What is an Health Insurance Exchange, Anyway?

The following brief from Mark Holloway of Lockton Companies summarizes the federal regulation of anticipated Health Insurance Exchanges that may be set up in each state to help individual businesses deal with the new insurance regulations in the future. Important information for any small business owner, employee or any voting American.
– Eric
Executive Summary

•    The U.S. Department of Health and Human Services has issued proposed regulations on the establishment of the state health insurance exchanges that will begin operation in 2014.
•    The proposed rules address the requirements states must satisfy to operate an exchange.
•    Individuals and small employers (generally, under 100 employees) can purchase coverage through the exchange.
•    Separate exchanges will exist for individual and small group coverage (SHOP) unless the state merges its individual and small group markets.
•    The enrollment rules that will apply to the exchange coverage are similar to rules used by employer health plans.
•    Although the rules are only proposed and would only apply to small employers who purchase coverage through the small employer (SHOP) exchanges, employers will need to know how the exchanges operate so they can be able to help employees when they move from the exchange to employer coverage, and vice versa.

The U.S. Department of Health and Human Services (HHS) has issued proposed regulations on the establishment of the state health insurance exchanges under last year’s health reform law (PPACA). HHS issued a second set of proposed rules on the risk adjustment and reinsurance rules that will apply to the exchange markets. We won’t address the latter rules here.

Although there is federal funding available for the states to establish exchanges, only twelve states have enacted laws enabling an exchange. We expect many states will fail to meet the readiness deadline, which is January 1, 2013, due to inaction or as a conscious effort to avoid compliance with the health reform law. As discussed below, if a state fails to meet the deadline, then HHS will operate the exchange within the state.

Why the Exchanges are Important

The exchanges are a central tenet of the law’s goals to expand coverage and lower costs for health insurance. Individuals and small businesses (defined below) will be able to purchase health insurance through the exchanges beginning in 2014. Exchanges will certify standardized health plans that provide different levels of coverage for “essential health benefits”, based on the following actuarial values of coverage of benefits provided under the particular plan:

•    Bronze level – 60 percent
•    Silver level – 70 percent
•    Gold level – 80 percent
•    Platinum level – 90 percent

The law defines “essential health benefits” to include any of the following categories of benefits:
•    outpatient services
•    emergency services
•    hospitalization
•    maternity and newborn care
•    mental health and substance use disorder services
•    including behavioral health treatment
•    prescription drugs
•    rehabilitative and habilitative services and devices
•    laboratory services
•    preventive and wellness services
•    chronic disease management
•    pediatric services, including oral and vision care

However, the federal agencies have not yet issued guidance on the specifics of what qualifies as essential health benefits.

Beginning in 2014, people who do not have access to qualifying and affordable coverage through their employer may qualify for federal subsidies for coverage purchased through the exchange. The subsidies, which are ONLY available for coverage purchased through the state-operated exchange, include premium tax credits and cost-sharing reductions. However, to qualify, the person’s household income must be under four times the federal poverty level (generally, $89,400 for a family of four in 2011 dollars). At a later date, the federal agencies will issue guidance on the mechanics of how the exchanges will determine eligibility for coverage and the advance payments of the premium tax credits.

Who Can Purchase Coverage Through an Exchange?

Individuals and small employers can apply to purchase health coverage through an exchange. Importantly, the exchange for individual coverage within a state will separately operate from the small employer exchange (small business health options program or SHOP), unless the state merges its individual and small group markets. Insurers can offer stand-alone, limited scope dental plans through the exchanges, as well.

Small employer means an employer who has at least one employee on the first day of the plan year but no more than 100 employees during the preceding calendar year, taking into account all companies within the employer’s controlled group (generally, companies related by at least 80% common stock ownership). However, prior to 2016, the states can choose to define a small employ as an employer who employers no more than 50 employees during the preceding calendar year.

By 2015, each state’s insurance exchange must be self-reporting and will not receive any additional federal money. Thus, the exchanges will likely apply assessments or user fees on the insurers participating in the exchange. Beginning in 2017, each state has the option of opening its SHOP exchange to all employers, regardless of size.

How Does A State Establish an Exchange?

An exchange must be operated by either a state governmental agency or a non-profit entity established by the state. Health insurers can offer plans within the exchange, but cannot be a sponsor of a state exchange or be a service provider to the exchange.

States will need approval from HHS to start operating the exchanges. As you would expect, approval entails being able to demonstrate operational readiness and being able to provide the following functions:

•    Certifying health plans that qualify for being offered through the exchange
Note: States would have the option of allowing all qualifying health plans to participate OR imposing more restrictive rules; for example, using competitive bidding to select plans.
•    Performing eligibility determinations for enrollees, including an appeals process, as well as tracking and reporting terminations of coverage;
•    Enrolling individuals in health plans via a single, stream-lined application and transmitting the necessary information to the insurer;
•    Meeting standards for financial stability, oversight, quality, and the protection of confidential information (including enrollees’ protected health information and Social Security numbers);
•    Providing a premium tax credit calculator so enrollees can calculate government subsidies;
•    Providing customer assistance tools such as a call center, internet website and a provider directory; and
•    Establishing a “navigator program” that allows potential enrollees to comparison shop for coverage and enroll in plans.

An exchange must be ready to accept enrollees on October 1, 2013. HHS must approve a state’s exchange by no later than January 1, 2013, although HHS will grant conditional approvals for states that are moving forward. If a state fails to meet the deadline, then HHS is tasked with operating the exchange within the state.

