Health Insurance Exchanges: The Facts Behind the Debate

by Baker Donelson

Health insurance exchanges (commonly called the MarketPlace or the Exchanges) are a complex and highly debated part of the Affordable Care Act (ACA). With the looming January 1, 2014, deadline to open the marketplace for coverage, the exchanges can appear a moving target, with the political positioning made at both the state and federal levels. With all this movement and change coming faster and faster to keep up with market demands, many now wonder how the exchanges fit into this larger puzzle after the ACA.

Critical Dates

Under the ACA, Congress required that the exchanges meet several statutory deadlines, including election of the type of exchange. In the past, the Department of Health and Human Services (HHS) allowed states flexibility to elect models outside of the ACA deadlines. Other critical dates include:

Deadline Requirement
October 1, 2013 Open enrollment must start on the exchanges
January 1, 2014 The exchanges go live and coverage begins
March 31, 2014 Open enrollment for individual market exchanges ends
January 1, 2015 State exchanges must be self-sustainable

Who Runs the Exchange?

The purpose of the exchanges under the ACA is to offer affordable coverage to individuals and small employers. The exchanges will include a single risk pool for the individual market and another for the small group market. Many states elected to merge the two pools as permitted under the ACA. The ACA allows for the election of a state-run exchange or state-partnership, or to make no election and become a federal exchange run by the federal government rather than state government.

State Exchange

Under the state model, the states can elect to run their own exchanges that meet the requirements of the ACA. Different states may design and leverage existing resources, with the understanding that any flexibility must be balanced with financial stability. A state exchange needs to define its role and governance structure, along with adopting technology that would meet the enrollment, eligibility, compliance, and transparency requirements of the ACA.

State-Federal Partnership Exchange

The intent of the state-federal partnership exchange model is for the federal government to provide resources and knowledge to assist in becoming an independent state exchange. The role of HHS is to initially approve the election into the partnership, provide federal level support, and assist states with the transition to the state-based exchange model in future years. State-federal partnerships still are required to meet the required functions of a state exchange.

Federal-facilitated Exchange

States may elect or default into a federally run exchange if the state does not elect to become a state-run or state-federal partnership exchange. HHS expressed that the traditional state responsibilities for insurance will remain intact and it will harmonize state laws with federal exchange policies. For example, qualified health plans on federal exchanges still must meet state licensure and solvency requirements.

State Innovation Waiver

Under the ACA, starting January 1, 2017 states can apply for a state innovation waiver for an exchange alternative. Coverage provided under the proposed model must be at least as comprehensive as the coverage offered under the exchanges and the cost at least as affordable as through the health insurance exchanges. The waiver must show that coverage provided would include at least as many residents of that state as would otherwise be covered under the ACA.

Buying Coverage on the Exchange

Most Americans receive their insurance coverage through their employers and at this point will not be eligible to purchase on the exchanges, unless their employer qualifies under the Small Business Health Options Program (SHOPS).

The Individual Market

The exchange is intended to provide one-stop shopping for uninsured people who are eligible to purchase on the exchange. Eligibility for cost savings will be based on income. The purpose of the exchange is to cover uninsured Americans through a private health insurance marketplace without regard to the individual’s health status. In its proposed regulations, HHS points out that in 2007, prior to the passage of the ACA, 62 percent of personal bankruptcies were attributed to medical expenses, either from a lack of medical expense coverage under their health insurance or loss of medical coverage due to illness. To be eligible for health coverage through the exchanges, a person must:

  • live in the United States,
  • be a U.S. citizen or national (or be lawfully present), and
  • not be currently incarcerated.
  • U.S. citizens living abroad will not have to pay the fine for failure to secure insurance.


SHOPS was established to provide options to eligible small businesses. Small businesses may elect to purchase coverage if they have no more than 50 employees and provide health insurance coverage to full-time employees. Tax credits will be offered to small businesses that provide coverage through the exchange. On January 1, 2016, states can elect to increase the maximum number of employees to 100. Ultimately, the exchange may expand to larger employers in 2017.


Under the ACA, members of Congress and their staff must buy their insurance on an exchange. In contrast, other federal workers will continue to purchase their health insurance through the Federal Employees Health Benefits Plan (FEHBP). On August 7, 2013, the Office of Personnel Management (OPM) issued a proposed rule to amend the FEHBP regulations regarding coverage for members of Congress and congressional staff. The ACA defines member of Congress as any member of the House of Representatives or the Senate and congressional staff and all full-time and part-time employees of the official office of a member of Congress, whether in or outside of Washington DC. Many believe that the Washington DC health exchange will likely benefit from the addition of members of Congress and their staff.


The ACA created the ability for states to expand Medicaid eligibility to members of its states. The state election of Medicaid expansion was at the heart of the Supreme Court case, National Federation of Independent Business v. Sebelius, which upheld the ACA in all other accounts. The ACA increases the number of newly insured individuals in states that elect expansion. Regardless of a state’s position on Medicaid expansion, states are required to ensure eligibility for Medicaid, regardless of how individuals access their benefits. Some commenters find that the potential exists for individuals to jump between Medicaid benefits and the exchanges, making it difficult to track eligibility. For this reason, in the future Medicaid beneficiaries may be required to select their benefits through the exchange as a method to track their eligibility.

