State Exchanges Remain Unclear: A Dozen States Move Forward to Set Up PPACA Exchange Infrastructure

Under the Patient Protection and Affordable Care Act (PPACA), each state has been given the option to either create a state-run health insurance exchange or have a local exchange implemented and run for them by the federal government. The concept of an exchange is one of PPACA’s central vehicles through which individuals and small employers would be able to obtain health care coverage at rates similar to those enjoyed by large groups that have the ability to negotiate favorable discounts. It also will be used as a mechanism to provide subsidized insurance coverage to specific targeted populations.

States continue to deploy different strategies when addressing this opportunity.  While some states have taken definitive action to either set up a state health insurance exchange or defer action; others are either in a holding pattern or dealing with the fact that legislation to establish a state health insurance exchange failed to get the nod from state lawmakers.  

State Round-Up
As of November 28, 2011, 10 states had taken the necessary legislative steps to create their own state health insurance exchanges that meet PPACA’s guidelines.  Those states are California, Colorado, Connecticut, Hawaii, Maryland, Nevada, Oregon, Vermont, Washington, and West Virginia. 

Two states already have functioning state health insurance exchanges – Massachusetts and Utah – but will have to modify their current operations to comply with several key PPACA provisions.

Illinois and Virginia have stated their intent to create a health insurance exchange, but have not passed legislation to make it happen.

Several states have legislation pending including Michigan, New Jersey, New York, North Carolina, Pennsylvania and Wisconsin. In addition, the District of Columbia also is considering a bill. 

The following 18 states failed to pass exchange enabling legislation: Alabama, Alaska, Arizona, Arkansas, Georgia, Indiana, Iowa, Maine, Minnesota, Missouri, Montana, New Hampshire, New Mexico, North Dakota, Oklahoma, Rhode Island, South Carolina and Texas. 

Government officials from South Carolina recently informed the U.S. Department of Health and Human Services (HHS) that the Palmetto State will not be establishing a state health insurance exchange. As a result, HHS will have to set one up.

States Face Challenges
States face several real challenges when attempting to create and operationalize state health insurance exchanges. Issues include addressing the moving target of supplemental regulations, the logistics and timing of creating a complex organization, and funding for ongoing operations. 

Not only must a PPACA-authorized exchange recreate most of the infrastructure that BenefitMall has spent years perfecting, but each exchange also must develop an electronic process that automatically determines if an applicant is eligible for federal subsidies or qualifies for various public programs such as Medicaid or Medicare. Each state also needs to develop a process to determine which health plans are eligible for participation in the exchange. Not surprisingly, the wide range of governance requirements, workflow processes and infrastructure needs will take time and resources as states set up each exchange.    

To help the states, HHS acknowledges that cost could easily create a chilling effect in moving forward and therefore has offered to support state-sanctioned exchanges by providing grants to help pay for the start-up expenses. The federal funds will empower states to continue to scope out and implement the exchange operations.  Most states did agree to apply for and received the initial federal grants. 

However, it is not clear how long this financial pipeline will last. For example, no federal funds have been earmarked to subsidize the state-run exchanges down the road. In addition, Congress did not authorize funding for the federal government to create and operate a local exchange in those states that refuse to establish their own, like South Carolina. The immediate prospects of Congress amending PPACA to provide additional funding are unlikely.   

Another issue that will impact the success of exchanges is the unsettled definition of what constitutes an “Essential Health Benefit” (EHB) plan that state exchanges will offer. In October, the Institute of Medicine (IOM) released a report advising HHS on key processes and requirements to establish EHB coverage pursuant to PPACA. Most agree that a key policy goal is to ensure that the ESB standardized benefit levels are balanced both in terms of the cost and benefit design levels. If done correctly, exchanges will be in a better position to enroll and support individuals and small groups that need insurance.   

Certainly, the political whirlwinds both at the state and federal levels will impact how exchanges are finally operationalized. Interestingly, all of the states that have legislation on the books to create a state health insurance exchange have Democratic legislatures and governors who are ideologically in favor of PPACA. Every state that has not passed legislation to create a state health insurance exchange has at least one legislative house controlled by Republicans who are ideologically opposed – in whole or in part – to PPACA. 

The partisan lineup of the states will probably change after the 2012 elections – with some movement toward the Republican Party - unless the economy improves dramatically over the next 11 months. On a national level, all Republican presidential candidates have stated that seeking the repeal of PPACA will be among their first official acts as the newly-elected U.S. President. While there is still a lot of time between now and November 2012, the polls for many incumbents are not favorable.  If the Senate or the White House changes parties, the survivability of PPACA in its current form is not likely. This would include PPACA’s enabling legislation for exchanges that would likely be modified or repealed as well. If the Republicans do not make gains, much of the status quo will continue until a new political dynamic emerges in Washington. 

Another confounding variable that might impact how the exchange system is finalized is the judicial system through several ongoing legal challenges. For example, the exchange concept in many states would have to be revisited if the individual mandate to purchase health insurance is overturned. The U.S. Supreme Court has agreed to hear arguments on several issues related to PPACA’s constitutionality.  States are understandably hesitant to expend the resources to establish one or more local exchanges if the Supreme Court is going to declare the individual mandate unconstitutional or overturn other key elements of PPACA. Without minimum numbers of individuals or small employer groups participating in an exchange, the entire “pooling” process would be actuarially unsustainable in most jurisdictions.  

The future of state-based health insurance exchanges under PPACA will become clearer after the 2012 election, but in the meantime nobody has a crystal ball that can make an accurate prediction. PPACA may survive intact, or it may be declared all or in part unconstitutional.  If the individual mandate is declared unconstitutional in part, will the surviving parts be actuarially sustainable? Will the 2012 elections significantly change the players? Even if none of the above changes, will the states be able to pull together state health insurance exchanges in the limited time left? 

States will continue to take different directions in their respective approaches about how to set up and operate the exchanges. The state health insurance exchanges must be established and approved by HHS in time to receive the open enrollment activities of potential enrollees by October of 2013. 

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The views expressed in this Legislative Alert do not necessarily reflect the official policy, position, or opinions of BenefitMall. This update is provided for informational purposes.  Please consult with a licensed accountant or attorney regarding any legal and tax matters discussed herein.