Interpreting the Draft Insurance Exchange Regs

The Obama administration’s progress—with just a few stumbles—towards health care reform implementation took another major step this past week. In a carefully chosen small business setting—a Washington DC hardware store—HHS Secretary Kathleen Sibelius released draft regulations for the health benefit exchanges called for by the Affordable Care Act.

The exchanges, required to be established for every state, are predicted to serve some 24 million consumers by 2019 (provided that the ACA is neither significantly changed nor found unconstitutional), with the majority receiving federal subsidies to help pay for coverage.  So far, a dozen states have enacted bills to create exchanges, while in nine states such legislation has failed.

Responding to strident opposition to the ACA requirements from conservatives and from many business owners, Secretary Sibelius emphasized the flexibility of the draft regulations, which would allow considerable variation among states, give participating businesses considerable latitude in coverage selection, and interpret states’ readiness for exchange operation more loosely than implied by the ACA itself.  In describing the intent of the exchanges, she stated that they will “offer Americans competition, choice, and clout.”

Well, maybe, depending on one’s interpretation of the draft regs.

Here’s one assessment of the impacts of this week’s draft:

Despite the efforts of the administration to compromise with ACA critics, the draft is unlikely to sway politicians in the most conservative states. It’s not the exchange concept that’s anathema to the right, it’s the idea that the federal government can impose any rules at all—and, even more, that legislation that overcame conservative opposition only through procedural tactics should be successfully implemented. Don’t expect states like Florida, Arizona, Louisiana, and others to suddenly discover that exchanges aren’t so bad after all.

At the other end of the spectrum, more liberal administrations like those in California, Washington, and Maryland are already well into the detailed planning phases and are likely to be unaffected by the draft regulations—especially given the level of flexibility that they allow—while Massachusetts’ existing Connector already meets almost all the requirements (unsurprisingly, since it served as the primary model). Only a very few wavering states may be comforted by HHS’s willingness to compromise and will now take the plunge, rather than being forced to accept an exchange implemented by the federal government, as the ACA requires for states unwilling or unable to create their own models.

HHS’s new flexibility (or possibly frantic backpedaling) in defining operational readiness may lead to some interesting implementation problems. While the ACA implied that HHS must determine no later than January 1, 2013, whether or not each state’s exchange would clearly be ready for operation on January 1, 2014, otherwise forcing HHS to implement its own exchange(s), the draft regulations offer a fair amount of wiggle room (or possibly confusion). “Conditional approval” will be granted to states that persuade HHS that they are in “advanced preparation.” How these terms will be interpreted is unclear. So also is what will happen if it subsequently becomes apparent that a state with conditional approval cannot meet the January 2014 date. The best guess seems to be that HHS would—to avoid implementation chaos—allow the state to slide the deadline, perhaps to January 1, 2015. However, this would leave HHS with the problem of trying to plug the gap at the last moment with its own system, or waive mandated coverage requirements for the states’ businesses and individuals.

And, if HHS does have to step in and implement an exchange itself, what notice will it have? In states like Florida that have refused to participate, HHS will—at least in theory—have adequate time to implement a federal exchange (but possibly little state cooperation). The more difficult situations will occur in states that have committed to implementation but whose efforts are discovered to be behind schedule or failing to meet HHS rules. Assuming that at least a dozen states will either refuse to implement exchanges or—deliberately or not—stall their efforts, and that several other states will encounter serious development or implementation problems, HHS is likely to have its hands very full indeed.

Aside from providing a substitute for state exchanges, HHS will also have its own development responsibilities to worry about. The ACA requires that state exchanges interface with HHS and other federal agencies to confirm legal residency and potential eligibility for other programs such as Medicaid and CHIP.

Making matters even more complicated, the draft offers states the opportunity to “partner” with HHS, conceivably using components of a federal system to accelerate IT implementation. While this flexibility of approach could perhaps be helpful, it also should create plenty of opportunities for mutual finger-pointing.

The flexibility of the draft regulations in allowing insurer representation—short of a majority— on exchange governing boards is clearly intended as a sop to the industry, but it’s one that comes with some risks. Consumers hoping for lower premiums may find that industry representatives’ persuasion has resulted in inclusion of every possible health plan—hundreds in large states—and eliminated the chance to create effective price competition.

It’s also uncertain whether or not Secretary Sibelius’ attempts to mollify small business owners will be rewarded. The so-called SHOP exchanges have been granted design flexibility, and clearly have potential to lower premiums by creating larger risk pools. However, the lack of success of existing small business exchanges—including those in Massachusetts and Utah—suggests that many businesses will be very wary indeed of such exchange participation, and may choose simply to terminate existing coverage.

The conclusion: fuzzying the rules may be good short-term politics (is there any other kind?), but could lead to chaotic implementation problems. Changing the definition of “ready” won’t cause an IT system to be suddenly bug-free or result in millions of consumers being enrolled overnight. And, while greater flexibility may be helpful to states still debating exchange issues, HHS managers may feel as if they are trying to herd cats as they deal with the problems of different design rules for each of up to fifty states.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is editor of Health Care REFORM UPDATE.

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  1. At Health Affairs Blog Dr. Timothy Jost has also done yeoman’s work plowing through reams of policy-speak to make it more comprehensible for any layman patient enough to go through it. This is the last of a three-part series there for anyone interested.


    I find another piece of the program potentially more exciting, Non-profit health insurance cooperatives. The aim is to establish at least one per state.