Health Insurance Exchanges Under the Patient Protection and Affordable Care Act (ACA)
Released: 2013-06-05T00:00:00

Introduction

A health insurance exchange is a structured marketplace for the sale and purchase of health insurance. "Customers" can include individuals and businesses. The insurance companies ("issuers") that choose to sell their products through an exchange may be required to comply with consumer protections, such as offering insurance to every qualified applicant. Exchanges, however, are not issuers; rather, exchanges contract with issuers who will make insurance products available for purchase through exchanges. Essentially, exchanges are designed to bring together buyers and sellers of insurance, with the goal of increasing access to coverage.

This rather broad definition allows for a great deal of latitude, and therefore variance, in the number and scope of responsibilities covered in a particular exchange. For example, the role of an exchange may be more or less administrative: facilitating the sale and purchase of health insurance. An administrative-only exchange may function similar to websites that allow individuals to find airline travel options and purchase tickets (e.g., Kayak). Such an approach does not necessarily change or establish standards for the products being sold (whether they are health plans or airline tickets), or limit the types of buyers and sellers participating in the exchange, beyond what already exists in the private market. An example of a minimalist health insurance exchange is the Utah Health Exchange. Essentially, Utah's exchange is an Internet portal that is "designed to connect consumers to the information they need to make informed health care choices, and in the case of health insurance, to execute that choice electronically."

At the other end of the spectrum, an exchange may have multiple functions beyond the role of insurance marketplace. For instance, an exchange may be responsible for implementing regulatory standards, such as requiring standardization of all products offered through it or imposing requirements on exchange participants. An exchange may be responsible for determining eligibility for exchange plans and government-provided subsidies. An example of a more regulatory-oriented exchange is the Health Connector ("Connector") in Massachusetts. Similar to Utah's exchange, the Connector provides an online tool to allow consumers and others to find commercial health insurance options available to them. In addition, the Connector also manages a publicly subsidized coverage program for low-income state residents, and offers certificates to exempt individuals from the state's individual mandate, among other duties.

An exchange may occupy a physical location and/or be virtual (i.e., performing its functions on the Internet). It may be governed by a public agency, a private entity, or a hybrid organization. The insurance options offered through an exchange may also vary across insurance markets and plan types. Nonetheless, while the authority and responsibilities of an exchange may vary, its fundamental purpose is to provide a venue where insurance companies may sell their insurance products and purchasers can compare and choose from multiple options available to them. Thus an exchange allows for "one-stop shopping" with respect to health insurance.

The exchange concept was included in the Patient Protection and Affordable Care Act (ACA, P.L. 111-148 , as amended), as a means to increase access to health insurance. While ACA places many restrictions on the design and function of exchanges, the law also leaves many operational decisions to the states. Such flexibility will likely lead to variation in exchange models across the states. For example, a state may decide to operate an exchange by itself, establish an exchange in partnership with the federal government, or leave this work entirely to the federal government. The initial open enrollment period for all exchanges will begin on October 1, 2013, and all exchanges are to be operational and offering coverage on January 1, 2014.

This report looks at the requirements for exchanges established in ACA and provides information about the requirements and choices available to states for the establishment, functions, financial responsibilities, and coverage of the ACA exchanges. It also includes a brief discussion of the interactions between exchanges and other provisions in the law.

ACA Exchanges

ACA intends exchanges to be marketplaces where qualified individuals and small businesses can "shop" for private health insurance coverage. The coverage offered through exchanges will be comprehensive and meet all applicable private market reforms specified in ACA. Such plans offered through the exchanges will be certified as "qualified health plans" or QHPs.

ACA explicitly states that enrollment in exchanges is voluntary and no individual may be compelled to enroll in exchange coverage. While the main purpose of the exchanges will be to facilitate the offer and purchase of health insurance, nothing in ACA prohibits qualified individuals, qualified small businesses, and insurance carriers from participating in the health insurance market outside of exchanges.

For individuals seeking coverage, exchanges will not only create marketplaces where qualified individuals can purchase QHPs in the nongroup (individual) market, but exchanges will also assist individuals with obtaining federally subsidized premium and cost-sharing assistance to help low to middle income individuals offset the cost of both purchasing and using health insurance. Exchanges will also screen individuals for eligibility for certain public insurance programs (e.g., Medicaid) and connect them with appropriate agencies. For the purposes of this report, an exchange that allows individuals to seek nongroup coverage or eligibility for public programs is referred to as the "individual exchange."

Small businesses seeking coverage for their employees will be able to use the small business health options program (SHOP) exchange. The SHOP exchange is designed to assist qualified small employers and their employees with the purchase of QHPs offered in the small group market. Qualified small employers will be able to select one or more QHPs available in the SHOP to offer to their employees, and they will be able to set the amount they will contribute to QHP premiums.

Exchanges must be established by the state itself or by the Secretary of HHS, and they must carry out the general functions described above for both individuals and small businesses. Additionally, exchanges will be expected to perform a number of other functions relating to managing the QHPs offered through the exchanges and assisting individuals and small businesses in accessing and obtaining coverage. Regardless of how an exchange is established, the initial open enrollment period for an exchange will be October 1, 2013, through March 31, 2014. Exchanges must begin offering coverage to qualified individuals and small businesses on January 1, 2014.

