Health Affairs

Editor’s note: This post was updated on July 28, 2014 to conclude with a discussion of a rule expanding coverage under the Federal Employees Health Benefits program.

One question that has arisen in the wake of the Halbig/King decisions is what exactly is a state exchange? The D.C. Circuit in Halbig and the Fourth Circuit in King seemed unclear as to the answer to this question. The D.C. Circuit counted 14 state exchanges, the Fourth Circuit 16.

A great deal, however, may turn on the answer. Two of the eight federal judges that have ruled on the question so far have held that only state exchanges and not federally facilitated exchanges can issue premium tax credits. Were this conclusion to be adopted in the end by the Supreme Court, which exchanges would count? In other words, how exactly does a state establish an exchange?

A careful reading of the law suggests that a state “establishes” an exchange when, exercising the legal powers of the executive or legislative branch, the state government takes certain actions, discussed below. Establishing the exchange – that is, using the power of state government to enable the exchange to operate and fulfill its responsibilities – is different from the carrying out the day-to-day operations, of the exchange, which might be carried out by public officials, private contractors, or even the federal government.

ACA provisions on exchanges. Section 1311 of the ACA defines and establishes the duties of exchanges. It says that states “shall” establish an exchange. Section 1311(d)(1), the definitional subsection of the section, provides, “An Exchange shall be a governmental agency or nonprofit entity that is established by a State.”

Section 1321 explains how states establish exchanges, and what happens if they “elect” not to do so. It provides in subsection (a) that HHS small promulgate regulations with respect to, among other things, “the establishment and operation of exchanges.” It then provides that “Each State that elects, at such time and in such manner as the Secretary may prescribe, to apply” these requirements shall “adopt and have in effect— (1) the Federal standards established under subsection (a); or (2) a State law or regulation that the Secretary determines implements the standards within the State.” Section 1321 would suggest, therefore, that some sort of state law or regulation is necessary to establish an exchange.

(Section 1321 goes on to say that if a state elects not to establish an exchange, HHS “shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State.” In other words, HHS establishes the state-established exchange, but whether that works or not is, of course, is the issue in the litigation).

Regulations. HHS did adopt regulations implementing the exchange provisions of the ACA, one of which, 45 C.F.R. 155.100, deals with establishment of an exchange. It, however, merely repeats the statute. Another regulation, however, 45 C.F.R. 155.110, elaborates on the nature of the exchange governing board which must govern an independent agency or non-profit exchange and on exchange governance principles:

(c) Governing board structure. If the Exchange is an independent State agency or a non-profit entity established by the State, the State must ensure that the Exchange has in place a clearly-defined governing board that:

(1) Is administered under a formal, publicly-adopted operating charter or by-laws;

(2) Holds regular public governing board meetings that are announced in advance;

(3) Represents consumer interests by ensuring that overall governing board membership:

(i) Includes at least one voting member who is a consumer representative;

(ii) Is not made up of a majority of voting representatives with a conflict of interest, including representatives of health insurance issuers or agents or brokers, or any other individual licensed to sell health insurance; and

(4) Ensures that a majority of the voting members on its governing board have relevant experience in health benefits administration, health care finance, health plan purchasing, health care delivery system administration, public health, or health policy issues related to the small group and individual markets and the uninsured.

d) Governance principles.

(1) The Exchange must have in place and make publicly available a set of guiding governance principles that include ethics, conflict of interest standards, accountability and transparency standards, and disclosure of financial interest.

The statute and regulations go on to enumerate the responsibilities of the Exchange, including not only operating a website, enrolling individuals in qualified health plans, and determining premium tax credits and cost-sharing reduction payments, but also other functions, including:

• Certifying, recertifying, and decertifying qualified health plans;
• Reviewing the premiums of qualified health plans and determining whether making available a particular plan is in the interest of qualified individuals and employers in the state;
• Providing for the operation of a toll-free telephone call center;
• Rating qualified health plans and collecting and disseminating enrollee satisfaction information;
• Providing information on health plan through a standardized form;
• Providing information on eligibility and assisting with eligibility determinations for Medicaid and CHIP;
• Providing a coverage cost calculator;
• Determining whether individuals are exempt from the individual mandate:
• Providing the IRS with a list of individuals determined eligible for an individual mandate exemption and of individuals granted premium tax credits because their employers failed to provide minimum essential coverage or affordable and adequate coverage; and
• Establishing a navigator program.

States must also operate SHOP exchange programs for small businesses. The statute provides planning and establishment grants for state exchanges, but requires that exchanges be fully self-supporting, from user fees or from other funds, by 2015.

