California’s Insurance Exchange: C A L I FOR N I A Experts Tackle the Big Questions H EALTH C ARE F OU NDATION In the immediate aftermath of C ongress ’ passage of the A ffordable C are A ct , California became the first state to create an insurance exchange that would reflect the new opportunities and obligations established by the federal reforms. The California Health Benefit Exchange legislation is contained in AB 1602 and SB 900. To help inform the development of exchange legislation and early thinking regarding exchange Issue Brief implementation, the California HealthCare Foundation has provided information, analysis, and other support. As part of these efforts, a briefing was held in Sacramento on October 21, 2010 to discuss policy considerations related to the establishment of the state’s health exchange within the context of the federal law. Speakers included members of the Schwarzenegger Administration, legislative staff, and consultants with related experience nationally and in Massachusetts. Highlights of the briefing follow. How California Got to Yes Belshé sees the specific content of the legislation as “We’re having a conversation today that is not offering “great promise for the exchange to deliver occurring in any other state,” Secretary of Health on its very significant goals around coverage, and Human Services Kim Belshé said in her affordability, quality, and, most of all, around opening remarks. “We’re talking about [health improving the health status of the people of our care] reform, and not just reform in terms of the state.” She noted additional reasons for optimism. big ideas, but reform in terms of implementation.” Noting the level of expertise represented in the First, she said, “We’re not starting from scratch. briefing’s panel as well as the audience, she said, California has been having a conversation about “This absolutely is a gathering of the glitterati of purchasing pools and exchanges for many, many the health care policy and political worlds.” years.” She recalled the health insurance plan, PacAdvantage, that got its start during the Pete The context for California’s efforts around Wilson administration in the 1990s. It failed, implementation has been an “extraordinarily she said, but “it informed our thinking about difficult” one, she said, citing the political purchasing pools and exchanges.” In 2007, transition in Sacramento and a double-digit California tried to enact many of the components structural budget deficit in the state. Further, that are now included in the federal law, working there is “a lot of misunderstanding, if not across the administration, the legislature, and the misinformation,” about what an exchange is and broader stakeholder community. At that time, its role in reform. In this context, said Belshé, California’s leaders grappled with many of these “It was striking to me that, notwithstanding the same big issues. Said Belshé: “What is the overall fact that there were a lot of reasons not to move theory of an exchange? What are the goals? What forward, our state did.” is the relationship between the exchange and the non-exchange market?” D ecember 2010 Other factors that bode well for the success of the The Federal Framework for Exchange state’s exchange, added Belshé, include a high level of Goals and Models state expertise, augmented by consultants with direct Speaking from 25 years’ experience in the health exchange experience. She also commended the state’s insurance field, most recently as executive director of the strong political leadership. Governor Schwarzenegger, Massachusetts Health Connector, independent consultant she recalled, “stood up in April and said, ‘These are my Jon Kingsdale discussed possible goals and models for priorities. The exchange is one of them.’” Then, she said, California’s exchange. the legislative leadership “worked very collaboratively and showed tremendous political courage in the face of some The federal legislation, he said, provides a good pretty significant opposition.” foundation for streamlining and coordinating eligibility determination processes for different programs. In fact, Belshé concluded her remarks with a strong plea not to he said, the Affordable Care Act puts these issues forward forget Medi-Cal “in all the talk about exchanges — the more forcefully and explicitly than in the legislation shiny new object that everyone’s very excited about.” in Massachusetts that was enacted in 2006, “where we Come 2014, she said, “Medi-Cal is going to look pretty much just piggy-backed on the existing Medicaid dramatically different than it looks today. It is a totally eligibility determination process.” He noted that when new paradigm. It’s one grounded in actually covering counties and the state both play roles in determining people and insuring that our eligibility and enrollment eligibility, when most processes are paper-based, and when systems are streamlined and designed to bring people shopping for health insurance is still done on the phone into coverage and to stay in coverage.” By standardizing rather than on the Web, “there is a lot of opportunity for eligibility rules for the entire nation, from zero to improvement in customer responsiveness.” 