Establishment of ACA Exchanges

ACA provides general direction regarding the establishment and administration of an exchange. ACA is supplemented by regulations and other guidance produced by federal agencies, particularly HHS. Taken together, these documents set forth some requirements and minimum standards that various stakeholders—including consumers, states, issuers, and employers—must meet to be part of or to participate in an exchange.

One factor that could influence a number of exchange implementation decisions is how an exchange is established. States have the option of establishing their own exchanges (state-based exchange) as a governmental agency or a non-profit entity. States that intend to operate their own exchanges must have HHS approval. If a state-based exchange (SBE) is not approved, or if a state chooses not to establish its own exchange, the HHS Secretary has the authority to establish and operate an exchange in that state directly, or through an agreement with a non-profit entity. In a federally-facilitated exchange (FFE), HHS will carry out all functions of the exchange and have authority over the exchange.

States also have the option to partner with the federal government to establish an exchange. In a state partnership exchange ("partnership") a state partners with the federal government and certain state-designed and operated functions are combined with federally-designed and operated functions. States that enter into a partnership exchange are required to carry out certain functions and activities related to plan management or consumer assistance or both. While HHS and states share responsibility for carrying out functions in state partnership exchanges, HHS retains authority over these exchanges.

In May 2013, HHS published guidance that indicated that HHS intends to propose, through rulemaking, that a state may also choose to establish and administer its SHOP exchange while the federal government establishes and administers the state's individual exchange. In this case the state would retain authority over its SHOP exchange while the federal government would have authority over the state's individual exchange. For the purposes of this report, this arrangement is referred to as a "state-based SHOP/federally-facilitated individual exchange."

States had until December 14, 2012 to declare their intentions to operate a SBE in 2014; states had until February 15, 2013 to declare their intentions to have a partnership exchange in 2014. HHS has not yet indicated whether there will be a deadline for requesting to have a state-based SHOP/federally-facilitated individual exchange, but HHS has indicated that only states that previously submitted an approved application to have a SBE may request to change to a state-based SHOP/federally-facilitated individual exchange for 2014. Figure 1 shows the status of states' decisions as of May 30, 2013.

It should be noted that states may elect to operate a different type of exchange in the future. For example, if a state chooses not to establish a SBE for 2014, it still may elect to do so in the future. To do so, a state would have to follow the process and timeline outlined by HHS. The following sections provide more details about SBEs, FFEs, and partnership exchanges.

State-based Exchange (SBE)

The HHS Secretary must approve the operation of a SBE if it meets the following standards:

the exchange is able to carry out the required functions of the exchange as established in the law and regulation, which include making QHPs available to qualified individuals and qualified employers; the exchange is capable of carrying out the information reporting requirements related to sharing information with the federal government in order to determine an individual's eligibility for a premium tax credit; and either the entire geographic area of the state is covered in the exchange or the state has established multiple exchanges that cover the entire geographic area of the state.

A SBE is responsible for creating and implementing its structure and governing system according to the guidelines outlined in the statute and regulations, as discussed below.

Operational Structure of a SBE

A state that is approved to establish its own exchange has a number of decisions to make regarding the exchange's operational structure. A state must determine whether its exchange will be a governmental agency or a non-profit established by the state. The terms "governmental" and "non-profit established by the state" have not been defined; instead, it seems these terms are subject to state interpretation.

A state can choose to independently operate an exchange, or a state can enter into contracts with other states (regardless of whether the states are contiguous) to operate a regional exchange. States can also establish one or more subsidiary exchanges in the state if each exchange serves a geographically distinct area and if the area served by each exchange meets the geographic size requirement established in the law. In other words, while states have a great deal of leeway in establishing how the exchange is divided up geographically, they must serve the entire population in their state. Furthermore, regional exchanges and subsidiary exchanges must meet all exchange requirements.

A SBE must operate both the individual and SHOP exchanges, but a state can either merge the exchanges and operate both under the same administrative and governance structures, or elect to create separate administrative and governance structures for the individual and SHOP exchanges. Additionally, regional and subsidiary exchanges must perform the functions of a SHOP exchange. If an exchange chooses to operate an individual exchange and a SHOP exchange under two different governance and administrative structures, a SHOP exchange must cover the same geographic area as the regional or subsidiary individual exchange.

States also have the authority to allow a SBE to contract with the entities described below to carry out one or more responsibilities of the exchange. States can grant this authority to SBEs independent of whether an exchange is a governmental agency or a non-profit established by the state. For example, a SBE that is a non-profit established by the state could contract with a state agency that meets the criteria below to carry out certain consumer assistance functions for the exchange.

A SBE may contract with

an entity, including a state agency other than a Medicaid agency, incorporated under and subject to the laws of at least one state, that has demonstrated experience on a state or regional basis in the individual and small group health insurance markets and in benefits coverage, but is not an issuer; and/or a state Medicaid agency.

Governance of a SBE

Generally, a SBE must have a governing board that meets certain requirements; the board must

be administered under a publicly adopted operating charter or by-laws; hold regular meetings that are open to the public and announced in advance; ensure that the board's membership includes at least one voting member who is a consumer representative and is not made up of a majority of voting representatives with conflicts of interest (e.g., representatives of issuers); and ensure that a majority of the voting members on its governing board have relevant experience in the health care field (e.g., in health benefits administration, or in public health).

