Editor’s Note: In the post below, Tim Jost provides a detailed look at several issues that arise under the insurance reforms included in the Senate Democratic health reform bill. In an earlier post, Jost provided a first look at the bill. In a third post, Jost looks at how the bill treats abortion coverage and also at the question of the individual mandate’s constitutionality. In a final post, Jost looks at the legislation’s provisions on Medicare and other topics.

My first post presented a broad overview of the Senate bill, HR 3590 and a more detailed analysis of the bill’s provisions that go into effect prior to the 2014 general effective date.  This post will examine in detail four additional issues that arise under the bill’s insurance reforms.  There are 1) how the bill addresses implementation, administration, and enforcement; 2) the different categories of insurance coverage available under the bill and the requirements that attach to them; 3) how the exchanges function and the various types of coverage they will offer; and 4) the risk adjustment programs the bill creates.

Implementation, Administration, and Enforcement

The immediate addressee of most of the provisions of Title I of the Senate bill, “Quality, Affordable Health Care for All Americans,” is the “Secretary,” by which is meant the Secretary of Health and Human Services.  The House bill creates a new federal agency, the Health Choices Administration, whose Commissioner is primarily responsible for implementing the legislation.  The Senate bill, by contrast, calls on existing federal agencies to implement the bill, primarily HHS, but also the Department of the Treasury, which would implement the excise taxes imposed by the bill’s individual and employer mandates; the Department of Labor, which assists with the implementation of the provisions of the bill dealing with employment-related health plans; and the Department of Homeland Security, which helps to ensure that unauthorized aliens do not in any way benefit from the legislation. 

The primary responsibility of HHS under the new legislation is to draft the regulations, standards, and guidelines needed to implement the legislation.  This is often to be done in consultation with the National Association of Insurance Commissioners (NAIC), the states, or special advisory groups created to implement particular provisions, like the co-op and public option sections.

With few exceptions, however, the federal government has limited responsibility for the direct implementation and enforcement of the statute.  Most of the insurance reform provisions of the Senate bill are created through amendments to the Health Insurance Portability and Accountability Act of 1996 (HIPPA), as it is found in title XXVII of the Public Health Service Act.  Under HIPAA’s enforcement provisions (found at 42 U.S.C. §300gg-22), responsibility for enforcing the law against insurers rests in the first instance with the states.  Only if  HHS determines that a state has substantially failed to do so, may HHS step in and enforce the law directly.   This approach to enforcement is reinforced by section 1321 of HR 3590, which reiterates that the states are primarily responsible for enforcing the insurance reforms, and only if they have not taken steps to enforce the law by January 1 of 2014, can HHS enforce the laws directly,

The states are also responsible for establishing exchanges or for cooperating with other states in establishing regional exchanges.  Only if a state fails to do so by 2014 can HHS either directly or through a non-profit entity establish and operate an exchange.  The only major responsibility assigned to the federal government by the legislation (other than drafting regulations, standards, and guidelines) is to make eligibility determinations for premium and cost-sharing tax credits and to handle appeals of those determinations, but even here the applications are handled in the first instance by the states or exchanges and the federal government’s role will be largely invisible.

Our experience of implementing HIPAA should give us pause in pursuing this route.  While the HIPAA group insurance reforms were implemented smoothly, implementation of the individual market reforms encountered problems.   Moreover, the Senate approach puts the federal government in the very awkward position of regulating the states, which in turn must regulate insurers.  Some states will implement the law enthusiastically, but a number of states have already indicated their  lack of support for reform.  Depending on the states to get the job of reform done risks implementation delays.  In some states the reforms may not be implemented at all.  Unless an administration is in place in 2014 that is deeply committed to pushing recalcitrant states aside and taking direct action, it is likely that the reforms may never be implemented adequately throughout the country.

What Categories of Insurance Does the Law Recognize?

Another feature of the Senate bill that compares unfavorably with the House bill is its confusing definitions of insurance coverage.  The House bill recognizes one category of private insurance, a “qualified health benefits plan,” which employers are obligated to provide and  individuals to buy.  Only grandfathered plans are permitted to not meet the QHBP requirements.