400 percent of the federal poverty level (FPL), Belshé said, “federal reform is saying we as a society have a The insurance market itself is a bit flawed, he value for near-universal coverage, and we are going acknowledged. Products are wildly variable and lack to support a variety of policy changes to advance that transparency compared with other industries such as objective, including providing financial assistance for banking. Even shopping for something as complicated those individuals for whom this requirement to purchase as a mortgage, he said, involves only about four or five coverage is beyond their financial means.” The Medicaid variables that people can understand. In comparison, program, with eligibility up to 133 percent of the FPL, is health insurance can involve “20 or 30 variables most of the foundation for coverage, she noted, with the exchange which are hard to understand. People very quickly glaze extending eligibility from 133 to 400 percent of the FPL. over.” Rather than being a welfare-based program, she said, Unfortunately, he added, “A lot of competition among Medicaid will be “a full and foundational partner of the health plans is on risk selection rather than socially more overarching objective around reform…. So the success useful ends, such as service and benefits and value.” But of the exchange is going to be very much related to the there are market incentives for consumer choice, he said. retrofitting and success of the Medi-Cal program.” Exchanges can drive healthy competition among carriers in terms of customer service and benefits. This is a very “American concept,” he added. “It’s not all that different from [the idea behind] the Securities and Exchange 2  |  California HealthCare Foundation Commission — that we ought to have markets that A third goal could be to stimulate price competition. actually work for customers.” Health plans will want to “get onto the shelf of this major new insurance store,” and will compete on price in order to be selected. If they offer real value to Two Massachusetts Stories potential customers, the exchange is going to want to Jon Kingsdale offered two stories of individuals affected offer these plans. In some states there might be only two by the Massachusetts reforms. or three plans with any presence in the local market. • Jaclyn Michalos worked for her family’s restaurant, Massachusetts has currently selected nine major health which did not offer health insurance. She didn’t get plans to be in its exchange. First they had to compete to a lump in her breast examined because she couldn’t afford services. After the state reforms went into be in the exchange, and then they compete again to be effect in 2006, she qualified for subsidized health selected by the individual consumer. insurance and went to the doctor. She was diagnosed with cancer and was successfully treated. Finally, said Kingsdale, exchanges could drive quality • Abbie von Schlegell moved to Massachusetts from improvement and cost containment by selecting and another state, leaving her health insurance behind. offering health plans that reward physicians and hospitals Because of several chronic conditions, she was advised that she would not be able to get insurance for integrating and coordinating care. Well-designed again. But because of the state’s guaranteed issue and incentives, such as covering preventive care, paying community rating reforms, she was able to shop for for someone to coordinate specialized services, and and buy insurance “in a matter of 20 or 30 minutes.” not paying for medical errors ought to drive better integration and coordination of care delivery. California, he pointed out, already has considerable know-how and A principal goal for exchanges, said Kingsdale, would leads the nation in pay-for-performance, capitation, and be to facilitate fast, easy, and smooth eligibility development of integrated delivery systems. A major determination and enrollment. He described the arduous, public policy question, he said, is how far the exchange telephone-based research that health insurance shoppers should use its market leverage to drive further change in go through, only to find that the variations from plan the delivery of medical care. to plan make them difficult to compare. Finally, he said, “you’d walk across the street and you’d ask your neighbor, Kingsdale outlined the various models for exchanges that ‘What have you got?’” Facilitating the process was a key California can borrow from. goal of the Massachusetts Connector Web site, he said. Shoppers enter just three pieces of information that are Utah’s program, he said, offers relatively unstructured necessary for rating: age, size of household, and zip code. choices for employees of small or mid-size employers, Then, they pick a level of coverage — Gold, Silver, or allowing them to pick from any plan available in the Bronze — and three to five options pop up, in an apples- state. Connecticut has a privately-sponsored exchange to-apples comparison. through which employees of small employers can pick from a relatively structured set of options. New York Another goal, said Kingsdale, might be to reduce high and Massachusetts have exchanges for small employers administrative costs. In the non-group and small-group who pick from a relatively structured set of options sector, he said, it is estimated that anywhere from 20 to while their employees have only the traditional take-it- 40 percent of premium goes to administration — and a or-leave-it option. For subsidized individuals, the lot of that is just the cost of selling and enrollment. Massachusetts Connector offers “very aggressively bid, California’s Insurance Exchange: Experts Tackle the Big Questions  |  3 highly structured programs.” Kingsdale compared this to have readily available comparative information on cost type of configuration with the health benefits programs and quality through a