In addition, a SBE is required to have in place and make publicly available a set of governance principles that include ethics, conflict of interest standards, transparency and accounting standards, and standards related to disclosure of financial interests. A SBE must also implement procedures as to how members of the governing board will disclose any financial interests. The SBE's governance principles are subject to periodic review by HHS.

Federally-Facilitated Exchange (FFE)

If a state chooses not to operate its own exchange or if a state does not have approval to operate its own exchange, the HHS Secretary is required to establish a FFE in the state. In general, FFEs are required to carry out many of the same functions as SBEs. Additionally, FFEs and SBEs must adhere to many of the same standards outlined in ACA and regulations. For example, SBEs and FFEs are both required to offer the same tools to help consumers access an exchange and assess their plan options through an exchange.

HHS has published regulations and guidance that generally describes how a FFE will operate within the framework established by ACA. A detailed analysis of the regulations and guidance is beyond the scope of this report; however, they generally describes how a FFE will determine which plans will be offered through an exchange, how it will conduct eligibility and enrollment activities, and how it will operate the SHOP exchange.

Partnership Exchange

A FFE can be implemented by HHS alone, or a state can enter into a "partnership" with HHS, combining state-designed and operated functions with federally-designed and operated functions. Partnerships are considered a subset of federally-facilitated exchanges, indicating that HHS has authority over partnerships in federally-facilitated exchanges.

With regard to the partnership exchange, HHS retains authority over the exchange, but it expects states to assume responsibility for certain exchange activities. To enter into a partnership exchange, a state must either manage activities related to plan management or consumer assistance or both. If a state elects to administer plan management activities, the state will be responsible for recommending plans for certification to be offered through an exchange and managing day-to-day administration and oversight of exchange plans. If a state elects to perform consumer assistance activities in a partnership exchange, then the state will be responsible for providing in-person assistance to individuals applying for or enrolled in coverage offered through the exchange and can choose to be responsible for outreach and educational activities. If a state elects to administer both the plan management and consumer assistance activities within the partnership, then the state will carry out all of the activities described above.

What Exchanges Do

Exchanges are required to carry out a number of different functions, including determining eligibility and enrolling individuals in appropriate plans; conducting plan management activities; assisting consumers; ensuring plan accountability; and providing financial management. These functions are not necessarily exhaustive of exchange responsibilities; rather, this section is intended to provide a general overview of an exchange's responsibilities. Unless otherwise noted, both SBEs and FFEs are required to carry out the functions described in this section. Additionally, some responsibilities may be different for individual exchanges and SHOP exchanges, so the following discussion provides information for both.

Eligibility and Enrollment

Exchanges are responsible for a variety of functions related to determining an applicant's eligibility (whether an individual's or an employer's) for various plans/programs and for enrolling eligible applicants into those plans/programs. Exchanges must verify the information received from applicants and re-determine eligibility as necessary. Exchanges are expected to have secure electronic databases in place that support exchanges' eligibility and enrollment responsibilities by allowing information to be shared among state and federal agencies. An exchange's responsibilities to determine eligibility and to enroll eligible individuals are different, but related, for the individual exchange and the SHOP exchange (for small business employees).

Individual Exchange

To determine eligibility, an individual exchange must use a single, streamlined application to collect information from an applicant and verify that information according to procedures identified in regulation. For example, an individual exchange is expected to verify an applicant's social security number by transmitting the number to HHS, which will consult the Social Security Administration and the Department of Homeland Security, as needed, to verify the number.

An individual exchange is expected to re-determine an enrollee's eligibility if the individual exchange receives and verifies new information relating to the enrollee. This information can come from the enrollee, as enrollees are required to report any change with respect to eligibility standards within 30 days of the change, or it can come from information the individual exchange finds through its required periodic examination of available information that might affect eligibility (e.g., whether an enrollee has died). An individual exchange is also expected to re-determine or re-assess the eligibility of all enrollees on an annual basis. However, re-determinations and re-assessments due to changes in status do not fully satisfy the requirement for annual re-determinations and re-assessments.

Eligibility for Enrollment in a QHP

An individual exchange is required to determine an applicant's eligibility for enrollment in a QHP. If an applicant is determined eligible for a QHP, the individual exchange is expected to facilitate the applicant's enrollment into the QHP selected by the individual. Table 1 shows the criteria an individual exchange must use to determine eligibility for enrollment in a QHP.

Eligibility for Premium Tax Credits and Cost-Sharing Subsidies

Certain individuals who purchase a QHP through an individual exchange will be eligible for financial assistance to help them off-set the cost of the coverage and to defray some costs associated with using health services. ACA provides assistance, for the purchase of exchange coverage, in the form of premium tax credits. (A tax credit is a reduction that is applied to the amount an individual (or family) owes, if any, when filing income taxes.) Premium tax credits are advanceable, meaning instead of having to wait until after the end of the tax year to receive the credit, the individual may receive the payments in advance to coincide with when insurance premiums are due (usually on a monthly basis).

In addition to the premium tax credits, ACA provides cost-sharing subsides to certain individuals to help them pay costs related to the use of health services. (Cost-sharing generally refers to costs that an individual must pay when using services that are covered under the health plan that the person is enrolled in; common forms of cost-sharing include copayments and deductibles.) Both premium tax credits and cost-sharing subsidies are discussed later in this report under the section " Cost Assistance ."