The Senate bill is far more complicated.  Individuals are required under §5000A(f) to have “minimum essential coverage.”  Minimum essential coverage is defined, in turn, to include public insurance (like Medicare and Medicaid), “an eligible employer-sponsored plan,” a “health plan offered in the individual market in the state,” or a grandfathered plan.  Section 1301 defines “health plan” to include “health insurance coverage” and group health plans, but not self-insured ERISA plans.  “Health insurance coverage,” is defined by cross-referenced provisions of the Public Health Services Act to include all medical insurance offered by a health insurance issuer, which in turn is defined to include all health insurers and managed care companies.   Most of the insurance reform requirements of the bill address group and individual health plans, but some only address only insurance issuers in the group or individual market.  An amendment that the bill makes to ERISA, moreover, extends most of the insurance regulation provisions of the bill to ERISA plans, in seeming contradiction to the definition of “health plan” in the bill, which excludes self-insured plans.  But you have to go through the bill section by section, however, to determine which health plans are covered by which requirements or prohibitions.

Section 2707 of the bill requires health insurance issuers that offer health insurance coverage to ensure that plans cover the “essential health benefits package” required under the legislation.  Section 1302 defines “essential health benefits package,” to include the essential benefit package defined by HHS, the cost-sharing limits imposed by the bill, and the requirement that insurers offer coverage fitting into the four tiers (bronze, silver, gold, or platinum).  Presumably these requirements apply to all individual insurance and group insurance policies, but it is not clear that they apply to self-insured plans.   Individuals can qualify for premium credits, however, if “the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs.”  If the essential benefits requirements don’t apply to self-insured plans, it is not clear what benefits the plan must cover 60% of if the employer’s plan is self-insured. 

Another important definition in the bill is “qualified health plan.”   Qualified health plans must meet a number of additional requirements addressing such issues as marketing, coverage design, network adequacy, coverage of out-of-network emergency services, accreditation, and quality and patient safety.  Qualified health plans are offered by the exchange, and the bill almost always refers to qualified health plans offered by exchanges, but the definition of qualified health plan in the bill refers at one point to plans offered through the exchanges and outside of the exchanges. (Remember that in the Senate bill, unlike the House bill, individual plans can be sold outside of the exchange). 

One cannot help but wonder whether all of this complexity is intentional.  There may be some reason for imposing additional requirements on insurance sold through the exchange, but  I would hope that as the bill goes through conference, we get something closer to the simplicity of the House version.

Update:  I have learned that it is the intention of the Senate bill that qualified health plans can be offered outside of the exchanges, but that health plans offered outside of the exchanges do not need to be qualified health plans.  Also, although self-insured plans do have to comply with many of the new insurance regulatory requirements added by the Senate legislation, they are not required to offer essential benefits.  This leaves unsolved the mystery of how the “allowed costs of benefits” are to be determined that employers must pay 60% of to avoid being liable for for a penalty if their employees receive affordability credits.

The Exchanges

The exchanges will, as I have already noted, be operated by the states (although regional or substate exchanges are also possible and the federal government must establish an exchange in states that fail to do so).  The exchanges will make available qualified health plans to uninsured individuals and to employees of “qualified employers,” which are initially defined as small employers (with 100 or fewer employees, or at the option of a state 50 or fewer).  After 2017, the exchanges can be opened to larger employers.  Individuals and employers can purchase insurance outside of the exchange, but insurance plans outside of the exchange (other than grandfathered plans and self-insured plans) must consider all individuals and all small groups as part of the same risk pools, must charge the same premium rate as are charged for the same plan inside the exchange, and must participate in the risk-sharing system.  Despite these requirements, there will undoubtedly be adverse risk selection against the exchange, a major problem for exchanges in the past.