Web site and a toll-free hotline. for federal and California employees and many large Exchanges will do outreach to various populations employers that offer their workers three, four, or more through “navigators” who have existing relationships options. with those populations. Grants to navigators from the exchange are intended to help people through the process. Finally, Wisconsin has been pursuing the “ultimate The precise roles and tasks of navigators have yet to be vision” of a new exchange as a strategic purchaser that will worked out. drive “all health plans toward fully rewarding integrated, coordinated care.” Another role of the exchange, Neuschler said, is to certify the “qualified health plans” that are offered through The Massachusetts program, he said was conceived as the exchange. To become qualified, the plans first have “a non-regulatory store for insurance with a substantial to meet minimum federal criteria that will be specified public subsidy involved and a mandate to serve the by the HHS secretary. Then, the exchange will have to public.” Therefore, he said, “it has a strong interest determine that a plan, in addition to meeting the federal in long-term, value-based relationships with the criteria, is “in the interests of qualified individuals and health plans — meaning we wanted them to make employers.” This is the basis on which the exchange will a little money.” He pointed out that it is important have selective contracting capability. for individuals and small businesses to feel confident that their plan will not go out of business or leave the The exchange will also arrange eligibility determinations, exchange. So, he said, if plans “do a good job and they Neuschler continued, noting that “the federal statute deliver value and they play their role as tough buyers of never actually says that the exchange makes an eligibility services, they get financially rewarded in the marketplace.” determination” except with respect to Medicaid. However, the exchange will be “in the middle of ” the process of The existence of the Massachusetts exchange, Kingsdale accepting applications from people who want to get suggested, resulted in greater popularity for generic-brand federal premium tax credits or want to get an exemption health plans, which he referred to as the “salt-of-the-earth from the individual mandate. Exemptions may be granted plans.” These have more limited networks — some built to individual purchasers if all available products cost more around neighborhood health centers — than most large than 8 percent of income. This information, he said, will commercial plans, and low administrative expense ratios need to be put into some kind of system, which has not in the range of 6 to 8 percent of premium. They provide yet been determined. care for a substantial Medicaid population, and tend to emphasize primary care. In addition, noted Neuschler, the exchange is responsible for implementing the “No Wrong Door” eligibility Key Components of the Federal Law concept. It should inform individuals of the eligibility Ed Neuschler of the Institute for Health Policy Solutions requirements for the public coverage programs (in enumerated the intended roles of the exchange as written California, Medi-Cal and Healthy Families), screen into the federal law. people for eligibility for those programs, and, if they are eligible, enroll them. Since its key role is to provide convenient access to consumer choice of plans, he said, the exchange will need 4  |  California HealthCare Foundation The exchange can serve any lawful resident who is not including the tax-credit recipients, are in the same risk incarcerated, said Neuschler. It can serve any small pool. Premium calculations for the individual market employer with up to 100 employees, although the state and the small-group market remain separate, but within has the option of limiting the number to 50 for the first each market — individual or small-group — an insurance two years. In 2016, however, it has to go up to 100. carrier’s premiums are established based on that carrier’s Beginning in 2017, the state has the option of including combined risk for its enrollees both inside and outside of larger employers as well. the exchange. Nobody is required to use the exchange, Neuschler The second major difference, said Neuschler, concerns said, but there is a core population that will have strong payment and billing. In Massachusetts, the Connector incentives to do so because that is the only way they will makes the premium payments to plans on behalf of the be able to get tax credits. This group includes modest- subsidy recipients. If there is a share of premium, the income people who buy individual coverage through the Connector collects those premium payments from the individual exchange, as well as small employers who can participants, bundles them together with the subsidies, qualify for a federal tax credit toward their contributions. and sends them to the health plans. Under the federal This core population will form the critical mass needed to reform, he said, the U.S. Treasury is going to be making make the exchange viable. the advance payment of premium tax credits directly to the health plans, not through the exchange. That is a A tax credit for small businesses whose workers’ average “pretty significant operational difference,” he noted. earnings qualify them as “low-wage” is in place already, added Neuschler. Once the exchanges are running, in In terms of benefits and coverage levels, said Neuschler, 2014, the employers will have to purchase