HHS Announces New Round of Grants to Help States Establish Exchanges

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Department of Health and Human Services Secretary Kathleen Sebelius Jan. 20 announced a new round of grants to help states establish health insurance exchanges under the health care reform law.

Meanwhile, at a conference on health insurance reform in Washington, Office of Consumer Information and Insurance Oversight (OCIIO) Director Jay Angoff said one of the keys to the success of the exchanges will be ensuring that they do not result in “adverse selection” and end up covering mostly people with extensive health problems.

Regarding the new grants, Sebelius said: “Using the funding we're making available today, states will be able to move forward with plans to establish new health insurance marketplaces” by 2014 as called for under the Patient Protection and Affordable Care Act (PPACA).

No precise amount of money has been designated for the grants to set up exchanges, Sebelius said in a telephone press conference. “We anticipate states giving us a plan, and then making some determinations about overall funding,” she said. State needs will vary widely, and the funding announcement includes benchmarks that states must meet in their planning process, she said.

“For too long individuals and small business owners got a bad deal in the health insurance market,” Sebelius said. Large employers have bargaining power to negotiate better rates, keep administrative costs down, and spread risk among a large pool of workers to keep premiums down when employees have serious health problems, she said.

The establishment grants follow $49 million in planning grants issued in September 2010 to 48 states and the District of Columbia (see previous article). In addition, HHS awarded “early innovator” grants in October 2010 for states to design information technology to operate the exchanges (see previous article). HHS funding is available to help establish the exchanges until 2015, after which the exchanges are to be self-funded.

The exchanges are to used initially by individuals and small businesses. Customers are supposed to be able to easily compare health insurance plans that offer a minimum level of “essential” benefits to be set by HHS in the exchanges.

In addition, the exchanges are intended to allow individuals and small businesses to pool their purchasing power so they can buy health care coverage more economically than is possible in the current market. People earning between 133 percent and 400 percent of the federal poverty level also must purchase insurance through the exchanges to receive tax credits available under PPACA. In 2011, 400 percent of FPL is income of $88,200 a year for a family of four.

Uses for Grants.

States can use the establishment grants to conduct background research, consult with stakeholders, make legislative and regulatory changes, set up governance plans for the exchanges, establish information technology systems, conduct financial management, and perform oversight, HHS said in a release.

“We plan to give states the flexibility and support they need as they move from exchange planning to implementation,” Sebelius said. “States are in very different stages in their exchange planning, and have different needs.”


OCIIO Director Jay Angoff said one of the keys to the success of the exchanges will be ensuring that they do not result in “adverse selection” and end up covering mostly people with extensive health problems.




States that are further along in their planning can apply for multiyear funding, while “states that are taking a more step-by-step approach can receive grant funds periodically as they reach their key milestones,” Sebelius said.

Health officials from California, Maryland, and Colorado--three states that have made substantial progress in setting up exchanges--spoke at the press conference, applauding the new grants they said will help their states move ahead with the exchanges.

12 States Leading the Way.

A day before the grants were announced, Joel Ario, director of the Office of Insurance Exchanges in OCIIO, told the National Congress on Health Insurance Reform that about 12 states are currently leading the way in planning for the exchanges.

Many other states will receive “smaller chunks of money” under the establishment grants to take specific, incremental steps toward an exchange, Ario said at the conference Jan. 19. “Frankly, that is where many of the states are today--not totally committed to doing the exchange, still wanting to look at it carefully, analyze how things will work in their state, and make incremental progress.”

“Level one” establishment grants will provide up to one year of funding to states that have made some progress under the planning grants awarded last year, according to an HHS fact sheet.

“Level two” establishment grants will provide funding through 2014 for states that have met criteria outlined in the grant application, including getting legal authority to set up the exchange; setting up a governance structure; setting a budget for the exchange and a plan for financial sustainability by 2015; outlining steps to prevent waste, fraud, and abuse; and setting up consumer assistance provisions. Massachusetts, Utah, and California have so far enacted legislation authorizing exchanges, and other states are considering such legislation, according to HHS.

The secretary of HHS must determine by Jan. 1, 2013, whether a state should be certified to set up its own exchange. The federal government will operate exchanges for states that have not set them up. However, Ario told the Jan. 19 conference it would be best for “as many of these states to step up as possible, because health care markets are local. They work better if there are local people managing the situation, working with the local carriers, working with the local delivery systems.”

At the Jan. 20 press conference, Sebelius said it would be possible to set up regional exchanges to get more competition and stability in insurance pools in small markets. Conversations among states considering such exchanges “are under way right now,” she said. Companies that sell products in multiple states could develop products for such regional exchanges, she said.

Preventing 'Adverse Selection.'

One of the most important factors in the success of the exchanges will be for states to ensure that the exchanges do not result in “adverse selection,” with older, sicker people being the primary customers of exchange plans, OCIIO Director Angoff said at the Jan. 19 conference.

“The states can do more to prevent adverse selection than the federal government can,” Angoff told about 350 attendees at the conference.

If policies sold in the exchanges are primarily purchased by people who have extensive health problems, it would make exchange plans uncompetitive for healthier people to buy. In the first guidance HHS issued concerning the exchanges last November, the agency emphasized that states have flexibility to regulate health insurance plans inside as well as outside of exchanges, and that states should take additional action to prevent adverse selection (see previous article).

There will be “very robust risk adjustment” in the exchanges to try to prevent carriers from selecting customers based on their health risk, Ario said. “If you try to make a profit by getting only the best risk, we're going to do everything we can through risk adjustment to take that profit back,” and distribute it to insurers that take worse risks, he said.

Large Employers Could Use Exchanges.

While Angoff emphasized the need to prevent adverse selection in the exchanges, Ario said that if the exchanges work well, large employers may elect to send their employees to them in the future to purchase coverage.

“If they have an option that they could actually send their employees to the marketplace that would provide them with good, sound coverage, people may move that way over time,” Ario said. Under PPACA, states can open the exchanges to large employers in 2017.

While Massachusetts, one of the first states to establish an exchange, has not gotten much small business in its Health Connector, the amount of employer-based coverage in the state has increased outside of the exchange, Ario said. Like PPACA, the Massachusetts health reform law requires individuals to buy insurance, Ario noted. That results in employees putting more pressure on employers to offer insurance, he said.

Over the long term, the exchanges will perform much like “the two programs that have worked best--Medicare and large-employer insurance” in providing coverage and controlling costs by moving from paying for volume to paying for outcomes, Ario said.

All states except Alaska are considering creating their own exchanges, Ario said. In addition to political opposition to the health care reform law, it will be difficult to establish an exchange in Alaska because of its large geographic region and small, spread-out population, he said. HHS is discussing with Alaska officials whether a regional exchange or an HHS-run exchange would work there, he said.

By Sara Hansard

A fact sheet on the health insurance exchange establishment grants is available in HealthDocs™.