Two states, Massachusetts and Utah, have exchanges that pre-date federal health reform. The HHS proposed rules indicate that a state health exchange in operation on January 1, 2010 is deemed to qualify under the federal standards ONLY if the state’s percentage of insureds is at least the national-average after the implementation of the health reform law. The practical impact of this proposed rule is that Massachusetts’ exchange (The Connector) would qualify under the federal standards, but Utah’s exchange would not.

Although exchanges will operate on a state-by-state basis, the law allows states to band together to offer a regional exchange, although there has been little interest in doing so, to date. HHS will also allow subsidiary exchanges within a state that serves a geographically distinct area.

How Will Individuals Enroll in Coverage Through the Exchange?

Many of the enrollment rules that will apply to the exchange coverage are similar to rules used by employer health plans. For example, the exchanges must provide individuals with an initial open enrollment period, an annual open enrollment period and a special enrollment period when a person gains a dependent or loses other coverage.

The initial open enrollment period begins October 1, 2013 and extends through February 28, 2014.  Coverage will be effective on January 1, 2014 for people who elect coverage on or before December 23, 2013.  Otherwise, coverage is generally effective the first day of the month following the individual’s election.

Each year the exchange must offer an annual open enrollment that allows individuals to add coverage or change health plans. The annual open enrollment period will be between October 15 through December 7 of each year, with coverage effective on the following January 1. For example, the open enrollment period for 2015 will be from October 15, 2014 through December 7, 2014, with coverage being effective January 1, 2015.

Special enrollment periods allow an individual 60 days from a triggering event to enroll or change plans on account of certain life events and coverage changes. Coverage is effective on the first day of the following month if the individual elects coverage by the 22nd day of the previous month, subject to a special rule that applies retroactive coverage for birth, adoption or placement for adoption of a child. The events that allow a special enrollment period are:

1.    The individual (or dependent) loses minimum essential coverage, including coverage under an employer plan for reasons other than failure to pay premiums or situations that allow a rescission of coverage (e.g., fraud);
2.    The person gains a dependent or becomes a dependent through marriage, birth, adoption or placement for adoption;
3.    An individual, who was not previously a citizen, national, or lawfully present gains, this status;
4.    The individual’s enrollment or non-enrollment in a health plan is unintentional, inadvertent, or erroneous and is the result of the error, misrepresentation, or inaction of an officer, employee, or agent of the exchange or HHS;
5.    An enrollee adequately demonstrates to the exchange that the health plan in which he or she is enrolled substantially violated a material provision of its contract in relation to the individual;
6.    An individual is determined newly eligible or newly ineligible for the premium tax credit or has a change in eligibility for cost-sharing reductions, regardless of whether such individual is already enrolled in a health plan;
Note: The exchange must permit an individual whose existing coverage through an employer-sponsored plan will no longer be qualifying or affordable for his or her employer’s upcoming plan year to access a special enrollment period prior to the end of his or her coverage through such employer-sponsored plan.
7.    The individual or enrollee gains access to new health plans as a result of a permanent move; and
8.    The individual or enrollee meets other “exceptional circumstances” as the exchange or HHS may provide.

The events noted above do not allow the individual to change the level of coverage (e.g., move from a bronze plan to a gold plan), subject to an exception for number six (eligibility for subsidy).

How Will Small Employers Enroll in Coverage Through the Exchange?

Not surprisingly, the rules that apply to the small employer (SHOP) exchanges are similar to the rules that apply to the individual exchanges. At a minimum, the SHOP exchange must allow a small employer to select a level of coverage in the exchange (platinum, gold, etc.) in which all small group health plans at that level are made available to its full-time employees. The rules also allow the small employer to limit access to one or two plans. Nothing in the health reform law requires that a small employer use the SHOP exchanges to purchase coverage for its employees.

A small employer can participate in a state exchange only if it has a principal place of business in the exchange’s service area or offers coverage through the SHOP exchange serving the employee’s primary worksite. The SHOP exchange must establish a uniform enrollment procedure and timeline that includes the following elements:

•    Determination of employer eligibility to purchase coverage in the SHOP exchange;
•    Employer selection of health plans offered through the SHOP to employees;
•    A specific timeframe during which the small employer can select the level of coverage or health plan offering;
•    A specific timeframe for employees to provide relevant information to complete the application process;
•    Determination and verification of employee eligibility for enrollment through the SHOP exchange;
•    Processing enrollment of employees into selected health plans; and
•    Establishing the effective dates of employee coverage.

Coverage under the SHOP exchange is limited to plans that cover at least one “employee” of a small employer. Coverage that is limited to only self-employed people (partners, two percent shareholders of S corporations) and their relatives cannot be purchased through the SHOP exchange because there are no “employees.”

Next Steps

HHS will accept comments on the proposed rules through the end of September and plans to issue final regulations later this year. The agency has asked for comments on a variety of issues. The proposed rules do not address whether an employer can facilitate exchange coverage for former employees, such as pre-age 65 retirees.

Although the rules are only proposed and would only directly apply to small employers who purchase coverage through the SHOP exchanges, employers will need to be familiar with how the exchanges operate so they can help employees who move from the exchange to employer coverage, and vice versa.

1 By health plans, we mean individual health coverage or small employer health coverage that is approved and offered through the exchange. The proposed regulation refers to a “qualifying health plan” or QHP.

2 Health insurers must offer at least one silver level and one gold level plan through the exchange, as well as a child-only plan.The health insurer must charge the premium rates without regard to whether the plan is offered through an exchange.

Mark Holloway JD
Health Reform Advisory Practice

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About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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