Because the premium tax credits are advanceable, it will be necessary to determine an individual's eligibility for the credits at the time the individual applies for coverage through an exchange. In regard to advanced payment of premium tax credits, an individual exchange may either determine an applicant's eligibility directly or implement a determination of eligibility made by HHS. Determining eligibility directly is similar to determining eligibility for QHPs; the individual exchange reviews an applicant's information and makes a determination of eligibility. If an individual exchange chooses to determine an applicant's eligibility for advance payment of premium tax credits, the exchange must calculate the amount of the advance payment in accordance with Section 36B of the Internal Revenue Code. An individual exchange may only provide the advance payment if the applicant meets the eligibility criteria (see Table 2 ).

Similarly, an individual exchange may either directly determine eligibility for cost-sharing subsidies, or it may implement a determination made by HHS. If an individual exchange chooses to determine an applicant's eligibility for cost-sharing subsidies, the exchange must do so according to the criteria outlined in Table 2 .

If an individual exchange decides not to directly determine eligibility for advanced payment of premium tax credits or not to directly determine eligibility for cost-sharing subsidies but rather implements HHS determinations, then an individual exchange is expected to transmit all collected and verified information to HHS. The individual exchange does not make a recommendation in this process; rather, the individual exchange shares information with HHS and then is expected to adhere to the determination of eligibility made by HHS.

Eligibility for Medicaid and CHIP

An individual exchange may either determine or assess an applicant's eligibility for enrollment in Medicaid and/or CHIP. If an individual exchange determines eligibility for Medicaid and/or CHIP, then the individual exchange is also responsible for the enrollment of eligible applicants. Once an applicant has been determined eligible, the individual exchange must transmit the applicant's information to the state Medicaid or CHIP agency, thus effectuating enrollment.

An individual exchange may only assess eligibility for Medicaid/CHIP. If an applicant is assessed eligible for a program the individual exchange is required to transmit all collected and verified information to the state Medicaid or CHIP agency to enable the agency to make a final determination of the applicant's eligibility. In this case, the exchange is only making a recommendation and sharing information with the appropriate agency; it is not responsible for making a final determination of eligibility. The individual exchange is expected to adhere to the final determination made by the agency.

The final rule on Medicaid eligibility changes under ACA indicates that the state Medicaid and/or CHIP agency will decide whether an individual exchange will determine or assess eligibility for its program(s). Additionally, the rule clarifies that some individuals have financial eligibility for Medicaid based on modified adjusted gross income (MAGI), while others do not have financial eligibility based on MAGI. The rule provides that a state's Medicaid agency can separately decide on the individual exchange's role in determining or assessing Medicaid eligibility for MAGI and non-MAGI populations. Table 3 shows criteria an individual exchange must use to determine or assess eligibility for individuals whose financial eligibility is based on MAGI. It is beyond the scope of this report to detail the criteria used to determine or assess eligibility for individuals whose financial eligibility is not based on MAGI.

Eligibility for Enrollment in a BHP

The Basic Health Program (BHP) is a health insurance program for low-income individuals who are not eligible for Medicaid, and is offered in lieu of eligible individuals obtaining coverage through an exchange. Beginning in 2015, states will have the option to implement the BHP, and therefore, exchanges will interact with BHPs in only those states that choose to implement a BHP.

If a state chooses to establish a BHP, an individual exchange is expected to determine an applicant's eligibility for a BHP, and facilitate the applicant's enrollment in the program. Table 4 shows the criteria an individual exchange must use to determine eligibility for enrollment in a BHP.

SHOP Exchange

As the exchange for small businesses, the SHOP has responsibilities similar to the individual exchange in that the SHOP is also responsible for collecting and verifying information from employers and employees (both considered applicants), determining eligibility, and facilitating enrollment. An employer and each of its employees seeking coverage must submit an application to the SHOP. The SHOP must process the applications, and if the employer and employees are determined eligible, the SHOP must facilitate the enrollment of qualified employees into QHPs offered through the SHOP.

A qualified employee is an employee who receives an offer of coverage from a qualified employer. A qualified employer is a small group employer that elects to make, at a minimum, all full-time employees eligible for one or more QHPs offered in the small group market through an exchange and has its principal business in the exchange service area or offers coverage to each eligible employee through the SHOP serving the employee's worksite.

The SHOP is required to verify applicants' eligibility as outlined in regulation. In general, a SHOP must permit an employer to purchase coverage for employees at any time during the year, but the employer's plan must consist of a 12-month period beginning with the employer's effective date of coverage. Employees must adhere to annual open enrollment periods as determined by the SHOP, with special allowances for newly qualified employees. An employer who uses the SHOP is not required to contribute to employees' premiums; additionally, neither ACA nor regulations specify whether a SHOP can require a minimum contribution from employers.

A SHOP must allow certain "employer choice" functions; an employer must be able to select a level of coverage in which all QHPs within that level are made available to its employees. Additionally, a SHOP may allow an employer to make one or more QHPs available to its employees by a different method. For example, a SHOP could allow an employer to select two levels of coverage in which all QHPs are available to its employees. However, employers will not be required to offer all the plans in an exchange to their employees; a SHOP must allow an employer to limit the selection of plans. A SHOP must perform certain premium aggregation functions, such as collecting the total amount due from each employer and making payments to QHP issuers in the SHOP.

