On March 12, 2012, the Department of Health and Human Services promulgated final regulations governing the establishment of the American Health Benefit Exchanges.  The exchanges are at the heart of the Affordable Care Act strategy for making health insurance available and affordable to millions of Americans in the individual (nongroup) and small group markets.

The individual and small group markets are currently dysfunctional in many states, offering inadequate choices and high prices, and to many individuals offering nothing at all.  The exchanges promise to increase competition among insurers and to focus insurer competition on price and quality rather than on risk avoidance.  The exchanges will also open the door through which lower and middle-income Americans can obtain premium tax credits and cost reduction payments to reduce the cost of health insurance and health care services, and through which low-income Americans can access Medicaid and Children’s Health Insurance Program (CHIP) coverage.


The Affordable Care Act (ACA) asks the states to establish exchanges complying with federal requirements and established with federal funding. These must be in place and operational by January 1, 2014.  HHS must, however, determine by January 1, 2013, whether or not a state will have an exchange in place by that date.   In states that fail to establish exchanges on a timely basis, the federal government must establish “federally-facilitated exchanges.”

January 1, 2013 is less than a year away.  Most states have not yet adopted legislation needed to establish an exchange, much less taken the administrative action necessary to reach the goal.  HHS realizes, therefore, that it is urgently necessary that states receive the guidance they need to proceed with establishing an exchange.

HHS published proposed exchange establishment rules on July 15, 2011 (discussed here).  On the same day it published proposed rules for the ACA risk adjustment, reinsurance, and risk corridor programs.  A month later HHS published proposed rules governing exchange determinations of individual, Medicaid, and premium tax credit eligibility.

HHS has also published interim guidance to encourage the states to proceed with planning for exchanges even while they were awaiting final regulations.  HHS has now finally published its final regulations, although several sections of the rule are in interim final status pending further opportunity for the public to comment.

A Lengthy Rule …

The most striking thing about this rule is how long it is.  At 644 pages of preamble and text, it is by far the longest of the ACA Title I rules to date.  This is in part due to the fact that the rule combines the proposed exchange establishment and eligibility regulations.  It is primarily due, however, to the seriousness with which HHS took its task.

HHS received 24,781 public comments on the proposed rule, almost 2,000 of which were substantive.  HHS has taken these comments very seriously, and about 450 pages of the preamble are dedicated to discussing and responding to them in detail.  This also–along with many difficult decisions that needed to be made–explains why it has taken almost eight months to get the final rule out, despite the urgency with which those who will be affected by the rule–most notably the states–have pleaded for guidance.

… But Some Questions Remain

Despite its length, the rule leaves a great many questions unanswered.  This is in part because HHS has concluded that some issues–such as how quality of qualified health plans (QHPs) will be assessed or how appeals from exchange decisions will be handled–do not need urgent resolution now, and can wait.  It is also due in part to a belief that some issues, such as the number of languages into which notices must be translated or how the federally-facilitated exchange will function, are better addressed through guidance.

But the primary reason is, as the preamble states repeatedly, many issues will be left to the individual exchanges to sort out, such as how network adequacy or improper marketing practices will be defined.  This is consistent with the general approach that HHS has taken throughout the regulatory process of leaving as much flexibility as possible to the states.  As it becomes increasingly obvious, however, that many states will at least initially get a federally-facilitated exchange, many of these decisions will need to be made by HHS as it implements those exchanges.  Moreover, this approach predictably leaves HHS open to criticism (from critics who could not be satisfied in any event) that the rule does not provide enough guidance.

The topics addressed by this rule include general requirements relating to the establishment of the exchange; general functions of the exchange; eligibility determinations for exchange QHP enrollment, premium tax credits, and cost-reduction payments and Medicaid eligibility assessments; enrollment of individuals in QHPs; the Small Business Health Options (SHOP) exchange; certification of QHPs; QHP requirements: and employer interactions with the SHOP exchange.  In most instances, the final rule adopts the proposed rule with minor technical changes.  This post will address only the major changes made by the March 12 final rule.

A Focus On State Exchanges And State Flexibility

Despite the likelihood that many states will initially have federally-facilitated exchanges, the final rule continues to focus on state exchanges and says very little about how the federally-facilitated exchange or partnership exchanges will function.  It does clarify that partnership exchanges are in fact federal exchanges and that states must agree to operate both the individual and the SHOP exchange to qualify for state exchange status.  But it  also evidences a desire to facilitate state operation of exchanges wherever possible, using the term state “Exchange Blueprint” rather than “Exchange Plan” to clarify that HHS does not (as it proposed in the proposed rule) intend to submit state exchange proposals or modifications to as rigorous a review as is applied to state Medicaid or CHIP plans.