through the the federal statute requires that all plans, both inside and exchange in order to continue to qualify for those credits outside the exchange in both the individual and small- for an additional two years. group markets, offer the federally specified essential health benefits package. However, he said, grandfathered There are important differences between the federal plans — those in existence at the time the federal law construct and the Massachusetts Connector model, said was enacted — are exempt from these requirements. Neuschler. First, the Massachusetts Connector, even on The services that comprise essential health benefits are the individual side, effectively has separate exchanges with outlined in the federal statute but must still be fleshed out different carriers and products for the modest-income in regulations. The statute requires that the list of covered people — those below 300 percent of poverty —  who are services be equal in scope to benefits currently provided getting subsidized, and those nonsubsidized individuals under a typical employer plan. above 300 percent of poverty. “It is really two different programs,” he said. The federal statute requires that all plans offer coverage at four different levels (Bronze, Silver, Gold, and Under the federal framework, Neuschler said, an Platinum) that are based on actuarial value, defined as exchange is supposed to make the same certified qualified the percentage of the cost of essential benefits that the health plans available both to individuals who are plan pays for an average population. Neuschler noted getting subsidies through the premium tax credits and to that plans could have a variety of different cost-sharing nonsubsidized individuals. In addition, all people across structures: deductibles, co-payments, or co-insurance. the outside commercial market and the exchange market, But under the law plans will have to cover a specified California’s Insurance Exchange: Experts Tackle the Big Questions  |  5 share of the expected full cost of the benefits (60 percent Designing the California Law: at the Bronze level, 70 percent at the Silver level, The Big Choices 80 percent at the Gold level, and 90 percent at the Three panelists at the briefing who helped craft AB 1602 Platinum level). Every plan has to fall into one of those and SB 900 discussed the reasoning behind various categories, he said. However, people below 250 percent aspects of the legislation. Sumi Sousa is special assistant of the FPL will get additional subsidies to help with their to Assembly Speaker John A. Perez. Scott Bain is out-of-pocket costs, so the actuarial value for some of principal consultant with the California State Senate them will be higher — up to 94 percent for people below Committee on Health. Jennifer Kent is deputy secretary 150 percent of FPL, and ranging down after that. for legislation in the office of Governor Schwarzenegger. An exception to the four-level configuration is the Sumi Sousa laid out the scope of the legislative team’s provision for a lower-cost catastrophic plan, Neuschler work. “The first thing that we had to do,” she said, said. This type of plan will be sold only to people under was to figure out “what this exchange can and should age 30 or to those who would otherwise qualify for an be, given the federal law. How do we actually create an affordability exemption. It would have a flat deductible exchange that adds value….that’s something more than equal to the out-of-pocket maximum established under just a place where you go get your tax credit?” Given the federal law for health savings accounts (HSAs).For 2010, state’s history of success and failure in terms of exchanges, that amount is $5,950; it will be higher in 2014. After she added, “we had a very clear job of trying to reduce the deductible, coverage will be 100 percent, with a the amount of adverse selection and increase the overall few doctor visits and certain other services outside the exchange viability.” deductible. The task of the legislative team, she said, was to design The federal law allows plans to offer benefits in addition a structure, a governance mechanism, and a financing to the essential health benefits package if they choose arrangement in view of the federal requirement that to, said Neuschler. If the state wants to mandate service the exchange must be self-sufficient. Overall, Sousa coverage in addition to the federal list, they can do so, but said, the approach needed to work, and to work in then the state is “on the hook for the additional cost with perpetuity — across administrations and significant respect to qualified health benefit plans. In other words, differences of political viewpoint. “So we tried to put the feds don’t want their tax-credit money being used in the most solid foundation that we possibly could, towards extra services that the state is requiring.” with the transparency and openness that one expects of government.” The federal premium rating rules will apply, both inside and outside the exchange, to the small-employer markets, One section of the California legislation, she pointed Neuschler concluded. However, adjustments to premiums out, is basically “a recitation of the key things in the based on health status will be completely eliminated. federal law that the exchange is required to do.” For “That is a big, big change in California for the individual example, the federal law requires that the exchange market,” Neuschler said. The only allowable rating certify plans for participation and establish resources to