A year from now, in January 2014, new health insurance exchanges (HIX) will offer coverage to individuals and small-business employees. Part of the Affordable Care Act (ACA), the exchanges present vast and complex challenges for states, the federal government, and health insurers weighing whether to participate by becoming qualified health plan (QHP).

The Center for Consumer Information and Insurance Oversight (CCIIO) at the Centers for Medicare and Medicaid Services (CMS) has the bulk of responsibility for turning the health reform law’s provisions into specific policies for health insurance exchanges. CCIIO has been busy lately, churning out draft rules and guidance on topics ranging from federal-state partnership exchanges, to qualified health plans, to actuarial value and accreditation. CCIIO and CMS are likely to issue final rules this spring.  Since most states have decided against running their own state-based exchanges, CMS/CCIIO is responsible for setting up and running exchanges in about 25 states and handling major aspects of exchanges in a half dozen other states.

10 Issues Health Plans Should Consider Before Entering HIX

Health plans trying to navigate the dizzying landscape of health insurance exchanges can turn to a brief from Milliman, which distills federal rules and guidance into 10 considerations.

Milliman’s excellent briefing paper – Ten Critical Considerations for Health Insurance Plans Evaluating Participation in Public Exchange Markets – was written by Catherine M. Murphy-Barron, Craig B. Keizur, Jill Van Den Bos, Margaret A. Chance, and Paul R. Houchens.

Here is an overview:

1. Market Opportunities
The market for health insurance will change dramatically after 2014 for a variety of reasons: the individual mandate requirement for nearly all Americans to purchase insurance, the option for states to expand Medicaid to 138 percent of the federal poverty level (FPL), and federal insurance subsidies for plans purchased through HIX for people earning up to 400 percent of FPL.

Those factors present a number of opportunities for health plans. For example, some employers will drop health benefits for employees, leaving them to buy insurance through the exchanges, an effect known as crowd-out. Health plans – particularly Medicaid health plans – also might be able to target low-income people who year to year change from being Medicaid-eligible to HIX subsidy-eligible, a process called churning. The Urban Institute estimates that nearly 30 million people will change from Medicaid eligibility to HIX subsidy eligibility (or the reverse) from one year to the next.

2. Qualified Health Plans
Any health insurance sold through HIX must come from a qualified health plan. States will determine the parameters for QHPs on state-based exchanges, so the parameters could vary by state. CCIIO, however, has proposed rules for federally run exchanges that include requirements for insurance markets, accreditation, and which essential health benefits (EHB) the plans must cover. Click here to read the proposed QHP rules.

3. Essential Health Benefits
EHB requirements apply not only to exchange-based plans but to all new health plans outside the exchanges, though not to existing plans that are considered to be “grandfathered.” CMS asked each state to propose options for benchmark plans to serve as a reference for the EHB package. The U.S. Office of Personnel Management (OPM) published draft rules for benchmark standards in Multi-State Plan Program (MSPP).

Health plans have a few things to contemplate when it comes to EHB, primarily how well their current offerings compare to the EHB package.

4. Actuarial Value and Benefit Tiers
The ACA requires health plans both inside and outside the exchanges to offer insurance products broken down by levels of actuarial value, the proportional value of essential health benefit claims that a consumer’s premiums cover. There are four actuarial value levels: Bronze (60 percent actuarial value), Silver (70 percent), Gold (80 percent), and Platinum (90 percent). The levels are intended to help consumers compare plans.

Health insurers in the exchanges must offer at least one silver-level plan and one gold-level plan. Insurers outside the exchanges need only offer bronze-level plans. There is some flexibility. Plans’ actuarial value can vary plus or minus 2 percent from the requirements, and insurers can offer catastrophic plans that do not meet the level requirements for people ages 21 to 30.

5. Subsidies
People with incomes from 100 percent of FPL to 400 percent of FPL will be eligible for federal subsidies to purchase insurance through the exchanges. The Milliman brief gives a good description of how the subsidies will work, and has a helpful chart showing the different subsidy amounts for each income level.

6. Premium Pricing and Rate Filings
The health reform law and subsequent rules are strict about how insurers can price their plans both inside and outside the exchanges, starting January 1, 2014. One of the most significant restrictions is that health insurance premiums for older people cannot exceed three times the premiums for younger people. Individual states can choose to have an even closer age-based premium ratio than 3:1. The requirement means that premiums for young people will increase, since current premiums for older people are typically far more than three times as expensive as premiums for young people. The typical ratio today is about 6:1.

7. Risk-Adjustment, Reinsurance, and Risk Corridors
Risk-adjustment, reinsurance, and risk corridors are three ways the ACA allows health plans to offset the cost of insuring risky beneficiaries, given the limits on how much insurers can charge in premiums.

Risk adjustment programs in each state – run by the state itself or by CCIIO – will transfer premium payments from plans with less risky enrollees to those with more risky enrollees. But the programs could run into problems because of provider upcoding – which makes beneficiaries seem sicker than they are – and because plans will find it difficult to predict how much the newly insured population will cost to cover. Medicare Advantage health plans have received risk adjustment payments for more than 10 years, but newly insured people after 2014 will be younger and will have more pent-up demand for care than do Medicare Advantage beneficiaries.

The ACA’s reinsurance and risk corridor programs are temporary federal measures, lasting from 2014 to 2016, intended to bolster the insurance market as it absorbs an influx of enrollees. In the reinsurance program, commercial and group health plans will pay for the program with a fee estimated at $5.25 per member per month. The pot of money will reimburse plans with beneficiaries whose claims exceed a coverage threshold, which in 2014 is 80 percent coverage for expenses between $60,000 and $250,000. In the risk corridor program, insurers whose costs are at least 3 percent below projections would pay CMS a percentage of their savings. The money would compensate plans whose costs are more than 3 percent higher than projections.

8. Minimum Medical Loss Ratio
The health reform law requires large group health plans to spend at least 85 percent of premiums on claims and other qualified expenses – the minimum medical loss ratio. Plans in the small group insurance and individual markets must spend 80 percent. If they do not meet the requirement, plans must send rebates to their beneficiaries, the first of which plans sent in 2012.

9. Infrastructure Gaps
Health reform presents a variety of operational challenges for health plans. Companies contemplating whether to enter the health insurance exchanges, and even those that are not, should take a look at their information technology systems, marketing operations, and other important administrative functions.

10. Do Nothing?
Given the uncertainty and complexity shrouding health insurance exchanges, some insurers might consider staying away. However, a number of ACA provisions apply to all health plans regardless of whether they participate in the exchanges, such as the minimum medical loss ratio (MLR) and the limits on premium costs.

Getting to Know the Newly Insured

Knowing the demographics and health status of potential HIX-plan enrollees is as important to health plans as knowing HIX rules and regulations. A number of studies to date have estimated how many and what kinds of people will enroll in subsidized exchange plans.

One of the more recent analyses comes from the PWC Health Research Institute, which deals not only with the exchange population but with those who become newly eligible for Medicaid. Newly insured people will be more racially diverse, less healthy, less educated, and less likely to be married than people who already have health insurance coverage.

Targeting those enrollees could mean a lot of business for health plans. The Congressional Budget Office (CBO) estimates that by 2022, 11 million more people will enroll in Medicaid and 25 million individuals will enroll in the exchanges.