Health economists predict that in states that already have robust competition among insurance companies—states such as Colorado, Minnesota and Oregon — the exchanges are likely to stimulate more. But according to Linda Blumberg of the Urban Institute, “There are still going to be states with virtual monopolies.” Currently Alabama, Hawaii, Michigan, Delaware, Alaska, North Dakota, South Carolina, Rhode Island, Wyoming and Nebraska all are dominated by a single insurance company. The advent of the exchanges is unlikely to change that, according to Blumberg.
This story needs some additional context. Section 1334 of the Patient Protection and Affordable Care Act establishes a shared federal-state regulatory regime requiring health benefit exchanges to offer at least two “multi-state plans” (one must be a nonprofit) in their individual and small business exchanges. These plans would be established under federal charter through the Office of Personnel Management (OPM) and licensed in all states. The idea behind multi-state plans is to bolster competition in state markets, particularly those with smaller populations and fewer payers, as well as to create a larger risk pool to help assure affordability of premiums and ward off adverse selection.
The rest of this year and next will reveal in greater detail how competing market forces under the Patient Protection and Affordable Care Act (PPACA) play out in the individual and small group market segments. Health plans are making their opening gambit by warning in a Wall Street Journal story published this week that premiums will rise in response to new market rules that take effect in January 2014 requiring them to offer specified categories of benefits and use community-based rating instead of medical underwriting.
The PPACA’s managed competition scheme for these market segments will create countervailing downward pressure in addition to the reinsurance and risk adjustment mechanisms mentioned in the WSJ story to offset pressure for higher rates to account for taking on higher risk populations under community rating. That scheme is based on concentrating much of the market in state health benefit exchanges that will aggregate the purchasing power of individuals and small businesses, spurred along in the individual segment with generous income tax subsidies for those with adjusted gross incomes at 400 percent and lower of the federal poverty level. Small employers won’t get these subsidies (enhanced income tax credits will be available for very small, low wage employers) but would be able to pool their market power into one large purchasing entity, the exchanges’ Small Business Health Options Program (SHOP).
The test of that aggregated market power will begin over the next few months in about a half dozen states where the exchanges have opted to actively screen and select which plans can participate in their individual and SHOP marketplaces. Of these, the most illustrative market is the nation’s largest health insurance market — California — where that state’s exchange, Covered California, has established standardized benefit designs and cost sharing levels for plans it will offer. Covered California is utilizing a competitive bidding and negotiation process based on these standard designs that provides incentive to plans to moderate premiums.
Also part of the PPACA managed competition model and designed to boost competition to exert downward pressure on premiums are the large Multi-State Plans administered by the federal Office of Personnel Management. Multi-State Plans will also be sold on the state exchange marketplaces, initially available in 60 percent of the states once introduced. The PPACA mandates at least two Multi-State Plans be offered in each state exchange and be available in all state exchanges by 2017. Plus the PPACA allows cooperative health plans owned and operated by consumers to compete in the exchange marketplaces with investor-owned commercial health plans.
South Dakota lawmakers advanced a bill that would restrict the marketing of multi-state health plans (MSPs) to the state’s health benefit exchange, barring their sale outside the exchange market. Senate Bill 139 would also require MSPs be sold exclusively by state licensed insurance producers and mandates producers be paid commissions on a par with similar plans sold outside the exchange.
Section 1334 of the Patient Protection and Affordable Care Act requires at least two MSPs be offered in each state exchange. The MSPs will be phased in over a four-year period starting when the exchanges begin operating in 2014, when MSPs must be in 60 percent of the states.
Regulated by both the federal government and the states, MSPs are intended to increase competition and consumer choice, particularly in less populous states such as South Dakota where there are fewer health plans available. However, existing plan issuers and producers in these states likely fear MSPs will have a disruptive impact on the market and potentially crowd out smaller players by virtue of their interstate heft and superior economies of scale.
The sale and regulation of commercial health insurance is essentially an intrastate affair. States serve as discrete markets and each have their own rules governing health insurers and managed care plans. However, several provisions of the Patient Protection and Affordable Care Act (ACA) are apparently intended to give the industry a more interstate flavor starting in 2014 when state health benefit exchanges chartered by the ACA open for business in each state.
Section 1334 of the ACA establishes a shared federal-state regulatory regime requiring health benefit exchanges to offer two “multi-state plans” (one must be a nonprofit) in their individual and small business exchanges. These plans would be established under federal charter through the Office of Personnel Management (OPM) and licensed in all states. The idea behind multi-state plans is to bolster competition in state markets, particularly those with smaller populations and fewer payers, as well as to create a larger risk pool to help assure affordability of premiums and ward off adverse selection. At the same time, multi-state plans could raise fears among payers since by virtue of their large size (and thus their potential ability to offer more favorable coverage terms and rates), they could “crowd out” smaller, state-based players.
However, the Section 1333 of the ACA also provides a mechanism for health insurers and plans to pool risk and sell across state lines via “health care choice compacts” starting in January, 2016. It allows two or more states to enter into an agreement under which health plans could be offered in state individual markets but subject only regulation by the state in which the plan was written or issued. Plans sold outside their state of domicile would still however be subject to licensure and rules in the state in which the purchaser resides relative to market conduct, unfair trade practices, network adequacy, and consumer protection standards including standards relating to rating and handling of disputed claims. The ACA requires the federal Department of Health and Human Services (HHS) to issue regulations governing health care choice compacts by July 1, 2013 and additionally mandates that states must enact legislation authorizing their formation.
Finally, the ACA allows the exchanges themselves to operate across state lines. Section 1311(f) provides for “Regional or Other Interstate Exchanges” operating in more than one state if the involved states and the federal HHS approve.