How Effective Will A Federal Health Exchange Be?

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New state health insurance marketplaces are supposed to be set up in every state  by 2014.

By J. LESTER FEDER | 7/18/11 10:31 PM EDT

Will there really be a strong federal health insurance exchange to take over for states that don’t build their own? Or is it a paper tiger?

That question is nagging at some policy experts following last week’s release of the proposed federal rules on the new state health insurance marketplaces, which are supposed to be set up in every state by 2014 under President Barack Obama’s health reform law.

If states do not meet the requirements in time to launch their own exchanges in January 2014, the law gives the Department of Health and Human Services the power to set up a federally run version for those states.

But the law does not give HHS the power to regulate insurance sold outside the exchanges — which would basically require it to take over the job of the state insurance commissioners. And it doesn’t give HHS the power to take over a state’s Medicaid program, even though the exchanges are supposed to handle enrollment when Medicaid is expanded to new populations in 2014.

“It could be a real problem to set up an exchange that’s even viable,” mused Norm Thurston, health reform implementation coordinator for Utah, who has said his state will not cooperate with important requirements of the health care law.

“It’s a question that’s come up with a lot of state people,” Thurston said. The reality, he said, is that “nobody knows” if a federal exchange can work.

Whether it can work depends heavily on how it’s structured, and the health world was disappointed that HHS opted not to include details in last week’s proposed rule on how federally run exchanges would operate.

But Jon Kingsdale — the founding director of the Massachusetts health exchange, who is now advising HHS on the design of a federal exchange — isn’t worried about whether a federal version could work.

Federally run exchanges are “absolutely viable,” Kingsdale said. And ironically, he added, the Republican backlash against the health care law means “we may wind up with more of a federal exchange run out of Washington” — just as many House Democrats wanted in the first place. They had proposed a national exchange during the health reform debate, rather than the state-by-state exchanges that won out in the more conservative Senate.

But Sara Rosenbaum, chairwoman of George Washington University’s health policy department, is less confident. One of her top concerns is that discrepancies between state insurance regulation and the rules of a federal exchange could mean sicker, more costly patients get dumped into federally run exchanges.

The health reform law does impose several requirements on nonexchange plans to prevent “risk selection” — in which health insurance companies profit by avoiding costlier beneficiaries. But without a unified regulator overseeing the whole market, experts doubt that risk selection could be stamped out altogether.

The law also has a backstop of “risk adjustment,” in which health plans get extra payments if they attract an unusually high number of people with costly health conditions. But the accounting is imperfect, and it would be difficult to calculate without state officials’ help in collecting data from insurers.

Utah’s Thurston said “smart actuaries” would have no problem helping a hostile state undermine a federal exchange. “If a state chose to be antagonistic, there are a lot of things that they can do to create that risk problem,” he said.

Kingsdale’s biggest concern is potential disconnects between a federal exchange and Medicaid, the state-administered program that the health care law opens to all low-income Americans who need coverage. The law aims to create an enrollment process that would seamlessly enroll people in Medicaid or private insurance, depending on their income levels.

HHS can set up an exchange, but it can’t take over a state’s Medicaid program. If a state doesn’t want to coordinate with a federal exchange, Kingsdale said, “absolutely you would” worry about enrollment problems.

“I think the losers in that situation would be the residents of that state who fall through the cracks,” Kingsdale said.

There are reasons beyond ideology why a state might want to minimize Medicaid enrollment. For one thing, state Medicaid programs are likely to end up with people who will increase their costs. Under the law, the federal government will pay the entire cost of the newly eligible Medicaid beneficiaries for the first few years. But states will still be responsible for a portion of costs for those who were eligible for Medicaid before the law took effect but weren’t enrolled.

Cheryl Smith, director of the exchange practice in the health consulting firm headed by former HHS Secretary Michael Leavitt, said that careful crafting of the rule laying out the blueprint for a federal exchange can forestall many of these problems. But inevitably, there are problems they will most likely not anticipate.

“If the feds fail to cover all of their bases — and it’s difficult to cover all your bases when you’re doing something new like this — they could leave room for gaming the system,” she said.

But assuming the courts uphold the law and Republicans fail to win enough power in Washington to repeal the law in 2012, Smith thinks even the states that are fighting the hardest to resist the law eventually will have to build the exchanges.

“I think it becomes hard to resist as other states are successful not only in setting up [exchanges] but [in] reducing their number of uninsured,” Smith said. Even now, she said, her firm is talking to policymakers in several of the states whose governors have said they will block exchanges.

“I have not encountered a state official who thinks the status quo is sustainable and is in favor of doing nothing,” Smith said. “Even if [they’re] moving quietly, they’re looking into it.”

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