According to a final rule published in June 2013, a SHOP will not be required to carry out the employer choice and premium aggregation functions described above until 2015. For 2014, a SHOP may choose to carry out the functions, or it may choose only one method by which an employer can select a QHP (or QHPs) for its employees, and a SHOP may choose whether to perform the premium aggregation functions. HHS has indicated that, in 2014, SHOPs in FFEs and partnership exchanges will only allow an employer to choose one QHP to offer to its employees and they will not perform premium aggregation functions.

Plan Management Responsibilities

Exchanges are required to ensure that QHPs are certified. An exchange may certify a plan as a QHP if the plan meets the required minimum criteria and if the exchange determines that it is in the best interest of qualified individuals and employers to have such a plan available. The minimum certification criteria outlined in ACA and further defined through regulation include requirements related to marketing, choice of providers, plan networks, accreditation, and other features.

In addition to certifying QHPs, an exchange must establish processes for recertification and decertification of QHPs. The recertification process, at a minimum, must include a review of the general certification criteria and must be completed on or before September 15 of the applicable calendar year. The decertification process must, at a minimum, include the following requirements: the ability for an exchange to decertify a plan at any time if the exchange determines that the QHP no longer meets the certification requirements; an exchange must establish a process for the appeal of a decertification; and an exchange must provide a notice of the decertification to all affected parties, including the QHP issuer, the exchange enrollees, HHS, and the state insurance department.

An exchange has additional plan management functions. For example, the exchange must require plans seeking certification as QHPs to submit justification for premium increases before it takes effect, and the plans will have to post the information about their premium increases on their websites. Also, the HHS Secretary is required to create a system that rates QHPs on the basis of relative quality and price. An exchange is expected to assign a rating to each QHP according to the HHS Secretary's criteria and provide the quality rating information through its website.

Consumer Assistance and Accountability

Exchanges have a number of responsibilities related to assisting consumers in accessing and obtaining coverage, including providing tools to help consumers access the exchange, helping consumers determine which plan or program to enroll in, and helping consumers determine their potential financial responsibility for a QHP offered through an exchange. Additionally, exchanges are expected to adhere to accountability practices to increase an exchange's transparency.

The following are some of an exchange's responsibilities related to assisting consumers and being accountable to stakeholders, including consumers. An exchange must

Provide for operation of a toll-free telephone hotline that addresses the needs of consumers requesting assistance and informs individuals with disabilities and limited English proficiency of the availability of services to assist them. Maintain a website which, among other things, provides standardized comparative information on each QHP available through the exchange and allows qualified individuals to select a QHP in which to enroll. Make available an electronic calculator (through its website) that facilitates the comparison of available QHPs (including the impact of any advance payments of tax credits and cost-sharing subsidies in the individual exchange and the impact of any employer contribution in the SHOP exchange). Conduct outreach and education activities that will educate consumers about the exchange and insurance affordability programs (IAPs) to encourage participation. Establish a Navigator program with grants to eligible individuals and entities to provide information about the exchange and help individuals select a QHP. Navigators are also required to conduct activities to raise awareness of an exchange. Include results on its website from the Secretary's survey on enrollee satisfaction with the QHPs offered through the exchange, in a manner that allows for easy comparisons of enrollee satisfaction levels. Regularly consult with stakeholders regarding the accessibility and administration of an exchange. These stakeholders include enrollees of QHPs; individuals and entities with experience in facilitating enrollment in health insurance coverage; advocates for hard to reach populations (e.g., individuals with substance abuse problems); small businesses, large employers, and self-employed individuals; state Medicaid and CHIP agencies; federally recognized Tribes; public health experts; issuers; and health insurance agents and brokers. Share financial information on its website, regarding: any regulatory fees or other payments required by the exchange; administrative costs of the exchange; and monies lost to waste, fraud, and abuse. Determine the role of agents and brokers in the exchange. An exchange may allow agents and brokers to be Navigators, provided they otherwise meet the Navigator eligibility criteria. An exchange may also allow agents and brokers to enroll individuals and employers in QHPs offered through an exchange if the agents and brokers meet certain requirements.

Financial Management

Exchanges are responsible for financial management and are expected to be self-sustaining by 2015. They have been given authority to generate funding to support their operations; however, while the law and regulation describe this authority, neither specify how an exchange may or may not generate funding. An example provided in regulation is that exchanges could charge participating issuers assessments or user fees.

Exchanges are expected to play a role in collecting premiums and distributing the premiums to issuers. ACA requires exchanges to perform certain functions relating to financial oversight and integrity, including keeping an accurate accounting of all financial activities and submitting a report annually to the HHS Secretary concerning such accountings. Exchanges are also required to cooperate with investigations into the affairs of exchanges, conducted by the HHS Secretary in coordination with HHS Inspector General.

Federal Responsibilities for Establishment and Administration of All Exchanges

ACA requires federal agencies, primarily HHS, to oversee the exchanges, thus carrying out a number of responsibilities related to the establishment and administration of exchanges. Many of these responsibilities require federal agencies to create systems and criteria. For example, the HHS Secretary is required to develop the minimum criteria an exchange will use to certify QHPs to be offered through an exchange. The HHS Secretary is also required to grant financial awards to states to be used to establish exchanges.

Federal Oversight

Federal agencies, primarily HHS, have oversight and other responsibilities for exchanges. These responsibilities not only relate to the general operation of the exchange, but they also relate to how an exchange is expected to share information and coordinate its duties with federal agencies.