The exchanges have many responsibilities, including certifying, recertifying, and decertifying health plans; enrolling qualified individuals and employees of qualified employers; rating health plans; certifying individuals who qualify for exemptions from the individual mandate; presenting available insurance alternatives in a standardized format through an internet portal; taking applications for subsidies; and informing the IRS when employees receive subsidies because their employers provide inadequate or unaffordable subsidies.  The exchanges are also supposed to contract with “navigators” to assist with consumer education.

Although exchanges do not have the authority that the exchange has under the House bill to negotiate with insurers, they are required to certify “that making available such health plan through such exchange is in the interest of qualified individuals and qualified employers.”  The exchanges are prohibited from setting premiums for plans, but can require plans to justify premium increases and can consider unjustified or excessive premium increases in deciding whether or not to make a plan available.

In addition to regular state-licensed private insurance plans, several specific types of plans are available under the bill.  First, insurers can sell plans across state lines through interstate compacts.  The legislation allows the states in which the plans are purchased some regulatory control over interstate plans, although not as much as the states have under the House bill.  Second, insurers can offer nationwide plans, indeed states must permit nationwide plans to be sold unless a state opts out.  A nationwide plan can be a plan with a common service-mark, so the BCBS plans might qualify nearly automatically.  Nationwide plans are subject to all state laws other than coverage mandates.  Third, the legislation provides grants and tax exempt status for member-governed co-ops, consumer operated and oriented plans.  Fourth, the bill permits states to establish a basic health program outside of the exchange for uninsured individuals with incomes above the Medicaid level but below 200% of the FPL.  Because the state is only paid 85% of the amount that  the premium credits would pay to provide benefits to the covered population through private plans, it is hard to believe that this option will be attractive, but it might work in some states.

Finally, there is the community health insurance option, the public plan.  This option is offered on a national basis, although states can opt out by law.  The public option could receive loans for start up costs, but would otherwise face additional quality and service requirements, could not provide benefits other than the essential benefits unless states paid for the extra benefits, and would have to comply with all state and federal requirements applicable to private plans.  Its premiums, which would be geographically adjusted, would have to cover its costs.  It would negotiate rates with providers, as in the House bill.  There is not provision, like that in the House bill, however, that Medicare providers are presumed to participate in the public plan unless they opt out, so these negotiations may be more problematic.  The legislation contains extensive and frankly confusing provisions for permitting HHS to contract out the administration of the public plan. While the legislation seems to contemplate private administrators functioning like Medicare contractors and prohibits them from bearing risk, it also requires that the administrators be licensed insurers that meet solvency requirements.   The CBO projects that the public option will face adverse selection, high provider payments, and difficulty in controlling utilization, and that it will only cover only 3 to 4 million enrollees.

Risk Adjustment

Experience in the United States and in other countries has shown that regulatory controls are not enough to eliminate health status underwriting and that risk adjustment is also needed.  The Senate bill contains not just one, but three risk adjustment mechanisms.  First, § 1343 requires states to assess a charge against insurers in the individual and small group market (other than self-insured and grandfathered plans) that have below-average actuarial risk and to make payments to plans with higher than average actuarial risk.  A second program under § 1341 would be in effect from 2014 through 2016 and would collect payments from all insurers and self-insured plans (but not grandfathered plans) and distribute the payments to insurers who cover individuals with specific high-cost conditions. 

The third program, modeled after the Medicare Part D risk corridor program, requires HHS to make payments that reward plans in the individual and small group markets whose “allowable costs” (expenditures for health care services) are less than their “target costs” (premiums minus administrative costs) and to make payments that penalize those plans whose allowable costs exceed their target costs.  This program also will only last from 2014 to 2016.  Since HHS would not under the Senate bill in fact make payments to insurers, as it does in the Part D program, it is very hard to figure out what the drafters have in mind here.  In fact, since neither the states nor the federal government control payments to insurers at all under the Senate bill (other than the premium and cost-sharing credits) and since an active insurance market will continue outside of the exchange, making any of these risk adjustment schemes work is going to be difficult.  The House approach of channeling all individual insurance through the exchange and then adjusting premiums paid through the exchange to compensate for risk seems far more practical.