Health Insurance Exchanges 3-Point Bulletin

by Cozen O'Connor

1) What are they?

Health insurance exchanges under the Affordable Care Act are government-run, online marketplaces for private insurance, which will allow individuals and small businesses to compare health insurance options and enroll in a plan easily. They are slated to be up and running by January 1, 2014. A primary goal of the Affordable Care Act is making health insurance available to everyone. The insurance exchange is one of the ways the law plans to achieve this goal.

2) How do health insurance exchanges help ensure that health insurance is available to everyone?

The reason an insurance system works at all is because it attracts, at least in theory,  a mix of all different risk levels into one pool. To an insurer, it’s okay if one beneficiary ends up being extremely unhealthy and expensive to treat so long as someone else ends up being equally healthy and inexpensive to treat on the other end of the spectrum. Achieving this balance requires the group to be random with respect to health. Because a group is likely to be more random and less sensitive to outliers as it gets larger, it is easier for a large company to get access to affordable insurance coverage than it is for a small company or an individual. The large number of individuals in the group suggests to an insurance company that it can bank on the average being the reality. This predictability gives the insurance company more flexibility in determining rates, and in turn, enables big companies to provide their employees with better and/or lower-cost health insurance.

For individuals outside of the large-employer-sponsored health insurance pools and for small businesses, which have smaller risk pools, it is more difficult to negotiate good rates. It is these individuals and small businesses that the health insurance exchanges seek to benefit. The exchange is intended to join these individuals, and separately (in most cases) the small businesses, into risk pools like the risk pools large organizations have, and to provide security against individual risk by increasing the size of the pools.

Together with the Affordable Care Act’s individual mandate, which requires all individuals to have health insurance, the random risk pools these large insurance exchanges create theoretically help relieve adverse selection problems.

3) Where are the states in the implementation process?

Under the Affordable Care Act, states need health insurance exchanges by 2014. A state can set up its health insurance exchange itself, work with the federal government to jointly establish an exchange, or defer to the federal government to establish it. States must decide which of these options to pursue (or let the federal government pursue) by this November 16th.

For states that want to create a state-based exchange, there is also a January 1, 2013 deadline. On this date, HHS must approve the state-based exchange as on its way to being fully or conditionally operational by January 1, 2014. Most states are well behind schedule to meet these deadlines. Some states that are still studying options might have already chosen to operate a state-run exchange were it not for the tight deadlines. Other states have hired consultants to give them insight as to the time and monetary cost of establishing an exchange and some have then decided to let the federal government take on the responsibility. Some states believe the federal government would have difficulty establishing exchanges for as many states as are opting for federal exchanges, and, standing in opposition to the Affordable Care Act, would like to contribute to making the job too big for the federal government to accomplish. Still others realize that if Governor Romney becomes president and has sufficient congressional support, the exchanges might be repealed or might look different than they look under the Affordable Care Act, and as a result, these states may wait until after the election to make significant time or monetary investments in making a decision. In addition to these complexities, given budget realities in Washington, there are concerns about the availability of funding for exchange implementation whatever states decide.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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