It is beyond the scope of this report to detail all of the responsibilities ACA gives to federal agencies; however, the following are general examples of duties required of federal agencies. Other examples are included in this report, where appropriate.

The HHS Secretary is required to promulgate regulations relating to, among other things, setting standards for the establishment and operation of exchanges, the offering of QHPs through exchanges, and the establishment of the reinsurance and risk adjustment programs established by ACA. The HHS Secretary is expected to coordinate efforts between the exchange and other federal agencies (such as the Social Security Administration) to verify information collected by the exchange from applicants and related to eligibility for the exchange and other programs (e.g., premium tax credits). The HHS Secretary is expected, through consultation with other entities (such as the National Association of Insurance Commissioners), to develop and maintain tools and set minimum standards for tools that exchanges may use to assist consumers with accessing the exchange.

Federal Financial Assistance

While exchanges are expected to be self-sufficient by 2015, there is some federal assistance provided to states to help them as they develop their exchanges. ACA requires the HHS Secretary to award planning and establishment grants to states for the purposes of activities related to establishing exchanges. ACA gives the HHS Secretary the authority to determine the amount of the grants and to renew the grants if a state is making sufficient progress toward establishing an exchange. No planning and establishment grant may be awarded after December 31, 2014.

Planning grants were given to 49 states and the District of Columbia. These grants of up to $1 million each were intended to provide resources to states to help them conduct research and planning related to establishing exchanges. Establishment grants have also been awarded to a number of states. Level one establishment grants are annual awards to states that are still in the initial phases of developing exchanges, and level two establishment grants are multi-year awards intended to assist states that have made significant progress in implementation of exchanges. As of the date of this report, 34 states and the District of Columbia have received level one grants, and 12 states and the District of Columbia have also received level two grants. In total, the states and the District of Columbia have received about $3.6 billion in establishment grants.

The HHS Secretary has also awarded grants to eligible entities to help them develop and adapt technology systems to be used by an exchange to determine eligibility and process enrollment. These "early innovator" grants were given to seven entities to help them design and implement the information technology infrastructure needed to operate an exchange. The grants were awarded to entities that have "demonstrated their technical expertise and ability to develop these IT systems on a fast track schedule, and their willingness to share design and implementation solutions with other states." The seven entities combined have received more than $249 million in early innovator grants.

Coverage Offered through the Exchanges

Most private health insurance plans sold through exchanges must include a comprehensive set of benefits. The law specifies standards for the types and levels of coverage that can be offered through exchanges.

Coverage Levels and Benefits

Generally, exchange plans must (1) cover "essential health benefits" (EHBs), at a minimum; (2) limit cost-sharing, including out-of-pocket costs; and (3) provide coverage that meets one of four levels of plan generosity based on actuarial value (defined below). These requirements will become effective beginning in 2014, to dovetail with the establishment of exchanges. The following discusses them in greater detail.

Essential Health Benefits (EHB)

ACA does not explicitly list the benefits that comprise essential health benefits (EHBs). Instead, the law identifies 10 broad benefit categories which must be included in EHBs, at a minimum:

ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness and chronic disease management; and pediatric services, including oral and vision care.

States may impose additional benefit mandates beyond what is required under EHBs. However, any state that requires health plans to offer benefits beyond EHBs must assume the total cost of providing those additional benefits, for all the plans, and regardless of whether or not an individual is receiving any financial assistance with premiums or cost-sharing. The state must make payments either directly to the individuals enrolled in health plans affected by the state benefit mandates, or to such plans on behalf of enrolled individuals.

The bulk of the responsibility for defining EHBs is given to the HHS Secretary. In defining the EHB for at least 2014 and 2015, HHS asked each state to select a benchmark plan. Plans required to offer the EHB must model their benefits package after the state's benchmark plan. HHS identified four benchmark plan types that a state could select for the purpose of defining EHBs in that state:

one of the three largest plans in the state's small group health insurance market; one of the three largest state employees health benefits plans; one of the three largest national plans offered through the Federal Employees Health Benefits Program (FEHBP); or the largest commercial non-Medicaid health maintenance organization (HMO) in the state.

If a selected benchmark plan does not cover services and benefits from all 10 categories listed in statute, a state is required to supplement the benchmark plan (according to a process outlined by HHS) to ensure that all 10 statutorily required categories are represented. The default benchmark option, the largest plan by enrollment in the largest product in the state's small group market, will apply in cases where a state did not voluntarily select a benchmark plan.

Each state's benchmark plan was finalized in early 2013. The benchmark plan in 45 states and D.C. is a plan offered in the small group market, the benchmark plan in two states is a state employee health benefit plan, and the benchmark plan in three states is a non-Medicaid HMO. (No states selected a FEHBP plan as its benchmark plan.) This process for defining the EHB is in effect for 2014 and 2015; HHS may revisit how the EHB are defined for the 2016 plan year and beyond.

Cost-Sharing Requirements

Cost-sharing includes deductibles and co-payments for services rendered. ACA limits the amount of cost-sharing that exchange plans generally may impose on enrolled individuals. These cost-sharing limits prohibit

any deductible applicable to preventive health services; deductibles, in small group health plans, that are greater than $2,000 for self-only coverage, or $4,000 for any other coverage in 2014 (annually adjusted thereafter); and annual cost-sharing limits that exceed existing limits specified in the tax code, relating to certain high deductible health plans.