factors will be single-versus-family coverage, geographic assist potential enrollees in navigating their options, and area, tobacco use (with a ratio of 1.5:1), and age (with a the California statute also includes those requirements. maximum variation for adults of 3:1). But the California statute goes beyond federal law by authorizing the exchange to “selectively…contract with 6  |  California HealthCare Foundation carriers so as to provide health care coverage choices that California’s Exchange Legislation offer the optimal combination of choice, value, quality, Two pieces of 2010 legislation, signed into law by and service.” Governor Schwarzenegger, establish the California Health Benefits Exchange (CHBE) as of January 1, 2011. The legislative team was in firm agreement that it did not SB 900 establishes the exchange and its governing want to put the exchange “in a situation where it becomes board. AB 1602 establishes the duties and operations of the exchange. Some key features of the legislation: the de facto third regulator,” Sousa said. “California is complicated enough with a dual regulatory system.” • The CHBE is an independent state entity governed by a five-member board. Two members are gubernatorial However, she added, the question of rate regulation appointees, one is an appointee of the California will not go away, and will likely be the subject of future Senate Rules Committee, one is an appointee of the legislation. Assembly Speaker, and one is the California Secretary of Health and Human Services. Board members are subject to strict conflict of interest provisions and Because the program has to be in place by 2014, receive no salary. concluded Sousa, the team had to emphasize practicality. • The CHBE will comply with the federal requirements Therefore, she said, “the decisions that we made were very pertaining to state exchanges that were part of the much grounded in that practical ‘Will this work? Is it federal Affordable Care Act of 2010. possible?’” • A Small Business Health Options Program (SHOP) will be established, separate from exchange plan options and administrative structures that serve individual Still to Be Decided purchasers. Many policy and operational issues will need to be • The CHBE will determine criteria and processes addressed by the exchange board, the Governor, and/or for eligibility, enrollment, and disenrollment that are the legislature, including: consistent with federal law and coordinate with • What criteria will drive the exchange’s selective processes for other public coverage programs. contracting approach? • The CHBE will establish and use a competitive • How will coordination and transitions between the process to select participating carriers in order to exchange, Medi-Cal, and other public coverage provide coverage options that offer “the optimal programs be supported? combination of choice, value, quality, and service.” • How will “No Wrong Door” for eligibility • The CHBE board has authority to standardize products determination and enrollment be assured? to be offered through the exchange. • To what extent will products, benefits, and • The CHBE board may require insurance carriers to cost-sharing be standardized? regularly update, and make available to the exchange, • How will California-specific benefit mandates electronic directories of the providers in their network. and products compare to the emerging federal definition of “essential benefits”? • Requirements are imposed on insurance carriers in order to protect the exchange from adverse selection: • Carriers that participate in the exchange must sell coverage at all “precious metals” levels, both inside and outside the exchange. Some Unknowns and Concerns • Carriers that do not participate in the exchange Scott Bain discussed the exchange timeline and some of may not sell catastrophic-only policies and, if the policy considerations. “One of the questions we were the exchange chooses to standardize plans, regularly asked is, “Why are you doing this now, when must sell at least one standardized plan at each the exchange doesn’t need to be enrolling people until “precious metal” level. California’s Insurance Exchange: Experts Tackle the Big Questions  |  7 2014?” The reason, he said, is that the exchange has a exchange may want to include innovative products that number of big tasks to accomplish before then. It has to are emerging in the individual market. “As the market certify and contract with health plans, devise an eligibility evolves, you wouldn’t want the exchange to be the only enrollment system, establish a means of developing place to buy.” Further, he noted, under the federal law exemptions from the individual mandate, and administer some populations, such as undocumented immigrants, the federal tax credits. Federal funding is available until are not eligible to buy coverage on the exchange. If the 2015 for the exchange start-up tasks, he noted. exchange were the only option, these people could not get insurance coverage at all. A second option was to make There have been concerns about exchange viability, said the exchange a simple “pass through” for subsidy. This Bain, partly rooted in California’s experience with the approach was likened by Jon Kingsdale to a “phone book Health Insurance Plan of California (HIPC), which option” in which all of the products available in a market became PacAdvantage. “It’s really a two-part concern,” he would be listed in the exchange, “regardless of their price, said — first, the exchange’s overall viability, and secondly, regardless of their