Building a Health Insurance Marketplace One Step at a Time

 
Dr. Joshua M. Sharfstein
Maryland Department of Health and Mental Hygiene
"The first challenge for the exchange is to develop some momentum," says Maryland Health Secretary Joshua Sharfstein. "Once it grows, we should have more leverage to push for cost containment."

Less than a year from now, states will have to prove to Washington that they are capable of running a health insurance exchange on their own, or the federal government will create one for them. The way it looks now, only a handful of states are likely to make that deadline.

Considered the engines of the national health law, state exchanges are online marketplaces designed to make it easier for individuals and small businesses to shop for insurance policies. They will also be one-stop enrollment centers for low-income people who qualify for Medicaid and moderate income individuals who qualify for federal tax credits.

Most state officials are in favor of running their own exchanges. So far, however, only 12 have enacted statutes or executive orders establishing their intent to undertake the project, according to the National Conference of State Legislatures , and some of those are scrambling to make progress.  Most states have been stymied by political opposition.

One small group of states — led by Maryland, Washington, Oregon, Rhode Island and California — is running significantly ahead of the rest. Statutes have been enacted to create the exchanges and the basic decisions about how to run them have already been made.

But even in Maryland, one of the pace-setters, the executive director for the exchange, Rebecca Pearce, says the work left to do is formidable. She wants to create an exchange that not only fulfills the basic requirements of the Affordable Care Act but also sets an example in health cost containment. But instead of trying to make all of the decisions at once, she says Maryland first has to be sure the exchange will thrive.

In 2014, when the national health law calls on nearly every American to have insurance, the health care industry will be facing a whole new set of rules, and some 50 million uninsured Americans are expected to start shopping for health plans. "It will be a very unstable time. So what we put up in the beginning may have to change," Pearce says.

Adverse selection

Like officials in other states, Pearce worries that not enough people will use the online marketplace initially and insurance companies could have trouble paying claims if they are stuck with too many people who face big medical bills — a phenomenon known as "adverse selection." Something called a "death spiral" can even occur when a pool is so small that it cannot support the claims costs of a few sick people and everyone's rates become unaffordable.

It has happened before. California, Florida, Texas and a few other states created separate insurance marketplaces prior to enactment of the national health law. Called "health insurance purchasing cooperatives," they offered an alternative for people who could not find suitable insurance elsewhere. But those early experiments ended up looking more like high-risk pools and ultimately failed.

The national health law foresaw this potential problem and provided a remedy. All insurance carriers must hold back a portion of their premiums to create a pot of money to help carriers with higher than average claims. The idea is that insurance companies should compete on efficiency and quality without being penalized for attracting more people with health problems.

The process is called risk adjustment. But it's not a perfect tool. That's why Maryland and other states are trying to create a market structure that makes adverse selection less likely in the first place.

Maryland's strategy

States that have established legal authority for exchanges

Starting in 2014, all insurance carriers in Maryland will be required to offer all of their plans both inside and outside the exchange for the same price. Otherwise, there would be nothing stopping an insurance company from opting out of the exchange and charging lower rates in the outside market to entice healthy young people away from the exchange. That could undermine the entire program.

Under the national health law, carriers inside and outside the exchange are required to include a set of so-called "minimum benefits" in all of their policies. As a result, the biggest differences in policies will be in the level of premiums, deductibles and co-pays. In addition, insurance companies will no longer be able to vary rates based on health status.  But they can still offer cut-rate deals, which could attract young healthy people who aren't worried about big medical bills. In Maryland, they won't be able to do that.

"The incentive for insurance companies to risk-select is powerful," says expert Karen Pollitz of the Kaiser Family Foundation. She says what Maryland is doing makes sense. By telling insurance companies to keep it simple and offer the same policies inside and outside the exchange, "you're giving them less room to monkey around."

In Maryland, an estimated 170,000 uninsured people and 64 percent of the state's small businesses are expected to show up at the exchange in 2014. In addition, 900,000 Medicaid recipients will be logging on, plus thousands more newly eligible beneficiaries.  "The onus is on the exchange to make buying insurance easy and transparent," Pearce says.

To avoid disrupting what is already working well in the insurance market, Maryland has decided to create two separate exchanges, one for individuals and one for small businesses. The state's 20,000 licensed private insurance brokers will continue to serve the small business and individual markets. Already, half of all individuals and all small businesses in Maryland use brokers to purchase insurance.

A bill outlining the final details of Maryland's plan will be announced next week. "The first challenge for the exchange is to develop some momentum," says state health secretary Joshua Sharfstein. "Once it grows, we should have more leverage to push for cost containment."

Catching up

Most states are not nearly as far along as Maryland. Short on revenue and, in some cases, short on staff, some states that want to create an exchange are struggling with a raft of technical and logistical challenges. As a result, they are expected to let the federal government get the process started for them. 

Others will opt out for political reasons. Republican lawmakers and governors who oppose creation of an exchange — even if they agree on its merits — say they don't want to contribute to the national health law's implementation.  Florida and Louisiana already have taken that position. Instead, they are waiting to see whether the U.S.Supreme Court upholds the law in a case to be decided this summer.

But health care policy analyst Linda Blumberg of The Urban Institute says states will have another chance to develop exchanges. "It's not a static process," she says. Many states may start out with a federally run exchange, but there will be opportunities for them either to partner with Washington or take over in the future. Some states may form regional exchanges.

It's hard to find a state official, Democrat or Republican, who is opposed to the concept of an insurance exchange. Individuals and small groups are expected to get a better array of insurance choices; more people are likely to buy coverage; and the resulting boost to competition is expected to drive down premium costs. The federal government sweetened the deal by promising to foot the bill for setting up the exchanges, and gave states wide latitude to tailor their exchanges to meet their own needs. 

Maryland, like all other states, received a $1 million initial planning grant, and has since received $34 million to execute its plan and $6 million to act as an early innovator and assist other states. Another check will come this year to fund further development of the exchange through 2014.  The District of Columbia and 27 other states have also received a first installment of federal money for their exchanges. Rhode Island already has received its second payment.

As for how tightly other states can be expected to regulate the insurance industry, Blumberg says it's likely to vary. "The art of the exchange is striking a balance between getting carriers to participate and providing consumers with the best competitive choices."

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