Levels of Plan Generosity

Health plans that provide the essential health benefits package must tailor cost-sharing to meet one of four levels of generosity, based on actuarial value. Actuarial value (AV) is a summary measure of a plan's generosity, expressed as the percentage of medical expenses estimated to be paid by the issuer for a standard population and set of allowed charges. In other words, AV reflects the relative share of cost-sharing that may be imposed. On average, the lower the AV, the greater the cost-sharing.

Each level of plan generosity is designated according to a precious metal and corresponds to a specific actuarial value:

While the term actuarial value may imply a high level of precision,

actuarial analysis is inherently an estimation process and hence is somewhat inexact. Actuarial value estimates will vary by the data sources, projection methods, and assumptions used, and there may be a reasonable range of appropriate methods and assumptions used to develop these estimates.

Given this, ACA requires the HHS Secretary to promulgate regulations regarding the determination of the levels of plan generosity. The determination will be based on a benefit package consisting of essential health benefits and a standard population. To date, HHS issued a bulletin that described its proposed definition for actuarial value and solicited comments. In the bulletin, HHS proposes to use a standard data set based on a countrywide standard population, with the option for individual states to "develop State standard populations based on State claims data."

Exchange Health Plans

Exchanges will offer several types of health plans, as specified in statute and regulation. Exchange plans will provide a comprehensive set of covered benefits (i.e., the essential health benefits), except for stand-alone dental plans (which will have to meet a narrow set of benefit requirements). While most of these comprehensive plans will be available to any individual or employer who is qualified to enroll in exchanges (such as multi-state QHPs and CO-OP QHPs), some plans will be available only to specific subpopulations (child-only QHPs and catastrophic QHPs). Finally, plans offered in exchanges may also be offered outside of exchanges.

Qualified Health Plans

In general, exchanges will offer comprehensive coverage that meets the standards to be certified as "qualified health plans" (QHPs), provided it meets requirements related to marketing, choice of providers, plan networks, and other features, or is recognized by each exchange through which such plan is offered. In addition, all QHPs are required to comply with benefit, cost-sharing, and generosity components of the essential health benefits package (described above). In addition to qualified health plans, exchanges will also offer multi-state QHPs, child-only QHPs, and CO-OP QHPs (described below).

An issuer of QHPs must be licensed and in good standing with each state in which it offers coverage; must offer at least one QHP each providing silver and gold levels of coverage; and must comply with regulations applicable to exchanges. An issuer may offer QHPs outside of exchanges as well as inside, but the premiums would have to be the same, even if the QHP is sold through an insurance agent.

Multi-State Plans

Multi-state plans (MSPs) are designed to offer nationally available QHPs, so that individuals and small businesses will all have access to these plans, regardless of where they live. The Director of the Office of Personnel Management (OPM) will enter into contracts with issuers to offer at least two MSPs ultimately through every exchange in all the states. Any individual eligible to purchase insurance through the exchange may enroll in an MSP. Enrollment is voluntary, and individuals may be eligible for premium credits and cost-sharing assistance.

Each contract for an MSP will be for at least one year and can be automatically renewed if neither party provides notice to terminate. At least one contract will be with a nonprofit entity, and at least one contract cannot provide coverage for abortion services. The OPM Director will enter into a contract with an issuer if the issuer offers the plan in at least 60% of states in the first year, at least 70% in the second year, at least 85% in the third year, and in all states thereafter.

An issuer offering an MSP must meet certain requirements and adhere to certain policies. For example, an issuer offering an MSP must meet the requirements in every state's exchange, offer a uniform benefits package in each state consisting of the essential health benefits, and comply with the minimum standards prescribed for carriers offering health benefits plans under the Federal Employees Health Benefits Program (FEHBP). However, unlike other QHPs offered through an exchange, which are regulated by a state, MSPs will be licensed by states, but regulated by OPM. For example, OPM has the authority to certify, recertify, and decertify MSPs for participation in an exchange. If OPM certifies an MSP, the MSP is deemed certified to participate in every state's exchange.

Child-Only Qualified Health Plans

ACA requires an issuer that offers a QHP through an exchange to also offer that plan as a "child-only plan." Child-only plans will provide QHP coverage for individuals who are less than 21 years of age. The final regulation on exchanges stated that a child-only plan must be provided at the same level of coverage (bronze, silver, gold, or platinum) as a qualified health plan, as specified in the law.

Consumer Operated and Oriented Plans

ACA establishes the Consumer Operated and Oriented Plan (CO-OP) program, with an intent to "foster the creation of qualified nonprofit health insurance issuers to offer qualified health plans in the individual and small group markets in the states in which the issuers are licensed to offer such plans." ACA gives the HHS Secretary the authority to grant start-up and solvency loans to non-profit organizations applying to become qualified issuers.

Health plans offered by a CO-OP loan recipient may be deemed certified as a CO-OP QHP; if a plan is deemed a CO-OP QHP, then an exchange must recognize the plan as eligible to participate in an exchange. CO-OP QHPs are eligible to participate in an exchange for two years and may be recertified every two years after that for up to 10 years following the life of any loan awarded. To be deemed certified, a CO-OP QHP must comply with a number of requirements, including all state-specific standards established by an exchange for QHPs operating in that state (except where those standards operate to exclude loan recipients due to being new issuers or based on characteristics that are inherent to being a CO-OP. CMS, or an entity designated by CMS, has the authority to deem CO-OP QHPs as certified to participate in an exchange.