quality.” “that we get enough plans to participate in the exchange so that people have a choice of products.” As part of these decisions, said Bain, the team had to decide whether to merge the individual and small- The exchange is really two exchanges, Bain noted, “one group markets, which is allowed under federal law. “We for small employers, one for individuals.” There is a big elected not to take that option, in part because we didn’t difference between them in terms of the value of the tax know the impact of premiums on small employers and credit, he said. The federal tax credit for small businesses individuals if we did merge those markets.” However, he is limited under current law to the first two years of the said, the California legislation calls for a study on that exchange’s existence. It is also limited to employers with topic to be provided in 2018. generally lower-wage workers. The tax credit for people buying individual coverage is not time-limited. “It goes In the end, the team decided on a third hybrid model up to a higher income level and is permanent…and so that “would preserve the outside market, but the exchange we think there’s going to be a lot more people taking would drive change in the market and in the exchange advantage of the individual tax credits, and enrollment in itself.” He likened the exchange to an “insurance store” the exchange may reflect that.” Bain noted that planning that would enable people to make apples-to-apples is complicated by the fact that “We really don’t know how comparisons among products, then make their purchase many people are going to enroll in the exchange.” The in a brief online transaction. The team set clear rules federal estimates were in the range of 24 to 29 million for participation in the exchange in order to enable people, while California estimates from different sources fair competition and drive value, Bain said. Through range widely, from 1.25 to 8 million, he said. these rules the exchange can standardize products, and can selectively contract based on choice, quality, value, Bain reviewed some frameworks that were considered in and service. The rules, he said, are devised to reduce devising the legislation. One possibility was making the adverse selection. Adverse selection occurs when a exchange the entire market so that individuals and small disproportionate share of high-risk and high-utilizing employers would only be able to buy coverage through individuals purchase coverage within an overall pool. the exchange. However, this option was rejected because If the exchange experienced adverse selection, its costs the team thought it might be disruptive to current would rise at an unsustainable pace and it would be coverage arrangements. Over time, he explained, the unable to offer affordable insurance products. 8  |  California HealthCare Foundation Governance and Financing Kent described the thinking on governance of the Jennifer Kent discussed the team’s charge to create a exchange. The team quickly decided that the board would structure that would be complementary to the existing be small. “Large boards,” she said, “while they may make market in California. “For individuals and small a lot of people feel really good about being able to sit on businesses that have no purchasing power, if they come them, are not necessarily nimble.” In devising criteria for to the exchange, how are we going to do a better job for the make-up of the board, the team looked at numerous them and how are they going to have choices that are models in state government and outside it. The final readily available, accessible, and easy to compare?” criteria, she said, were grounded in the pragmatic need for decisionmaking by this board. There must be purchaser The first decision point, she said, was whether to make experience as well as expertise in running a public the exchange a governmental entity or a nonprofit, since program and designing benefits. “These individuals, the federal law allows for states to choose either. She said especially for the first few years, which are critical… they decided on a government option principally because need to actually know what they’re doing… so that this government “has to conduct its business in the public.” is actually operational by 2014.” People have the opportunity to request documents and to participate in public meetings and hearings. That was Although the board will be subject to state open-meeting a fundamental threshold decision, Kent said. “This is and public-record laws, it will have the ability to meet in going to be a government entity because of those needs closed session on issues such as rate negotiations. For the to ensure that there is a public transparency process.” first two years, the board can issue emergency regulations. Further, in order to better meet California’s needs, it was decided to make the exchange a state entity, rather than “This first exchange board, especially given the nature and to participate in the fallback federal option established the import of what they’re going to be doing,” said Kent, under the Affordable Care Act. “has to be stable. These folks are going to have to get along.” Provisions were devised to ensure that the board A second major decision was where to house the worked with both the legislature and the administration exchange — within the administration as a department, because a great deal of coordination will be needed. For or off the administration branch of authority so that it example, Kent said, tax entities will need to work with the could perform some