction with qualified plans offered through the Exchange that had more than 500 enrollees in the previous year.
The Act provides two direct incentives for eligible individuals and families to acquire insurance through the Exchanges:
1) Premium Credits. The coverage will be subsidized for individuals in families with income below 400 percent of the federal poverty level ($43,320 for an individual and $88,200 for a family of four). The amount of credit is established based on a sliding scale and is paid directly to the insurer and the insured pays the balance.
2) Free Choice Vouchers. Employers who offer their employees health insurance coverage must offer a free choice voucher to those employees who otherwise would qualify for premium credits where the employee’s share of the employer-based insurance premium is between 8.0 percent and 9.5 percent of family income and the family income is below 400 percent of the federal poverty level. The value of the voucher must be equivalent to the amount the employer would have contributed to job-based coverage for the employee and his or her family. The employee may use the voucher to purchase an unsubsidized plan through an Exchange.
Each Exchange must offer at least two health plans that are available in two or more states and at least one of these health plans must be from a nonprofit organization.7 States may require that a qualified health plan offer more benefits than those described in the Act and by the regulation to be enacted. The state will need to assume the cost of any additional benefits by making payments to any individual who is eligible for the premium tax credit available under U.S. tax law, or cost sharing reduction under section 1402 of the Act to enable that individual to defray the cost of any additional benefits that were required by the state.
The Act does not provide authority to the states to set the premiums offered in the Exchanges but does require the insurers to justify any rate increase and prices to the state regulators. In this context, while state regulators cannot reject proposed increases, state regulators can make recommendations to the state Exchange about whether particular health issuers seeking to offer qualified plans through an Exchange should be excluded from participation in the Exchange based on premium increases that appear unjustifiable. These recommendations are not binding on the Exchanges.
Prior to the January 1, 2014 deadline noted above, states will receive funds on a yearly basis8 to establish the Exchanges. Funds would be made available by HHS each fiscal year provided that a state is making progress in developing the Exchanges. No federal funds will be available for the operations of the Exchanges as of January 1, 2015, and states shall ensure that their Exchanges are self sustaining.9
The Exchanges will not be the exclusive distributors of health insurance policies. The Act does not prohibit an insurer from offering insurance outside of the Exchanges. Nor does the Act prohibit individuals and employers from purchasing insurance outside of the Exchanges.
Consumer Operated and Oriented Plan Program (CO-OP)
The CO-OP is a federal program designed to assist in the creation and in the operation of nonprofit, member-run health insurance issuers. The purpose of the CO-OP program is to foster the creation of qualified nonprofit health insurance issuers that will offer qualified health plans to the individual and small group markets. Under the program, a federal “advisory board” will recommend which applicants will receive public funding to start a non-profit health insurance organization. The organizations formed under the CO-OP program will be tax exempt.
There is $6 billion in federal funding available under the Act for the CO-OP program. This funding will be distributed through loans to cover start-up costs and grants to provide assistance in meeting any solvency requirements of the states in which the entity seeks to be licensed to issue qualified health plans. The federal funding for the CO-OP program must be disbursed no later than July 1, 2013. HHS is required to disburse the funds in a way that ensures the establishment of at least one qualified nonprofit health insurance plan in each state.
Health insurers in existence prior to July 16, 2009, are not entitled to apply for federal funding under the CO-OP program. If a particular state does not receive any applications for creation of a qualified nonprofit health insurance issuer, HHS can elect to use the funds set aside to encourage the establishment of a nonprofit health insurance issuer within the state or the expansion of a nonprofit health insurance issuer into that state from another state. To qualify, substantially all of the company’s activities must consist of the issuance of qualified health benefit plans in each state in which it is licensed.
Each CO-OP must operate with a strong consumer focus and profits must be used to lower premiums, improve benefits, or improve the quality of health care delivered to its members.
Conclusion
For insurers interested in participating in the Exchanges, now is the time to begin crafting health insurance plans for qualification, which inevitably will take place in early 2013, given that by January 1, 2014, Exchanges must be open for business. So “first movers advantage” will be important, and determining what a qualified plan must cover and what would be an acceptable premium will require a significant commitment of resources in the coming months as both states and the federal government grapple with implementing regulations.
1 Once Exchanges are established in 2014, they will be available exclusively to: individuals who are employed at companies with fewer than 100 employees or which do not provide insurance; individuals who are self-employed or unemployed; retirees not covered by Medicare; and small businesses. Starting in 2017, the Exchanges will allow employers with more than 100 employees to participate.
2 This could be helpful or attractive in the context of a smaller state seeking to benefit from an Exchange created in a neighboring state although it is not clear if a state can opt not to establish an Exchange and instead rely on a neighboring state’s Exchange in fulfillment of the obligations imposed under the Act.
3 A plan that shall provide a level of coverage designed to provide benefits equivalent to 60 percent.
4 A plan that shall provide a level of coverage designed to provide benefits equivalent to 70 percent.
5 A plan that shall provide a level of coverage designed to provide benefits equivalent to 80 percent.
6 A plan that shall provide a level of coverage designed to provide benefits equivalent to 90 percent.
7 This nonprofit organization would be established under the consumer operated and oriented plan program (CO-OP) of the Act. The CO-OP program has the characteristics of a public health plan. The federal government, under the CO-OP, will provide funds to nonprofit organizations to enable them to become licensed and authorized insurance companies under state laws offering plans, which will provide insureds with the option to obtain through the Exchange a plan other than a private health plan offered by private insurance companies.
8 For each fiscal year, HHS shall determine the amount of funds that will be available for each state. The grant of funds will be renewed only if the state is making progress in establishing the Exchange prior to 2014 as required under the Act.
9 Exchanges will be allowed to charge participating health insurance issuers an assessment or a user fee to provide funding to support its operations. The Exchanges must publish the costs of licensing, regulatory fees and any other payments required by the Exchange on its website.
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