Multi-State Health Insurance Plan Regulations Further Boost Federal Role in Individual and Small Group Insurance Exchanges

Since the passage of the Affordable Care Act (ACA or the "Act"), public attention has principally focused on the constitutionality of the Act and the broad parameters of how the U.S. Secretary of Health and Human Services (HHS) intends to implement the Act's provisions. During the pendency of the litigation challenging the constitutionality of the Act, HHS issued informal pronouncements, guidelines and some proposed rules and regulations, but it generally remained silent on many of the Act's core provisions. The slow pace of HHS regulations has hindered the states' decision-making process on the creation of state exchanges, which has resulted in 19 states to date opting not to create state exchanges. The federal government will set up federal exchanges in these states. Sixteen states are setting up state exchanges, and eight will have state-federal partnership exchanges. The slow pace of HHS's release of regulations has also fed public uncertainty over how ACA will change the health insurance system in 2014 when many of its measures become effective.

HHS has issued a welter of proposed regulations since the November U.S. presidential election on a variety of subjects, including the definition of essential health benefits (EHBs) to be offered under qualified health plans (QHPs) on all exchanges and the operation of exchanges. Many of these regulations are inter-dependent and complex. In addition, on December 5, 2012, another federal agency weighed in on an important component of ACA when the U.S. Office of Personnel Management (OPM) issued its proposed regulations under Section 1334 of the Act dealing with multi-state plans.

Section 1334 of the Act has not received widespread public attention to date, but may become one of the Act's most influential provisions in shaping the availability and cost of individual and small group health coverage on the exchanges and the competitive landscape in these two markets. This section dramatically expands the federal government's role in the nation's health insurance system by creating the Multi-State Plan Program (MSSP) to offer federally negotiated and selected private health insurance plans on exchanges that will compete with the private insurance plans that heretofore have been offered to consumers on a state-by-state basis.

OPM presently contracts with private health insurers to provide large group coverage to eight million federal employees, retirees and their dependents under the Federal Employees Health Benefits Act (FEHBA). One of ACA's goals is to allow individuals and small employers a similar form of access to the types of plans available to federal employees under FEHBA. The Act therefore directs OPM to negotiate and contract with private insurers to offer at least two individual and small group multi-state plans (MSPs) on each of the exchanges. Although the MSPs will be separate from the FEHBA large group plans offered to federal employees, in the words of the proposed regulation: ". . . consumers will benefit from OPM oversight and contract negotiation experience to ensure consumers get the greatest value for their premium dollars." OPM will act directly as the bargaining agent for the consumers in setting the premium charges, standards and other contract terms of MSPs.

Like the HHS proposed regulations, the OPM Section 1334 regulations are dense and require careful and repeated study. The principal features of the proposed Section 1334 regulation are as follows:

  • MSP issuers selected by OPM must be a group of issuers affiliated either by common ownership and control or by the use of a nationally licensed service mark (e.g., a Blue mark), or an affiliation of health insurers and an entity that is not an issuer but that owns a nationally licensed service mark.
  • OPM must select at least two MSP issuers in each state, and at least one issuer in each state must be a nonprofit entity. Competitive bidding is not required, and OPM will negotiate the rates and terms of each plan directly with the issuers.
  • MSP issuers must offer at least one silver and gold plan on the individual exchanges and the Small Business Health Options Program (SHOP) exchanges, and must offer child-only coverage for each level of coverage it offers on each exchange. OPM may also permit MSP issuers to offer bronze or platinum MSP plans.
  • The MSSP will have a four-year phase-in period. Starting in 2014, an MSP issuer must offer its MSPs in 31 states, which will increase to 36 states in the second year of the program, 44 in the third and to all 50 states and the District of Columbia by 2017.
  • During the phase-in period, an issuer may choose not to offer plans on a SHOP exchange, but must offer plans on both the individual and SHOP exchange after the phase-in period terminates.
  • The proposed regulation details the general principle that MSPs and qualified health plans (QHPs) will offer the same EHBs and be subject to the same overall state and federal statutory requirements. However, the proposed regulations also state that there may be circumstances in which OPM may adopt standards or requirements for MSSP plans that differ from standards and requirements applicable to QHPs. The potential differences in requirements for MSSP plans and QHPs introduce substantial ambiguity that require clarification in the regulation.

    The regulation addresses the overlapping and potentially conflicting regulatory roles of OPM and state insurance departments over MSPs. Each MSP must set premium levels on a state-by-state basis. There will be no MSP uniform national premium. OPM will conduct its own rate-review process of MSPs, and OPM-approved MSP rates will be deemed certified to be offered on all exchanges. OPM "intends to follow State rating laws as much as practicable so as not to distort local markets procedures." However, since OPM will be negotiating with the MSP issuers the premiums, the medical loss ratio, profit margin and other MSP terms as OPM deems in the best interests of enrollees, disagreement could arise between OPM and state insurance regulators over the propriety of MSP rates. OPM will allow each state the opportunity to review MSP rates under state law. However, if there is a disagreement over MSP rates between OPM and a state regulator that cannot be amicably resolved, OPM retains the power to make the final decisions.

  • An MSP issuer must offer a uniform benefit package for each MSP within a state, but not necessarily uniform among all states. MSPs must comply with all HHS requirements, but OPM may issue additional guidelines regarding any unique MSP issues. MSP issuers may offer a benefits package that is substantially equal either to each state's EHB-benchmark plan or any EHB-benchmark plan selected by OPM. In general, an MSP issuer must either base its benefits package in all states on the individual state's benchmark plan or the OPM-chosen benchmark plan.

The Section 1334 regulations contain many specific provisions that are beyond the scope of this Alert, and the OPM regulations should be read in conjunction with earlier released HHS regulations on QHPs and EHBs. Section 1334 and the OPM regulations represent a broad new initiative by the federal government in the private individual and small group health insurance markets that may have profound consequences for consumers, state regulators and the overall success or failure of the Act. The regulations warrant prudent study. The comment period on the Section 1334 regulations ends on January 4, 2013.

For Further Information

If you would like more information about the topics discussed in this Alert, please contact Robert L. Pratter, Alice T. Kane, Carla C. Small, any of the members of our Corporate Practice Group, any of the members in our Insurance and Reinsurance Practice Group or the attorney in the firm with whom you are regularly in contact.