Exchange Functions and Requirements

The exchanges are meant as a marketplace where individuals and small employers can purchase health insurance. The intent of the exchange is to promote competition among insurance providers and transparency to give an apples-to-apples comparison of insurance products. Exchange functions are set by the ACA and include:

• Certification of plans
• Toll-free hotlines
• Website
• Assignment of price and quality rating
• Standardized format within the exchange
• Electronic calculator for premiums/fees
• Certification of exempt individuals
• Enrollee satisfaction scores
• Open enrollment
• Consultation with stakeholders
• Publication of data

On the exchange, consumers will be able to compare price and quality, including premiums, copays, coinsurance, deductibles, and coverage. Individuals may submit an application electronically to determine eligibility. The exchange will be responsible for ensuring transparency, network adequacy, quality improvement activities, a uniform enrollment process, and plan compliance. The exchanges will include in-network and out-of-network information, such as provider directories. Exchanges must provide for “aggressive” public outreach and stakeholder involvement.

Qualified Health Plans and Essential Health Benefits

Only qualified health plans can sell their products on the exchanges. A qualified health plan must certify that its products meet the criteria for each exchange and provide essential health benefits (EHBs). EHBs are a comprehensive package of benefits considered a baseline of benefits required by the ACA in order to be certified and offered in the exchange. EHBs fall into 10 categories:

  • Ambulatory patient services
  • Emergency services
  • Hospitalizations
  • Maternity and newborn coverage
  • Mental health and substance use disorder services (including behavioral health treatment)
  • Prescription drugs
  • Rehabilitative and habilitative services and devices
  • Laboratory services
  • Preventive care/wellness services
  • Chronic disease management
  • Pediatric services (including oral and vision care)

In addition, all Medicaid state plans must cover these services by 2014.

A qualified health plan must be licensed and in good standing with each state in which it offers an exchange product. Levels of plans are required and are categorized based on bronze, silver, gold, and platinum levels. A qualified health plan must offer at least one plan in the silver and gold levels for each exchange in which it participates. The plans will be rated on the cost, including total cost sharing, to avoid the chilling effect of individuals who may be discouraged from enrolling in the exchange. The plans must also be rated on quality, including clinical quality and the experience of care of its enrollees.

Potential Impact on Key Stakeholders


The Consumer

From the consumer’s perspective, the exchanges may offer a transparent comparison of insurance products on the individual market and small business market, in a web-based interactive format. Many Americans purchase insurance through their employers with more than 50 to 100 full-time employees and may not be impacted by the exchanges. The ACA contemplates the potential expansion of SHOPS and inclusion of Medicaid enrollment in future years.

The ACA requires exchanges to offer levels of products (e.g., gold, silver, bronze), which may bring increased cost but ensure a standard set of benefits. Once insured, individuals who may not normally access the health care system will have a wide range of benefits. On the other hand, individuals need to balance the penalty for being uninsured and the cost of the individual market coverage. Certain individuals who are required to purchase insurance may be required to pay a fee, which in 2014 is 1 percent of yearly income or $95 per person for the year, whichever is higher. The fee increases each year and by 2016 the fee is 2.5 percent of income or $695 per person, whichever is higher.

The ACA requires education, training and application and enrollment assistance. The campaign includes bringing awareness of the exchanges through Navigators and other application counsels. Concerns have been raised about fraud and privacy and security. The concern over fraud is highlighted, given the vulnerability, language, and educational barriers of some of the uninsured population.

The Employer and the Employee

Depending on the number of full-time employees, employers may not see an impact of the exchanges. Instead, many employers are focused on the one-year delay in the employer mandates that require companies to offer their employees health insurance. In the future, SHOPS may include larger employers, which may balance risk pools on the exchange. The exchanges are meant to provide additional transparency to the small group market. Certain companies have decided to drop coverage for their employees, especially small business or part-time employees because of increased costs.

The Health Plan

Each state may have a different ability to attract commercial payers in the market. Health plans are not required to sell a product on the exchange. Many health plans have already started to build their network and contract with health care providers for exchange products. Critics express concerns about the cost of high-level benefits at the silver and gold levels and potentially skewed risk pools for the exchanges that could have more ill enrollees than healthy. While some health plans that previously decided to provide products on the exchanges pulled their proposed products, declaring that regulator’s rates would not allow enough premiums to be collected to cover the cost of the benefits required for exchange plans, other health plans are moving full-speed ahead into the MarketPlace.

The Health Care Provider

Certain health care providers see the exchanges as an expansion of coverage for individuals who seek their services. For example, many uninsured seek care through hospital emergency rooms, which is a high-cost care setting, rather than seeking care at more appropriate care settings, under EMTALA requirements that hospitals screen and stabilize all individuals who come to their campus. Health care providers leverage negotiation power with certain health plans for exchange products with health plans because of the health plans’ network adequacy requirements. These arrangements span from typical fee-for-service arrangements to quality incentives and now even capitated models. Many hospitals and health systems are considering the newly insured as part of their analysis as Medicare and Medicaid reimbursement is being reduced and the shift in care settings moves away from hospitals and acute care settings.

Will the Exchanges Work?

It is unclear that individuals will want to buy their insurance online, yet purchasing products and insurance on the Internet is commonplace these days and may take the mystery out of the individual health insurance market. Since the risk pools are separate from the rest of the individual and small business marketing some critics are worried that only the sick will seek coverage, yet in DC we know Congress and their staff will likely even out concerns in that exchange. Some wonder if the extensiveness of the benefits required for exchange products will inhibit health plans from creating exchange products.

Many states have focused resources to ensure that the exchanges will be sustainable, while others have defaulted into the federal exchanges taking a wait-and-see approach as to whether the federal government can provide a successful exchange in their state. The pushes and pulls of the political debate may end up dictating the success of the exchanges. We can read daily about ACA funding debates, repel attempts and fraud concerns. Beyond the political questions related to funding of the ACA and the exchanges, the question remains: Will the exchanges work?

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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