tasks “without having to necessarily exchange as will the departments that run public coverage go through an administrative structure.” The legislative programs. The bill takes effect January 1, 2011, and it staff decided on an independent, five-member exchange is expected that board appointments will be made very governing board within the state government. Board shortly thereafter. members would be appointed by the Governor and legislative leadership, and the exchange staff would report Kent described the design of the financing component to the exchange board. The board members would be of the legislation. From the state’s perspective, and as unpaid, and significant conflict of interest provisions were emphasized by the Governor, the General Fund cannot created to bar individuals who work for insurers, agents/ be at risk. Therefore the bills are “chock full of General brokers, health care facilities, or health care providers. In Fund protections,” she said, so that if someone decides to addition, there is a one-year ban on such employment sue the board because of one of its decisions, the General after board members leave the exchange. The staff would Fund will not be affected. be civil service, except for a limited number of executive staff positions. California’s Insurance Exchange: Experts Tackle the Big Questions  |  9 Because the exchange will have to function without responses came in, the exchange would score them against General Fund dollars, Kent added, the board will the criteria, and publish the results through a board have to decide what it is capable of doing within the meeting. The plans that are selected would be awarded resources that they have. These funds will be limited to certification. federal grant awards, assessments on premiums when the exchange is operational, and to any nonprofit or Holland said such a process should enable the exchange to foundation money that may be available. The exchange be viable in the market. “You’re trying to bring in carriers, must report annually to the legislature and the Governor because that’s how you create a shopping experience.” The on expenses, performance, operations, and progress. This idea, he said, is that “You really want to create a dynamic report must also be posted on the exchange Web site, in which people willingly — both individuals and small Kent said. employers — come to the exchange to select carriers and select benefit designs.” Holland stressed the importance Finding the Sweet Spot: Trade-Offs in of transparency. “In Massachusetts, we articulated the Selective Contracting Design goals of the procurement very clearly. We had a lot of The specifics of plan procurement — selection, communication with the carriers….Oftentimes, carrier certification, and contracting — were outlined by Patrick input would inform our thinking, and we would alter Holland, of Wakely Consulting Group, formerly with the the procurement slightly by issuing an amendment to the Massachusetts Connector. procurement.” “The exchange is going to be like running a business,” Insurance Market and Exchange Rules he said, “so the idea is to structure the procurement in a Rick Curtis of the Institute for Health Policy Solutions way in which you are not only meeting your goals from talked about the market rules, which, he said, are a policy and business standpoint, but you…bring in intended to make competition work for the individual the carriers so that they’ll offer their products on your consumer and small employer. The aim is to achieve a exchange. That’s the sweet spot.” market “in which it’s safe for an exchange to do the right thing and not be basically killed by adverse selection…. The procurement procedures that Medicaid programs More generally, the competition is over service and value across the country have established over time can help and quality, not over who’s best at attracting the best inform the way the exchange selects plans, said Holland. risks.” Standards and criteria are created, published, and then vetted by the governing authority. First, a request for The federal law establishes a strong foundation for the proposal or other form of solicitation goes out to the avoidance of adverse selection, he said. “In the reform marketplace. Most states have formal scoring criteria market, there is guaranteed access to plans for everyone. that are developed internally. The criteria, he said, are You’re not charged more if you’re sick or likely to get sick. structured to reflect the priorities of the governing That’s a big difference.” authority. Importantly, said Curtis, insurers must treat their A similar process could help the California exchange enrollment as one risk pool. They can’t, he said, have get “the right blend of product designs and carrier their “low-risk special” with a very good price for the selection,” said Holland. The criteria would be vetted by healthiest population, and then price the plan way up for the board so that the process is transparent. When the higher-risk people. Insurers have to “spread the costs for 10  |  California HealthCare Foundation the population across the various products.” There is risk There is an important difference between the federal adjustment across the insurers in the market, said Curtis. and California legislation concerning the exchange rules “This is market-wide so that the plans that end up with a and the outside-market rules, Curtis said. The federal more costly population get compensation for that.” law specifies that to participate in the exchange, a plan has to offer at least the Silver and