Insurance exchange board faces key policy decisions

There’s still nearly two years before the major pieces of federal health reform roll out, but for the planners designing Connecticut’s health insurance exchange, one of the central pieces of the law, the time line is much tighter.

The exchange will serve as a marketplace for individuals and small businesses to buy insurance beginning in 2014, and the board at work designing it has a number of key decisions to make well before people start signing up for coverage next year.

Among them:

How will the exchange, a quasi-public agency expected to employ about three dozen people, be funded?

Will insurance plans sold on the exchange be required to cover all state-mandated benefits, which could leave the state with added costs?

And in offering coverage, should the exchange combine the individual and small group insurance markets, or keep them separate — a choice that could have significant ramifications for the costs each group faces in buying coverage?

Board members discussed preliminary recommendations on those and other issues during a meeting at the State Capitol Thursday.

The meeting also drew a silent protest from critics of the board, who wore Band-Aids over their mouths and held letters that together read “Consumers not represented.” These critics have taken issue with the appointment of three former insurance industry executives to the board and have said the board does not represent consumers and small businesses that will be most affected by the decisions it makes. Defenders of the board say it’s important to have people who understand insurance, and point to board member Michael Devine, a small business owner.

Combining risk pools?

The exchange will serve as a more tightly regulated insurance marketplace, through which individuals and small businesses can buy health plans, most of which are expected to be offered by commercial insurance carriers. People earning below 400 percent of the poverty level who don’t get coverage through their jobs will get federal subsidies to buy coverage on the exchange.

Under the federal reform law, state exchanges have the option of combining the risk pools for individuals and small groups, or keeping them separate. The two markets are now separate in Connecticut, and subject to different rules. An analysis by the consulting firm Mercer projected that combining them would raise rates by 4 percent for the small group market — which typically serves small businesses — while lowering rates 2 percent for individuals.

Currently, the people covered through the individual market as a whole are healthier than those in the small group market, in part because rules governing the individual market allow insurers to deny coverage to a person based on health status, said Bob Carey, a consultant to the exchange. In the small group market, by contrast, insurers must offer coverage, regardless of the group’s health status.

But Mercer projected that under health reform, the individual market’s risk pool will become less healthy than the small group pool. That’s because the rules for the individual market will change in 2014, requiring insurance carriers to sell coverage to anyone who seeks it, leading people with medical conditions to join the risk pool.

In addition, Carey said, the law allows people to avoid buying insurance if the cost of doing so represents more than 8 percent of their income. People in that category who are young and healthy might choose not to buy insurance, he said, while those who are sicker would be more likely to buy it anyway.

A draft recommendation suggested that the state maintain separate small business and individual insurance markets, at least at first. “It’s not as if in 2015 you can’t decide to merge the pools,” Carey told the board. “You can merge the pools at any time.”

Board members did not vote on the recommendation but some expressed support for it.

What benefits to cover?

One of the matters that must be resolved most quickly is what benefits the plans sold in the exchange must cover. Carey said the board should make a decision this summer so it can be vetted by others by the fall and leave insurance companies time to develop products to offer for the exchange by late 2013.

Under the law, plans sold in the exchange must cover a set of “essential health benefits,” which were initially expected to be defined by the federal government.

But last month, the federal government announced that it was giving states more flexibility to define the benefits required for exchange plans. Instead of issuing a single list of essential benefits, the U.S. Department of Health and Human Services said it intended to let each state base its definition of essential health benefits on a “benchmark” plan offered in the state. States can select as the benchmark a plan that covers small groups, state employees, federal employees or an HMO offered in the state’s commercial market.

The exchange board’s draft plan calls for creating a task force to examine the four benchmark plan options, with representation from the exchange, insurance department, healthcare advocate’s office and executive and legislative leaders.

In deciding what benefits to require, the exchange will also have to address how to handle state mandates. Connecticut mandates that insurance plans cover dozens of benefits, some of which could go beyond what are considered essential benefits. (The state mandates do not apply to self-insured plans that are common among large employers, so if the exchange uses the state employee plan, the federal employee plan or an HMO as the benchmark, some state mandates might not be considered essential benefits.)

Under the federal reform law, the state could still require that exchange plans cover all its mandated benefits, but Connecticut would have to pay the cost of that coverage, at least, as of 2016. HHS has said states would be allowed a “transition period” in 2014 and 2015 to coordinate state benefit mandates; in that time, states would not likely be required to pay the cost of those benefits.

How to pay for it

The federal government has provided grants to fund the development of the exchange and will fund its first year of operation. But beginning in 2015, the exchange must be financially self-sustaining.

There are multiple ways to raise the funds needed. Massachusetts, which already operates an exchange known as the Massachusetts Connector, funds it through an assessment on premiums of plans sold through the exchange. Mercer estimated that Connecticut’s exchange would require an assessment of about 2.8 percent of premiums on plans sold through the exchange.

Utah, which also has an exchange, charges a fixed fee for each insurance contract.

Carey said some states developing their exchanges are considering broader-based fundraising methods, such as assessments on all health insurance plans sold in the state. Other options include charging fees to insurers who sell health plans in Connecticut but don’t offer plans in the exchange, using the state’s existing tax on insurance premiums, or selling advertising, such as on the exchange’s website.

Carey suggested holding off on a decision until the board can get a better understanding of the most appropriate way to fund the exchange.

Benjamin Barnes, secretary of the Office of Policy and Management and a board member, asked how the method of raising funds for the exchange could affect insurers’ decisions about whether to offer plans through the exchange or what variety of plans to offer.

Since participating in the exchange is voluntary for both consumers and insurers, Carey said it’s a major consideration. He noted that a significant assessment on insurers for participating could limit their willingness to sell plans through the exchange, but said that insurers could find that the exchange can save them money if it takes on functions insurers would otherwise do, like handling billing.