What Are Health Insurance Exchanges?

Explaining Health Care Re form: What Are Health Insurance Exchanges?
A number of recent health care reform plans call for the creation of a health insurance “exchange,“ a new entity
intended to create a more organized and competitive market for health insurance by offering a choice of plans,
establishing common rules regarding the offering and pricing of insurance, and providing information to help
consumers better understand the options available to them.
An exchange is part of the plan aiming for universal coverage currently being implemented in Massachusetts
(where it is called the “Connector“). It was also featured in proposals from the major Democratic candidates for
President (including President Obama), in the Healthy Americans Act sponsored by Senators Ron Wyden and
Bob Bennett (where they are called Health Help Agencies), and in a white paper released by Senate Finance
Committee Chair Max Baucus. In all of these plans, the exchange is a key element in providing coverage to the
currently uninsured and in facilitating changes to the insurance market, particularly for those who buy insurance
on their own. Some proposals allow employers or employees to purchase coverage through the exchange as well.
This brief explains the purpose and function of exchanges, how they would relate to greater regulation of the
insurance market, and some of the key questions likely to be addressed by any health reform proposal that calls
for the creation of exchanges.
Purpose and Function of an Exchange
In the context of a health reform plan aiming for a substantial expansion in the number of people insured and
universal access to affordable coverage, there are a number of functions envisioned for exchanges, including:
1. O ffering consumers a choice of health plans and focusing competition on price. Exchanges offer enrollees
a choice of private health insurance plans, and some proposals also envision including a public, Medicarelike
plan. Covered services and cost sharing (i.e., deductibles, coinsurance or copayments, and out-ofpocket
limits) would be organized or standardized in ways that make comparisons across plans easier for
consumers. The aim is to focus competition among plans on the price of coverage and minimize the tendency
for plans to vary benefits in order to attract healthier than average enrollees.
2. P roviding information to consumers. In conjunction with offering a choice of health plans, an exchange is
intended to provide consumers with transparent information about plan provisions such as premium costs and
covered benefits, as well as a plan’s performance in encouraging wellness, managing chronic illnesses, and
improving consumer satisfaction. The exchange could also serve a customer assistance function—typical for
large employers—to assist consumers who encounter billing or access problems with their plans.
3. Creating an administrative mechanism for enrollment. For people who obtain private insurance coverage
through work, the employer typically facilitates enrollment in a plan and the payment of the premium. This
is especially true in larger businesses. An exchange could serve a similar function for people without access
to that kind of assistance, including people buying insurance on their own or who work for small businesses.
The exchange could also be used to determine eligibility for and administer income-related subsidies.
Alternatively, these functions could be handled by a government agency or through the tax system.
4. M oving towards portability of coverage. Coverage through an exchange can be de-linked from employment,
helping to make health insurance more portable for people moving from job to job. However, since
employment-based coverage would still exist under some proposals, insurance may not truly be fully
portable. Exchanges also could coordinate enrollment shifts between Medicaid and subsidized private
coverage for people with very low and potentially changing incomes.
MAY 2009
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5. R eforming the insurance market. Another function of an exchange is to facilitate changes in the rules
governing how insurers sell coverage. In most states today, people buying insurance in the non-group market
can be denied coverage or charged a higher premium based on a pre-existing health condition. Health
insurers are required by federal law to offer health insurance to any small business, but premiums in most
states can vary within prescribed limits based on the health status of workers. Many health reform proposals
would require insurers to accept all applicants without consideration of the applicant’s health, and would
further prohibit or significantly limit premium variation related to health status. Although these types of
changes can be implemented simply by changing insurance laws and do not necessarily require the creation
of exchanges, some argue that exchanges can make these insurance market reforms more effective by
monitoring marketing practices and administering a uniform system for enrolling in a health insurance plan.
Key Questions
1. Who has access to the exchange?
At a minimum, most would envision that people
without access to employer-sponsored insurance
or a public plan like Medicaid could obtain coverage
through an exchange. This would include people
now buying insurance on their own (like the selfemployed),
as well as people receiving incomerelated
subsidies. The exchange could be the
exclusive place where people buying insurance
themselves get coverage, or an outside non-group
market could continue to exist. Some proposals
would also permit workers with access to employer
coverage to join the exchange, or give employers the
choice of buying insurance through the exchange.