The final rule, like the proposed rule, recognizes that states may initiate an exchange after January 1, 2014, evidencing an obvious hope that the states will eventually realize the exchange is here to stay and take up the responsibility of running the exchange.

The exchange governance section of the final rule makes a minimal concession to consumer advocates, requiring exchanges to have at least one consumer advocate.  The proposed rule provision requiring a majority of the board to not have a conflict of interest is also retained.  But states are allowed to determine themselves how to handle interest conflicts, and it is likely that in a number of states, insurers and their agents will dominate consumer interests.

Under the ACA, exchanges must be self-supporting as of 2015.  The rule gives the states flexibility in determining how to finance the exchange, but recognizes that exchanges will most likely be financed through user fees, which in turn will be passed on to consumers through premiums.

The final rule enhances the language access provisions of the proposed rule, requiring oral as well as written translations and taglines in non-English languages indicating the availability of language services,  It does not specify the languages that must be accommodated, however.  Further guidance on access for people with disabilities is also promised.

Agents And Brokers

The role of agents and brokers within the exchange has been hotly contested.  Many agents and brokers have seen insurers cut their commissions in recent years and attribute the cuts to the medical loss ratio provisions of the ACA.  They had hoped that they would make up for this lost income by playing a major role in marketing insurance to the millions of new health insurance customers brought in through the exchanges.  The final rule contains good news and bad news for agents and brokers.

First, it seems likely that their role as navigators will be more limited than some might have hoped.  Under the ACA, navigators will educate and inform health insurance consumers and assist them in navigating the exchanges.  The final rule considerably sharpens the focus of the navigator program.  Although agents and brokers can be navigators, the rule prohibits states from requiring navigators to be licensed agents and brokers or to carry errors and omissions insurance, typically carried by agents and brokers.

States must recognize at least two categories of navigators, at least one of which must be a consumer or community-focused non-profit.  States must adopt conflict of interest standards governing navigators, and navigators may not receive any compensation (including gifts or free travel) for marketing health insurance, either inside or outside of the exchange.

On the other hand, the rule recognizes that agents and brokers–including web-based agents (sometimes called private exchanges), but also traditional “mom and pop” agents and brokers–can play an active role in marketing exchange products.  The ACA explicitly recognizes that agents and brokers have a role in marketing exchange products.  Experience has shown that support from agents and brokers is vital if exchanges are to succeed.

There is a real concern, however, that web-based agents might steer consumers towards plans that are most profitable for the agent, not the best placement for the consumer, and, indeed, that web-based private exchanges might undermine the public exchange.  There is also a serious concern whether the privacy of the very sensitive information that consumers will make available to the exchanges for insurance assistance program eligibility determinations be protected.

The rule, therefore, allows agents and brokers, including web-based entities, to market exchange products, but requires the exchange itself to determine eligibility for public insurance affordability programs and to ultimately enroll the consumer in a QHP.   Web-based brokers must allow consumers to view all QHPs offered through the exchange, display all QHP data and information provided through the exchange, not steer consumers to particular plans through incentives such as rebates or giveaways, and allow consumers at any time to withdraw from the web-based broker and use the exchange website instead.  Agents and brokers will also have to be registered with the exchange and comply with its requirements.  How this will all work is far from clear, but it is a serious attempt to enlist agents and brokers to support the exchange while offering some protection to consumers who use their services.

Privacy And Security Standards

The final rule devotes considerable attention to privacy and security standards, which it strengthens. Exchanges must develop and implement privacy and security standards consistent with the principles identified in the National Privacy and Security Framework for Electronic exchange of Individually Identifiable Health Information developed by the Office of the National Coordinator for Health Information Technology.    These principles must be applied to information created, collected used, or disclosed by the exchange and information shared with other individuals and entities that carry out exchange functions or coordinate with the exchange.  Personally identifiable information must be created, collected, used, and disclosed only to the extent necessary to carry out exchange functions.

Determining Eligibility For Premium Tax Credits, Medicaid, And CHIP

The final rule includes extensive provisions dealing with the role of the exchange in determinations of eligibility for premium tax credits, cost sharing reduction payments, and Medicaid.  These are quite technical, and will not be discussed in detail here.  The goal of the rule continues to be the creation of a seamless, integrated application and determination process that will direct the applicant either to Medicaid and CHIP or to premium tax credits (or to both for some families or neither for higher-income applicants) as appropriate, and promptly enroll the applicant in a QHP.  Insofar as possible, applications are to be processed based on existing data or attestations from the applicant.

