For most business people, a market-based solution to providing health care coverage to uninsured Americans is a no-brainer. But when it comes to the federal Affordable Care Act, nothing is quite so simple. As California and the nation steadily progress in implementing the law, questions about impending health care exchanges — soon to be the key insurance access point for millions of residents — outnumber answers.  

“Exchanges should be good for consumers, but it’s too soon to really know,” says Lisa Folberg, vice president of medical and regulatory policy for the California Medical Association. Hers is a common refrain among observers.

“On paper, they should make it better,” she says. “But they still could go so many ways.” 

That uncertainty is not surprising given that the exchanges’ start date is more than two years away. But, with so much of the law’s success hinging on whether exchanges can do what their creators say they will, interest in them is acute. And though the ACA has sparked a furious political and legal debate, its supporters believe exchanges, if created and operated properly, could immediately ease some of the burden rising health care costs have placed on U.S. employers, particularly the nation’s 6 million small businesses.
 
“Exchanges are not a panacea, but by creating competition and the incentive to deliver services in a more rational way than just fee-for-service, we should at least see a lessening in the ongoing increase in health care costs,” says John Arensmeyer, CEO of the pro-business group Small Business Majority.

In general, the law allows states three options for creating exchanges: a wholly state-operated model, a hybrid model run as a state/federal partnership or an agency run entirely by the federal government.

Any of those have the same assignment: Provide consumers and businesses that have 100 workers or fewer with an easily accessible, one-stop, online portal allowing them to shop for the best health insurance for their needs and budget, using group purchasing power to suppress costs. The federal government would subsidize some low-income individual buyers while providing tax breaks to certain small businesses. All of this has to be up and running by January 2014 and be fully self-supporting exactly one year after with baseline funding from fees charged to health insurers selling plans through the exchange.

Details are numerous and complex. States have many options for their exchange structure, including setting it up within an existing agency, as an independent nonprofit or as some combination of the two. Exchanges also could be “active” or “passive” purchasers. Active purchasers would contract with only select plans meeting both federal minimum standards for coverage options and yet-to-be-determined state criteria. Passive purchasers would accept virtually any plan that meets the ACA guidelines, also known as the “clearinghouse” model.

California wasted no time choosing the active purchaser, state-run option, creating the quasi-governmental California Health Benefit Exchange in October 2010. Before leaving office last January, former Gov. Arnold Schwarzenegger named two high-ranking members of his administration, chief of staff Susan Kennedy and former Health and Human Services Secretary Kim Belshé, to the agency’s five-member governing board. Gov. Jerry Brown also had one appointment, naming current Health and Human Services Secretary Diana Dooley. Lawmakers chose the final two members: Paul Fearer, chairman of the board at the Pacific Business Group on Health and a senior vice president at Union Bank, and Dr. Peter Lee, deputy director for the Center for Medicare and Medicaid Innovation at the Centers for Medicare and Medicaid Services in Washington D.C. Lee was also named the board’s executive director. All of the positions are four-year terms, and all are unpaid.

Although there has been some grumbling about the board’s lack of diversity, most observers seem confident its members are up to making the exchange work.

“In California, we have a terrific exchange board,” says Micah Weinberg, a senior policy adviser with the Bay Area Council, a pro-business group that supports the ACA. “If we allow these very knowledgeable people to do their work, I think we can create real transformation in our health care system.”

“The success of the insurance industry is tied to the success of and the proper functioning of insurance markets. Success of insurance markets is very much dependent on the success of health reform.”

Mike Johnson, director of public policy, Blue Shield of California

That sentiment is echoed by Mike Johnson, Blue Shield of California’s director of public policy, who lauds the board’s “extreme intelligence and dedication” for “giving us the confidence” the exchange will function as promised.

But getting there will be a daunting challenge. Dissent among some groups over the exchange board’s makeup sparked talk of end-of-session legislation to expand or otherwise alter its composition. No changes occurred this year, but one or more remain a possibility. Ongoing legal challenges to the ACA also could upend the federal law, leaving California and other states scrambling to figure out what to do next.

Regardless of those hurdles, making the exchange a reality will be expensive. The exchange board has already collected approximately $40 million in federal grants: $1 million in initial startup funds followed in August by a $39 million grant to pay for establishing a three-year business and operations plan, which includes establishing the technological infrastructure critical to the program’s success.

The state in 2012 can apply for more money, which it will need — the IT system alone is expected to cost more than $85 million. The state also can borrow up to $5 million from the California Health Facilities Authority Fund, which must be repaid with interest. Once the exchange is up and running, ongoing operating costs are to be covered through fees charged to insurers selling policies through the portal. The ACA doesn’t bar states from using general fund dollars to pay for those expenses, but California law does.

Within those parameters, the exchange board must craft a program attractive to individual consumers, small employers and, perhaps most critically, the health insurance providers. How that will get done is the big question.

“The exchange is really going to be three parts: one part selling insurance, one part that is basically a regulator and one part being a safety-net public program,” says Weinberg. “That’s pretty challenging. It basically forces the exchange to create partnerships with insurance companies.”