Another regulation provides that a state that intends to operate an exchange must submit an “Exchange Blueprint.” The initial blueprint issued by HHS required states to provide a:

• Copy of current law and/or regulation that indicates that the State has necessary legal authority to establish an Exchange or that establishes the Exchange; or
• Other legislation or general authority (e.g., Executive Order) that the State has determined provides the necessary legal authority to establish an Exchange; and
• If authority is not clear on its face, provide a Statement from the legal counsel of the office of the applicant, the Governor’s legal counsel, or the State’s Attorney General’s Office (correspondence or a formal legal opinion) certifying that the State is authorized to establish an Exchange under State law.

At least three states—New York, Rhode Island, Kentucky—are operating exchanges under executive authority. If a state official — in particular an official other than the governor — were to attempt to establish an exchange through executive authority without authorizing legislation or other legal authority, it would not be approved. Thus Mississippi insurance commissioner Mike Chaney’s attempt to establish an exchange was rejected because his application was not signed by the governor. Most states are operating their exchanges under legislative authority.

The ACA does not require state exchanges to carry out all exchange functions, but rather allows them to contract with “eligible entities,” to carry out operations. Eligible entities are either the state Medicaid agency or incorporated entities with experience in insurance benefits that are not insurers. Most, if not all, states contract out some functions. For 2015, Maryland will be contracting with Connecticut to use its exchange software for eligibility functions.

For 2014, the federal government provided the IT functions two state exchanges, New Mexico and Idaho,  although both have approved state exchanges. For 2015, HHS will provide IT functions for Nevada  and Oregon, and may do so for Massachusetts, but their exchanges remain state exchanges.

Conversely, the federal government also permits state governments with federally facilitated exchanges to carry out certain exchange functions.  These are called partnership exchanges.  For 2014, partnership exchanges could perform plan management or consumer assistance functions. For 2015, partnership exchanges perform consumer assistance functions. But HHS works with any state insurance department cooperatively as to any plan management functions the state wishes to take on. Partnership exchanges are not state exchanges.

In sum, for a state to “establish” its own exchange it must:

• Enact authorizing legislation or a have a properly issued executive order establishing the exchange;
• If the exchange is operated by an independent agency or non-profit, establish a properly constituted governing board;
• Have in place exchange governing principles;
• Fulfill all exchange functions, either itself or by contract with a private entity or under arrangement with HHS
• Provide funding for the exchange, which must be self-sufficient for 2015.

It is not enough for a state simply to set up a website. It is also not sufficient if a state Department of Insurance operates some functions in a partnership relationship with a federal exchange.

Gruber statements. A brief observation on another matter – a minor media storm has erupted in the past few days over discovered tapes that seem to show Professor Jon Gruber stating in early 2012 that only state exchanges could grant premium tax credits. Of course, Professor Gruber neither drafted nor voted on the ACA, so his understanding in 2012 says nothing about what Congress intended in 2010. I would note, however, that Professor Gruber and I worked together on a study panel for the National Academy of Social Insurance on exchanges, and our publication on federally facilitated exchanges issued in December of 2011 clearly states that federal exchanges can issue premium tax credits. Whatever Professor Gruber might have been thinking when he apparently made statements to the contrary in early 2012, he knew better.

Update: FEHBP coverage extension. On July 28, 2014, the Office of Personnel Management released a proposed rule  extending coverage under the Federal Employees Health Benefits program to certain part-time, seasonal, and temporary employees no later than January 2015. This rule is intended to bring the FEHB program roughly in line with the requirements that apply to other employers under the ACA employer mandate provisions, although the proposal relies on the OPM’s general rulemaking authority rather than the ACA, and the terms of the rule are not identical to those enforcing the employer mandate.

Under current OPM rules, temporary federal employees become eligible for FEHB coverage after completing one year of employment but, once eligible, do not receive FEHB contributions for coverage. Those working seasonal schedules for less than six months in a year or intermittently are excluded from coverage.

Under the proposed regulation, temporary, seasonal, and intermittent employees would be eligible to enroll in an FEHB plan, with a federal contribution, if the employee is expected to work 130 or more hours in a calendar month. If the employee is expected to work fewer than 90 days, the employee would not be eligible until the 90-day period elapsed. Temporary, seasonal, and intermittent employees expected to work less than 130 days in a calendar month would not be eligible to enroll unless the expectation changed and they became expected to work 130 hours or more in a calendar month.

Once enrolled, employees would continue to be covered as long as the employee remained in the same position. Newly eligible employees could enroll during a 60-day period after their employer notified them that they were eligible to enroll in a FEHB health plan. Exceptions could be made by employers that could show that the rule would have an adverse effect on the employer’s “need for self-governance,” although such exceptions are expected to be rare.

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This entry was posted on Monday, July 28th, 2014 at 11:46 am and is filed under All Categories, Health Law, Health Reform, Insurance, Policy, States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.