Gold levels. This Curtis addressed a common worry that because of weak precludes a plan from participating only at the Bronze initial year penalties on individuals who do not obtain level, “where the unsubsidized healthy people will be,” health insurance, high shares of people with pent-up but this federal restriction pertains only within the medical needs will obtain coverage, causing costs and exchange, not in the outside market. The California law, premium prices to skyrocket. However he pointed to said Curtis, goes beyond that and requires any carrier federal provisions protecting against such premium price participating in the exchange to offer at least one plan at hikes in the first several years. In particular, there will be all five levels — Catastrophic, Bronze, Silver, Gold, and reinsurance that is externally funded by assessments on Platinum — inside and outside of the exchange for the a broad base of health plans (including administrators individual or small group market, or both, if the carrier of large employer self-insured plans), operated by the participates in both. state. Further, he said, there are risk corridors that will compensate plans that have costs substantially outside of The California law gives the exchange board authority where they priced the premiums. to standardize the products offered in the exchange. Should it exercise that authority, all issuers in the outside All of these measures, said Curtis, “should mean that market not participating in the exchange will also be prices are very reasonable initially, and that “plans will be required to offer at least one standardized product in eager to participate.” He added that “This is harnessing each of the precious metal categories. If the board does competitive market forces to get plans to compete to offer not choose to standardize plans, there is no requirement better value.” on outside market carriers — who do not participate in the exchange — to offer the plans at each metal level. The competitive market with guaranteed access for However, the exchange is likely to standardize, Curtis individuals is enabled by the individual requirement said, because if it does not, issuers in the outside market to participate in coverage, he emphasized, so that over will only be able to offer Bronze-level plans and thus will time the healthy people as well as the sicker people will disproportionately attract low-risk persons and lure them participate. “These kinds of market rules don’t work in a away from exchange-participating plans. voluntary individual market that is not subsidized,” said Curtis. Massachusetts tried it that way, he recounted. While the federal law allows a variety of cost-sharing “Their individual market premiums were sky high and configurations that can be hard to compare, Curtis came way down under state reform.” He said that the said, the California legislation authorizes the exchange exchange in California will be “very, very different from board to move to standardization in order to enable the HIPC” because the individuals and small employers apples-to-apples comparisons. The exchange’s ability who are eligible for tax credits have to participate in the to specify standardized products at each of the four exchange in order to take advantage of them. “This is a levels that carriers in the outside market must offer very substantial core population,” he said. “It will be a is designed to facilitate comparisons by consumers, large population with risk spread broadly.” said Curtis. Massachusetts evolved to standardizing all offerings in their exchange, he said, after the exchange California’s Insurance Exchange: Experts Tackle the Big Questions  |  11 surveyed members and found out this is what they wanted. “Similarly, an evolution responding to consumer About the F o u n d at i o n The California HealthCare Foundation works as a catalyst to preferences is likely in California,” he said. fulfill the promise of better health care for all Californians. We support ideas and innovations that improve quality, Curtis compared the federal and California provisions increase efficiency, and lower the costs of care. For more in terms of the small-employer exchange. The federal information, visit us online at www.chcf.org. law allows states to either combine the small employer and individual exchange under one umbrella or keep them separate. While California chose to have one umbrella organization, the exchange is to have separate administrative capacity to provide consolidated billing and enrollment services for small employers. Otherwise, he said, worker choice of plans through the exchange would be “an administrative nightmare for the employer,” because every employer would have to conduct separate transactions with all the different health plans in which their workers enroll. Instead, employers will deal with only one entity while the exchange does the “heavy lifting” of dealing with all the different health plans. Due to its previous experience, he said, California is very concerned about risk selection, “probably more than any other place in the country.” Fortunately, the federal construct “puts these exchanges in a far better position to begin with than the HIPC was with respect to selection,” he said. Beyond that, he added, a number of additional measures that the legislative team placed in the California law should further circumvent problems. “I’ve never seen people working so hard to find a solution to problems,” said Curtis. “Their focus was always on ‘Let’s make it work.’” 12  |  California HealthCare Foundation