Editor’s Note: This is the latest in a series of posts by Timothy Jost on the implementation of the Affordable Care Act.  Earlier posts by Jost provide analyses of regulations implementing provisions of the Act governing coverage for pre-existing conditionsappeals of coverage denialscoverage for preventive services, a patient bill of rights, grandfathered plans, tax exempt hospitalsthe small employer tax credit, the Web portal and reinsurance for early retirees, and young adult coverage.

The health insurance exchange is the centerpiece of the reformed health insurance system created by the Affordable Care Act.  When the ACA is fully implemented in 2014, state exchanges will offer a market through which millions of Americans in the individual and small group (and eventually — potentially — large group) markets will compare and purchase high-value health insurance products.  The exchanges will assist individuals and families who do not qualify for Medicare and who do not have employer-sponsored benefits apply for premium tax credits and cost-sharing reduction subsidies, or, if they have an income below 138 percent of the federal poverty level, for Medicaid.  The exchanges will also ensure that each plan that it offers meets minimum certification requirements and “is in the interests of” the individuals and employers who purchase insurance through the exchange.

The exchanges will become the channel through which billions of federal dollars will be made available to help middle and lower-income Americans purchase health insurance.  This money will not only reduce the number of the un- and underinsured Americans; it will also flow through to every health insurer, hospital, physician, and pharmacy in the country, as well as reduce the amount of money that states spend on public hospitals and uncompensated care.

Although the exchange is central to the operation of the Affordable Care Act, it has proved less controversial than other provisions of the law.  The Heritage Foundation, a conservative advocacy group, embraced the concept of a state-wide exchange in 2006. The two states that currently have active exchanges, Massachusetts and Utah, created their exchanges under Republican governors, and California, the first state to adopt post-ACA exchange legislation, also did so with a Republican in the Statehouse. Forty-eight of the fifty states accepted grants from HHS to begin exchange implementation; one of the two states that did not, Minnesota, will in all likelihood proceed now that it has a Democratic governor, rather than a Republican governor who is building a Presidential campaign.

Perhaps the primary reason why the exchange has proven to be noncontroversial, however, is that the concept is so amorphous.  Although the ACA sets out basic requirements that an exchange must meet, it leaves a great deal of leeway to the states for designing exchanges.  It is possible, indeed likely, that a wide range of different exchange models will emerge by 2014. Given the flexibility that states have in shaping their exchanges — and the fact that the federal government must itself set up an exchange in states that fail to establish its own — it is expected that virtually every state will establish an exchange. 

Three New Documents On Exchanges

Three documents that have emerged in recent days begin to give us a picture of what those exchanges may look like. 

HHS Guidance To States. First, on November 18, 2010, the Office of Consumer Information and Insurance Oversight (OCIIO) of HHS released a Guidance to the states on establishing exchanges.  There is nothing dramatic in this Guidance.  Indeed, it seems intentionally crafted not to be dramatic.  Its primary purpose seems to be to calm any anxiety the states may have that HHS will demand significantly more from them than the basic requirements found in the ACA.  The six-page Guidance does contain, however, some interesting nuggets.

The Guidance briefly explains what an exchange is; sets out principles and priorities for exchanges; describes the two basic categories of ACA exchange requirements (functional requirements and oversight responsibilities); offers clarification and policy guidance on several points; and concludes with a description of available federal support.  Most of this information follows directly from the statute. 

The section of the Guidance of greatest interest addresses Clarifications and Policy Guidance.  The paragraph discussing organizational form notes the advantages and disadvantages of the three alternative forms of organization that seem to be available for exchanges — location within an existing state office (as in Utah); formation of an independent public authority (as in Massachusetts); or creation of a nonprofit.  The Guidance notes that wherever the exchange is housed, it must be publicly accountable and transparent, with competent leadership and the capacity to do whatever is necessary to meet federal standards. The Guidance notes that if the exchange is located in a private nonprofit, there may be consequences under the income and social security tax laws.  Although the Guidance does not mention this, there may also be consequences under the Employee Retirement and Income Security Act, or ERISA.  The Guidance also alerts the states that HHS will, in compliance with the ACA, be issuing federal rules next year for implementing the ACA’s risk adjustment, reinsurance, and risk-corridor programs, and that these programs must be operated (by the states) consistently throughout the country.

