State insurance exchanges are a marketplace for individuals, families, and small businesses to compare and purchase health insurance. The exchanges make comparing plan benefits and costs simple, and manage many associated administrative duties such as enrollee eligibility. To date, 15 states have established exchanges and three have elected not to create one. The remaining states are in various stages of progress, ranging from no activity to immediate plans to establish an exchange. However, the pending Supreme Court decision on the individual mandate provision of the Patient Protection and Affordable Care Act has slowed progress on state exchanges, as the success of the exchanges is reliant on this rule. The Supreme Court decision is expected to be released this week.

Legislative basis: State health insurance exchanges were established under sections 1311 and 1321 of the Patient Protection and Affordable Care Act, with additional provisions for exchanges detailed in other sections of the law (i.e., 1401, 1402, 1411, 1412, 1413, 2201). Many specifics of the program were not detailed under the statutory authority, and were later outlined by final rules from the Department of Health and Human Services and CMS fact sheets.

Rules and regulations: HHS governs state insurance exchanges through the final rule on exchanges, published in the Federal Register on March 27, 2012. This rule outlines the minimum standards states must meet to establish and operate an exchange, along with the minimum standards for health plans to participate in an exchange. HHS has released a related final rule implementing state standards related to reinsurance, risk corridors and risk adjustment within the health insurance exchanges. Various agencies of the federal government have also published related guidance, including the final rule on Medicaid eligibility changes under the PPACA, the final rule on health insurance premium tax credits, and a question-and-answer on implementing exchanges. Additional federal guidance regarding specific provisions of exchange rulings is expected in the future.

Each state is authorized to establish an exchange within federal guidelines and will draft regulations to guide implementation and operation. If a state has not established an approved exchange by January 1, 2013, the federal government will establish and operate an exchange within that state.

Funding model: Under state health insurance exchanges, the federal government will subsidize access to private health insurance for individuals and families with incomes up to four times the federal poverty level, or a maximum of $88,000 annually. Those who do not meet the guidelines for a subsidy can purchase insurance at full cost. States will charge insurers fees for exchange administration. As part of the individual mandate rule in the PPACA, individuals who do not purchase coverage will face penalty fees of $695 per person per year (with a maximum fee of $2,085) or 2.5% of adjusted gross income annually, whichever is greater. These fees will be phased in over several years, then increased by the cost-of-living adjustment each year beginning in 2017.

The government will classify each health plan based on the level of coverage it provides in order to make cost comparisons simple. These categories indicate the amount of health expenses the plan will cover, while the enrollee pays for the remainder of costs through deductibles, copayments, and coinsurance.

• Bronze plan: Insurance 60%, enrollee 40%
• Silver plan: Insurance 70%, enrollee 30%
• Gold plan: Insurance 80%, enrollee 20%
• Platinum plan: Insurance 90%, enrollee 10%

Exchanges will also offer catastrophic coverage plans to individuals who are under age 30 or exempt from the individual mandate for reasons such as financial hardship or religious objections.

Care model: State health insurance exchanges offer a marketplace for private health insurance plans. These plans will include a variety of care models, such as health maintenance organizations, preferred provider organizations, point-of-service health plans, high-deductible health plans, and accountable delivery systems like patient-centered medical homes and accountable care organizations.

All plans are required to offer certain essential health benefits, including preventive services at no cost to the enrollee.

Critical success factors: For exchanges to succeed, the Supreme Court must uphold the individual mandate provision in the PPACA. This mandate requires uninsured individuals to purchase a certain level of coverage or pay an annual penalty. In addition, the success of exchanges relies on uninsured individuals voluntarily choosing to purchase insurance under the mandate rather than pay the penalty for noncompliance.

Challenges: The irregularity of costs and income is a significant challenge for insurance companies in exchanges. As risk adjustment evolves to support predictability, insurers will be better able to accurately price their plans — thereby improving affordability, particularly for the low-income uninsured. Greater predictability will also reduce the incentive to design plans in a way that attracts only healthier, lower-cost enrollees (i.e., cherry-picking). It remains to be seen whether the established risk adjustment methodology, reinsurance, and risk corridors will succeed in protecting insurers from the challenges of no longer being able to rate potential enrollees based on health status.

Advantages and disadvantages: Advantages of state exchanges include:

• Program establishes free-market framework for enabling insurance plan choice and cost comparison
• Existing exchanges (e.g., the Massachusetts Connector) offer reasonable basis for measuring success of the new exchanges. However, it should be noted that these existing models are not based on the federal requirements that federal state exchanges will be obligated to comply with.

Potential disadvantages of state exchanges include:

• Political and legal uncertainties, including the pending Supreme Court ruling on the PPACA’s individual mandate
• Exchange regulations vary from state to state, resulting in a complex patchwork of rules

---

Also in the series

Accountable care delivery and payment structures: An overview
Medicare shared-savings accountable care organizations
Pioneer accountable care organizations
Medicare Advantage with physicians at risk
Medicaid health maintenance organizations
Private accountable care organizations
Bundled payment arrangements