In an acknowledgement that the application process might not be quite as seamless as had been hoped, the final rule recognizes that the exchange will make only an “assessment” of Medicaid eligibility, leaving to the state Medicaid agency the final Medicaid eligibility determination.  The exchange can, however, process a premium tax credit application if it makes a preliminary determination that the applicant is not eligible for Medicaid.

Changes in income. In an important victory for consumers, the final rule interprets the ACA provision that allows determination of eligibility based on evidence other than tax records where there has been “substantial changes in income” to mean any actual or projected decrease in household income.  The proposed rule had set a 20 percent decrease threshold, but HHS determined that much smaller changes could make a major difference in eligibility, particularly for cost-sharing reduction payments.

The final rule also allows exchanges to accept an attestation of income rather than rely on tax data where the applicant attests that actual income is no more than 10 percent below income evidenced by tax data.  Applicants must be allowed to file applications for assistance and to enroll in a QHP in person, but exchanges are not required to accept applications through mobile devices.

Of course, if the applicant receives too much in advance premium tax credits, the applicant will need to pay back the credits at tax filing time.  Because of the possibility of this “claw back,” recipients of tax credits must report any changes in eligibility within 30 days, exchanges can use data matches to confirm continuing eligibility, and exchanges can send periodic electronic notifications reminding recipients of their obligation to report changes.  Eligibility will also be redetermined annually.


The final rule expands the initial open enrollment period by a month to March 31, 2014 and requires the annual open enrollment period to last from October 15 to December 7.  The rule retains the special enrollment provisions found in the proposed rule.  The rule, however, only allows coverage to begin for a given month if a plan is selected by the 15th day of the previous month, rather than the 22ndas in the proposed rule (unless all QHPs in the exchange agree to an earlier date and the applicant waives premium and cost-sharing assistance for the partial month).  This will permit lengthy gaps in coverage, and is a disappointment to consumers.  In a victory for consumers, however, there are no limits on the ability of enrollees to move from one “metal” actuarial value tier to another during open or special enrollment periods.

The final rule does provide that an applicant who is enrolling in a QHP upon losing another form of minimum essential coverage (such as Medicaid) must be enrolled as of the first day of the following month.  Enrollment must also be effective as of the first of the month for persons added to a household through marriage and children must be covered as of the date of birth or adoption.

The Small Business Exchange

There are few major changes in the regulations governing the Small Business Health Options Program, or SHOP exchanges.  SHOP exchanges must provide a premium calculator so that employees can determine their premium obligations depending on the plan they pick.  SHOP exchanges can also impose minimum participation requirements on employers, a question left unsettled in the proposed regulation.  The aggregated bill provided by the exchange to employers must contain, in addition to the total amount due, an accounting as to how much is due from the employer and the employee for each employee’s premium.  The final rule leaves for another day a final determination on how employer size will be calculated to determine exchange eligibility.

The Exchanges And Participating Health Plans

The final rule reiterates the commitment of HHS to allow the states to decide whether to pursue an active purchaser or any willing insurer exchange model.  It encourages exchanges to leverage existing state rate review processes, but obligates exchanges to require QHPs to submit justifications for rate increases before implementing the increase, and to post these justifications.  The rule also allows exchanges to conduct additional scrutiny of rate increase justifications. Exchanges must ensure that QHP service areas cover at least a county except under exceptional circumstances to discourage redlining.

The final rule QHP standards require QHPs to meet network adequacy standards.  Specifically, plans must maintain “a network that is sufficient in number and types of provides, including providers that specialize in mental health and substance abuse services, to assure that all services will be accessible without unreasonable delay” and include essential community providers.  QHPs must follow state regulations governing marketing of plans and cannot employ marketing practices or benefit designs that will discourage enrollment of individuals with significant health needs.

QHPs must make their provider directories available to the exchange.  Exchanges are encouraged but not required to consolidate provider directories. Standalone dental plans cannot impose annual or lifetime dollar limits.   Plan quality issues are left for another day.

Finally, the ACA provides for a 90 day grace period during which QHPs cannot terminate coverage for premium tax credit recipients who fail to pay their share of the premium. Insurers expressed considerable concern that this would allow recipients to game the system, paying for coverage only 9 months a year.

The final rule provides that QHPs must cover the first month of nonpayment, but for the second and third months may “pend” payments.  If the enrollee finally pays up, the QHP must reinstate the enrollee and cover the bills. Otherwise, the QHP can deny payment and must refund advance tax credits received for the second and third month.   The enrollee will be left responsible for paying providers and repaying the tax credit received for the first month, as well as the first month’s premium.

What’s Next?

Further rules on the risk adjustment, reinsurance, and risk corridor programs; Medicaid eligibility; and premium tax credit eligibility are expected within days.  Further guidance is also expected on many of the issues left open by the exchange rule over the coming months.