In perhaps the most noteworthy paragraph of the Guidance, HHS clarifies that both an “active purchaser” (Massachusetts or California) or “open marketplace” (Utah) model are acceptable under the ACA.  Many consumer advocates favor an active exchange that would demand value for money from health plans, while insurers favor an “any willing insurer” model.  While the Guidance blesses both, it should be noted that, in the prior paragraph, the Guidance notes that the exchange must have “discretion to determine whether health plans offered through the Exchange are ‘in the best interests of qualified individuals and qualified employers” as Section 1311(e)(1) [of the ACA] requires.”  A state statute that required an exchange to certify any health plan that met all other explicit statutory requirements could not, therefore, be in compliance with the ACA.

In a paragraph titled “Performance Measures,” HHS alerts the states that it will be requiring public disclosure of data by the exchanges “to facilitate research, analysis, and evaluation.”  The Guidance specifically notes that given the diverse strategies the exchanges will pursue “analysis of performance metrics will be critical to identifying best practices that can be shared and used to improve the performance of all Exchanges.”  A section on “State Choices” notes that states have the option to “establish a competitive bidding process for plans” and the option of extending” some or all Exchange-specific regulations to the outside insurance market.”  The former option could be useful for bringing down insurance premiums, while the latter could help combat adverse selection against the exchange.  Finally, the Guidance notes that federal support will be available to the states until the end of 2014, but that beginning in 2011 states will have to meet certain milestones before they can get funding, and the level of funding may depend on the number of milestones met.  The Guidance contemplates an aggressive implementation schedule, not waiting until the last minute in 2013 to get underway. 

HHS Information Technology Guidance. A second Guidance document was released by OCIIO on November 3, 2010, in conjunction with the issuance of a proposed rule by the Center on Medicare and Medicaid Services regarding Federal Support and Standards for Medicaid and Exchange Information Technology Systems.  One of the most important functions of an exchange will be to process applications for the ACA premium tax credits and for Medicaid and the State Children’s Health Insurance Program, or CHIP.  The Guidance establishes the basic requirements for design, development, implementation, and operation that state exchange IT systems will need to meet. 

The IT Guidance also announces federal funding for IT implementation and operation.  The federal government will fund 90 percent of the cost that the states incur for the design and development of new Medicaid eligibility systems through the end of 2015, and 75 percent of the costs of operation of the systems indefinitely.  HHS also announced a competition to fund up to five “early innovator” awards to “reward States that demonstrate leadership in developing cutting-edge and cost-effective consumer-based technologies and models for insurance eligibility and enrollment for Exchanges.”  The grants will be awarded in February 2011.

The IT Guidance also contains few surprises.  It instructs the states to develop IT systems that:

  • Support “a first-class customer experience”;
  • Provide seamless coordination between the exchanges and the Medicaid and CHIP programs and between the exchanges, plans, employers, and navigators;
  • Generate robust data to support program evaluation efforts and ongoing improvements in the program;
  • Offer timely and responsive resolution of discrepancies that arise in the enrollment process;
  • Avoid duplication of costs, processes, data, and effort on the part of the state or enrollees;
  • Coordinate between the exchanges and federal agencies that play a role in the eligibility process;
  • Allocate costs properly among the Medicaid and CHIP programs, and the exchange;
  • Comply with HIPAA transaction standards and protocols and with additional transaction standards imposed by the ACA;
  • Meet the diverse needs of users, including the disabled, without barriers or diminished function or quality; and
  • Comply with security and privacy rules that protect health and tax return information.