One issue raised by this idea of giving people or
employers a choice of whether to join an exchange
or not is the potential for “risk selection,“ meaning
that sicker-than-average people could end up in
the exchange. This could be mitigated by requiring
that any insurance sold outside the exchange would
have to comply with similar rules operating inside
the exchange, including the guaranteed availability
of coverage and limits on the extent to which
premiums can vary by health status.
2. How is an exchange structured?
The functions of an exchange could all be
accomplished by a single, national exchange, and
likely with the lowest administrative overhead.
However, individual purchasers— consumers
and employers— may feel a greater sense of
ownership with an exchange representing their
region. Negotiations with health plans might be
more effective at the local level, but some sort of
oversight body to ensure that the exchanges are
complying with national and potentially state rules
would likely be needed.
3. How should an exchange be governed?
The functions of an exchange could be handled
by a federal or state government agency. Some
advocates of exchanges, however, see the role
of a purchaser as better served by a private or
quasi-public entity that could operate in a more
nimble way than government regulatory bodies are
typically able to. There are number of important
design questions that have to be addressed in
structuring the governance of an exchange:
• Who oversees the exchange, ensuring that it’s
complying with federal requirements? If the
exchange is facilitating coverage for people
receiving federal subsidies, it has the potential to
affect federal spending in significant ways. This
oversight may be particularly important if there
are multiple state or regional exchanges.
• How is the exchange board structured? A key
issue is whether an exchange operates primarily
as a purchaser (e.g., with only employers and
consumers on its board) or as a broader market
facilitator, potentially with representation by
health plans and providers.
• What is the role of states? Federal law could
permit states to operate exchanges, or give
states authority over the creation and oversight
of exchanges within their borders. If the current
role of states in regulating insurance markets
continues in some form, there would at a
minimum need to be significant coordination
between exchanges and state insurance
departments.
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What Are Health Insurance Exchanges?
4. How much purchasing authority should an
exchange have?
An exchange could range from a relatively passive
market facilitator — accepting any plan that
meets specified requirements — to a more active
purchaser with the authority to limit the number
of plans participating to a handful based on a
negotiation or bidding process. The more active
purchasing role might have greater potential to
drive down cost growth and improve quality, and
could simplify decision-making for consumers.
But, it could also be quite controversial, and
create disruption for consumers if their plans
were dropped by the exchange. In addition, if
the exchange covers a substantial share of the
market, a decision by the exchange to no longer
contract with a plan could in effect make the
insurer commercially non-viable. The authority
to make such far-reaching decisions might
require procedural requirements similar to what
a government agency would face when issuing
regulations, such as a public comment period when
individuals can voice their concerns. Another issue
is whether the exchange offers a public plan in
addition to private plans.
5. What benefits should be offered in an exchange?
From the perspective of encouraging competition
over price, fully standardized benefits are
preferred, making comparisons across plans
as simple as possible for consumers. However,
a uniform benefits package could discourage
innovation by plans and limit choice for consumers
wanting to purchase less or more coverage.
Benefits and cost sharing could alternatively be
standardized in tiers (e.g. low, medium, and high
option plans). In addition, plans could be allowed
to vary benefits and cost sharing so long as the
actuarial value— that is, the average level of
coverage provided to enrollees—meets a defined
threshold and plan variation does not discriminate
against the very sick. This approach complicates
choices for consumers, however, and may require
greater oversight by the exchange or a regulatory
agency.
Key Questions (continued)
Conclusion
The idea of a health insurance exchange holds great appeal to a broad range of policymakers and interest groups,
in part because they have different notions in mind of what an exchange is and what it would do. To some, it
is a tool for organizing a private insurance marketplace for a relatively narrow group of individuals receiving
subsidized insurance. To others, it’s a mechanism for offering anyone a choice of a public or private insurance
plan, and providing oversight of insurers beyond current insurance regulations. In many respects, differing views
of how an exchange would function mirror alternative visions of how health coverage should be delivered in a
reformed system, not only for the currently uninsured but for many who already have insurance as well.