Explaining health reform: new insurance exchange will play major role

April 28, 2010

By Daniel Weintraub

It will be years before the new health insurance exchange at the heart of the federal health reform passed in March rolls out in California. But decisions being made now could shape how that exchange looks and works, the health benefits it makes available to consumers, how much Californians pay for their coverage and the roles played by the government and the private insurance industry.

Democrats in the California Legislature have signaled with their early proposals that will try to create an exchange with a large dose of government intervention, with a board appointed by the governor and state lawmakers that would have the power to set benefits, rates, and cost-sharing and regulate the administrative costs of insurance companies that want to sell their policies through the exchange.

The idea behind the exchange is to provide a place for individuals and small businesses to pool their risk and gain the kind of market power now available only to large groups like government and big private employers.

The exchange could simply be a bare-bones online marketplace where insurers list their products and buyers come to make purchases. Or it could be something that begins to resemble the “public option” that Democrats were pushing during the debate over federal reform but eventually dropped before their bill gained final passage.

Assembly Bill 1602 by Assembly Speaker John Perez will be the vehicle for the Assembly’s version of the exchange, at least for now. In the Senate, SB 900, by Health Committee chairwoman Elaine Alquist, is the bill to watch.

AB 1602 is the more ambitious of the measures at the moment.

The exchange in AB 1602 would, at a minimum:

–Certify health insurance companies to participate in the exchange, and decertify those that were no longer allowed to sell their products through this pool;

–Operate a toll-free telephone hotline for consumers who need assistance;

–Maintain an Internet web site where consumers could get standardized information to compare the plans;

–Create an electronic calculator consumers can use to determine the full cost of their coverage, including premiums, deductibles and co-payments;

–Rate the available plans;

–Inform consumers about eligibility requirements for public programs such as Medi-Cal or Healthy Families and enroll them in those programs if they qualify.

But those are only the basic duties the bill envisions for the exchange. The exchange could also do much more, if the state determines that federal law allows it. The expanded duties include:

–Determine who is eligible to buy insurance through the exchange;

–Set standards and selection criteria for health plans that want to sell through the exchange, including setting “reasonable limits” on their administrative expenses;

–Determine the scope of coverage for consumers who buy insurance through the exchange;

–Set premium schedules, process applications, collect premiums, and administer subsidies to low-income consumers and rates paid to the insurance companies;

–Determine the rates paid to the health plans and approve cost-sharing provisions for consumers;

The potential scope of the proposed exchange — setting benefit levels and regulating rates, cost-sharing and administrative costs — has raised eyebrows within the insurance industry. In a letter to the Assembly Health Committee, the California Association of Health Plans raised questions about the bill, suggesting that it might go beyond what is allowed under federal law.

“All of these details point towards an Exchange that is intended to be at its core a purchaser of services,” wrote Charles Bacchi, the association’s executive vice president.

In an interview, Bacchi said the group had not yet taken a position on AB 1602 but views that bill and its Senate counterpart as crucial to shaping the future of health insurance in California.

“These are very important decisions,” he said. “It is really about much, much more than just complying with federal law. It a fundamental decision about what the market looks like in the future in California. The federal subsidies come through in 2015, but the decisions we make today and next year and the year after will build up how this exchanges handles people purchasing insurance, how it handles the subsidies, the basic nature of the exchange and how it’s governed.”

Peter Harbage, a health policy consultant who has closely followed the health reform debate and legislation, said he thinks the federal law is broad enough to allow California to create an exchange with vast powers over the insurance industry.

“My sense is that the federal language in a lot of these cases is really just a floor,” Harbage said. “It is very broad. It talks about a limited role for the exchanges but there is nothing by design to preclude the staes from being more aggressive with their oversight, their contracting, what they want insurance companies to provide in order to be a part of the exchange. Insurers don’t have to participate if they don’t want to, if they think the requirements are too strong.”

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