Developing IT to support all of the functions of the exchanges will be one of the biggest challenges that the states will face in exchange implementation.  HHS will not develop a single IT system for the states to use, but the Guidance is the first step to assuring that the diverse systems developed by the states in conjunction with private vendors will all meet basic functionality and operability requirements.

NAIC Model Act. The third important document comes not from HHS but rather from the National Association of Insurance Commissioners.  A subcommittee of the NAIC under the leadership of Commissioners Michael McRaith of Illinois and Sandy Praeger of Kansas has been working for several months on a state “American Health Benefit Exchange Model Act.”  That Committee finished its work on November 18 and reported out the Model Act, which now goes to the NAIC Accident and Health Committee and then to the full NAIC.   The Model Act has not proved terribly controversial, and is unlikely to be changed significantly.

The Model Act is intended to be used by states to implement the federal law, and by and large it simply sets out the federal requirements in state law form.  Only in a few places does it expand on or fill gaps in the federal law.  Section 3.E, for example, lists the different kinds of “excepted benefits” not covered by the ACA.  Section 3.H notes that an employer can either provide coverage through the exchange of the state in which it has its principal place of business to all of its employees, wherever located, or only to its employees employed in that state (presumably insuring employees in other states through the exchanges in those states).  Finally, Section 3.M describes how employees should be counted to determine whether an employer is a small or large employer, an issue not addressed by the ACA.

The most interesting parts of the Model Act are its “drafting notes,” which discuss the various options available to the states for implementing the federal law.  Section 4 on Establishment of Exchanges, for example, includes what was referred to on a subgroup call as “the mother of all drafting notes,” discussing at length the advantages and disadvantages of the three possible approaches to organizing an exchange (existing state agency, new independent public agency, non-profit entity.)  Another drafting note to section 4 contains the curious suggestion that an exchange may need to obtain a broker or consulting license from the state.

Insurers asked the NAIC to recognize that possibility of SHOP (small business) exchanges marketing traditional small group coverage in addition to the ACA-required option under which the employer chooses the tier of coverage and the employee chooses the plan.  Uncertain on whether a group insurance option was permitted by the ACA, the NAIC simply noted in a drafting note to section 6 that the question “remains open.”  Insurers also lobbied for adding a drafting note to section 7, “Health Plan Certification,” suggesting that states consider “consumer choice and additional costs” in evaluating whether or not to add additional requirements beyond the statutory minimum requirements.  Consumers countered with a request that other factors also be considered, like reducing premiums or increasing consumer protection.  The drafting committee compromised by adding a drafting note asking the states to consider “factors such as consumer choice and additional costs, in light of the value to enrollees provided by the proposed standards.”

The most controversial part of the Model Act is probably the drafting note to section 10 dealing with “Relation to Other Laws.”  Here, the Model Act notes that, under the ACA, states must themselves pay the cost of any state mandates imposed on qualified health plans in addition to the “minimum essential services” required by the ACA.  Consumer groups objected to the provisions of this drafting note, which explicitly encourages states to repeal such mandates or to find a way to pay for them.  Consumers are concerned that the states not be encouraged to repeal mandates before the federal essential benefit package is in effect.  A redraft of the note has been proposed for the health insurance committee that may address this issue.  Consumers did, however, win an important victory in the drafting note’s suggestion that states evaluate mandates not in terms of the price of mandated services, but rather in terms of their “net cost,” recognizing that some mandated benefits may in fact result in a reduced total cost even though a price must be paid for them up front.

Finally, the Model Act, not surprisingly given its origin, repeatedly recognizes the continuing role of state insurance commissioners and their relationship to the exchange.  A drafting note to Section 6, for example, suggests that the state commissioner be given the power to investigate, and require periodic reporting from, the exchange.  Another note to Section 7 asks states to consider delegating the exchange’s plan certification function to the insurance commissioner.  And a drafting note to section 9 suggests that the commissioner be granted rulemaking authority to implement the provisions of the Act within the commissioner’s authority.

The NAIC exchange subgroup will in the future be issuing white papers examining further issues that the states will have to consider as they proceed with implementing their exchanges.