Whether that actually happens will be greatly determined by how state regulators use the significant leeway granted to them under federal law. For instance, the ACA requires exchange plans to offer four levels of coverage that vary in price and coverage options, though all must meet minimum standards deemed essential health benefits, or EHB. It also requires a plan that offers only catastrophic coverage. But the law also permits states to demand that insurers include additional benefits exceeding those federal minimums at each plan level. That possibility makes insurers nervous.

“California has wide latitude in determining the essential benefits standard,” says Patrick Johnston, president and CEO of the California Association of Health Plans. “It is critically important that California not adopt requirements that exceed the federal designations.”

Engaging in such “selective contracting,” he says, could force many insurers to stay out of the exchanges, limiting the competition needed to keep premium costs under control. He also warns regulators against excluding any insurance providers that want to participate.

“The exchange needs to be a true marketplace where people can shop with good information about price and quality,” says Johnston. “In that regard it should welcome all licensed insurers and allow them to establish rates and a network that attracts customers.”

Insurers note the ACA already hits them with a wide spectrum of mandates and limitations affecting bottom lines. These include, among many things, requiring coverage for all applicants, including those with pre-existing health conditions; the elimination of lifetime coverage limits; caps on policyholders’ annual out-of-pocket costs; and allowing adult children to remain on their parents’ policy through age 26. The law further requires health insurers to spend up to 85 percent of premium costs on health care. Companies spending less must refund the difference to policyholders. 

The law also imposes caps on another long-held industry tool: age-rating ratios. Blue Shield’s Johnson says current law allows the variance between premium prices for an insurer’s youngest and oldest policyholders to vary by a ratio of as much as 7-1. That, he says, is a reflection of the difference in cost for insuring vastly more expensive older policyholders as compared to those who are younger and healthier. But starting in 2014, that variance would be limited to a ratio of no more than 3-1.

“That means young people are going to be paying significantly more than they pay today, while older members will be paying less,” Johnson says.

Coupled with a relatively cheap penalty for not purchasing insurance — as low as $95 per person or 1 percent of a person’s annual income, whichever is greater, until 2015 — he says, “There is plenty of motivation for young people not to buy insurance.”

Those fines gradually increase to $695 or 2.5 percent of income in 2016, with annual cost-of-living increases after that. But the law also offers numerous exemptions. Those with incomes below the tax-filing thresholds, or for whom the cost of the cheapest policy would eat up 8 percent or more of their income, are exempt from the penalty, as are prisoners, members of American Indian tribes and anyone who objects to the law on religious grounds.

It adds up to a thorny problem for the law’s supporters, who acknowledge its success relies on getting enough healthy people into the system to offset the expected influx of people with expensive health problems.

“The success of the insurance industry is tied to the success of and the proper functioning of insurance markets,” says Blue Shield’s Johnson. “Success of insurance markets is very much dependent on the success of health reform.”

In that regard, California’s health regulators are, at least for now, saying what insurers want to hear.

“The problem of adverse selection is at the very heart of the ACA,” says the exchange board’s Diana Dooley. “If the law isn’t going to allow exclusions for those seeking health insurance, then we have to make sure everyone is buying it.”

Dooley also notes that California has previous experience with an exchange format, the  HIPC/PacAdvantage, a state-run, small-group purchasing pool that she says, “came very, very close to succeeding.” Started in 1992, PacAdvantage eventually had more than 150,000 subscribers but ceased operation in 2006, a fate the Bay Area Council’s Weinberg says was directly linked to its own issues with adverse selection.

But the potentially devastating impact that low enrollment might have on insurers is just one of the reasons the state should make exchange enrollment its top priority, says Anthony Wright, executive director of Health Access, a statewide consumer health care advocacy group based in Sacramento. Wright is not as concerned about the impact on the well-being of the insurance industry as he is about what it means to consumers.

“How we implement the ACA is really critical,” he says. “We must create the infrastructure to maximize enrollment on day one. Having more people in the system creates a larger risk pool, which means lower costs for everyone.”

What that infrastructure looks like remains to be seen. The exchange board is still in what Dooley calls the “establishment phase,” working now just to create its own basic organizational structure. But she also sings the praises of newly appointed Executive Director Lee, an appointment she calls “critical” to the exchange’s eventual success. Lee, who has spent the past few years in the Obama administration, is the former CEO of the Pacific Group on Health, which ran the PacAdvantage program.

“There were many, many lessons learned from that experience,” she says. “We are the envy of many around the country for luring him back to California to run this program.”

Given the number of forces that have a stake in the exchange’s outcome, Lee will likely need all of his business and political savvy to navigate this trip through California’s health care maze. Insurers, health and consumer advocates, business interests and health care providers anxiously anticipate what he and his colleagues devise. All have their own views of how the system would work best.

Still, others wait with equal anticipation in hopes the ACA will be struck down in the courts before 2014, making all of this a moot point. But the Bay Area Council’s Micah Weinberg says the ACA’s opponents should be cautious with what they wish for.

“If we reform the system, if we make insurance prices competitive, prices will come down,” he says. “We need to give the market a chance to work, because if competition doesn’t work to bring down costs, it will only mean more government regulation, not less.”