CO-OP loan recipients must offer a CO-OP QHP at the silver and gold levels in every individual market exchange that serves the geographic regions in which the CO-OP loan recipient is licensed and intends to provide health care coverage. If offering at least one plan in the small group market, CO-OP loan recipients must offer a CO-OP QHP at both the silver and gold levels in each SHOP that serves the geographic regions in which the entity is offering coverage. This indicates that CO-OP QHPs will be offered in at least the individual market in every exchange that shares a geographic region with a CO-OP loan recipient. Individuals who enroll in CO-OP QHPs offered through the individual market are eligible for premium tax credits and cost-sharing subsidies.

The HHS Secretary began awarding CO-OP program loans in January 2012; as of December 21, 2012, 24 non-profits in 24 states had received loans. On January 2, 2013, the American Taxpayer Relief Act of 2012 ( P.L. 112-240 ) was enacted. The act included a provision that rescinded nearly all unobligated funding for the CO-OP program. The only funding that was not rescinded was an amount set aside for governance and oversight of loans already awarded.

Catastrophic Plan

Issuers may offer catastrophic plans in the exchanges, which will have actuarial values less than what is required to meet any of the levels of plan generosity for qualified health plans (described above). These plans are expected to have lower premiums, because they will have less generous coverage and higher cost-sharing. Catastrophic plans must

be available only to individuals under 30 years of age, or individuals exempt from the individual mandate, because they do not have access to affordable coverage or experienced a hardship; include coverage for "essential health benefits"; include coverage for at least three primary care visits; have a deductible equal to existing cost-sharing limits specified in the tax code, relating to certain high deductible health plans (the deductible will not apply to "preventive health services"); and be offered only through the individual health insurance market.

Stand-Alone Dental Benefits

ACA allows issuers to offer stand-alone dental benefits through the exchanges, as long as such benefits include pediatric oral services (as specified under the essential health benefits provision). The final exchange regulation clarifies that stand-alone dental benefits may be offered in a plan separate from a qualified health plan, or in conjunction with a QHP, as specified in the law. Exchanges may not limit the offer of stand-alone dental benefits to only one of these two options. In other words, issuers have sole discretion regarding (1) whether they will offer stand-alone dental benefits, and (2) the form in which those benefits will be provided (separate from or in conjunction with a QHP).

Cost Assistance

To make exchange coverage more affordable, certain individuals will receive premium assistance in the form of federal tax credits. (As specified in the law, the Treasury Department will send monthly payments to the insurance company which issues the health plan in which a credit recipient is enrolled, to cover all or part of that person's monthly premium.) Moreover, some recipients of premium credits may also receive subsidies towards cost-sharing expenses. Exchanges have some responsibilities, as outlined below, in regard to determining an individual's eligibility for cost assistance and calculating the amount of cost assistance provided.

Premium Tax Credits

New federal tax credits were authorized in ACA to help low-middle income individuals pay for exchange coverage, beginning in 2014. The premium credit will be an advanceable, refundable tax credit, meaning tax filers need not wait until the end of the tax year in order to benefit from the credit (advance payments will actually go directly to the issuer), and may claim the full credit amount even if they have little or no federal income tax liability.

To be eligible for a premium credit in an exchange, an individual must

have household income between 100% and 400% of the federal poverty level, with exceptions; not be eligible "minimum essential coverage" other than: through the individual health insurance market; or employer-sponsored insurance that is "unaffordable" or does not provide minimum value"; be enrolled in an exchange plan; and be part of a tax-filing unit.

The amount of the tax credit will vary from person to person: it depends on the household income of the tax filer (and dependents), the premium for the exchange plan in which the tax filer (and dependents) is (are) enrolled, and other factors. In certain instances, the credit amount may cover the entire premium and the tax filer pays nothing towards the premium. In other instances, the tax filer may be required to pay part (or all) of the premium.

Exchanges are responsible for either determining an individual's eligibility for advance payment of premium credits or implementing a determination made by HHS. If an exchange makes the determination, then the exchange is also responsible for calculating the amount of the credit in accordance with Section 36B of the Internal Revenue Code.

Cost-Sharing Subsidies

Certain individuals who are eligible for premium credits in the exchanges will also be eligible for subsidies towards service-related cost-sharing. (According to guidance issued by HHS, the federal government will provide monthly payments to the issuer of the health plan in which the subsidy recipient is enrolled, to reduce the amount of cost-sharing that individual would be responsible for when s/he uses health services.) An individual who qualifies for the premium credit and is enrolled in a silver plan through an exchange, will also be eligible for a cost-sharing subsidy. As discussed above, total cost-sharing in exchange plans will be limited according to amounts specified in the federal tax code. Given that most exchange plans will already be required to meet such limits, the cost-sharing subsidies will further reduce the total amount those individuals who qualify for the subsidies will pay for using health services.

Exchanges are required to either determine an individual's eligibility for cost-sharing subsidies or implement a determination made by HHS. To do this, an exchange is expected to collect and verify the information necessary to make the determination and share that information with HHS.

Interaction with Other ACA Provisions

Individual Mandate

Beginning in 2014, most individuals are required to have health insurance or potentially pay a penalty for noncompliance. Generally, individuals will be required to maintain "minimum essential coverage" for themselves and their dependents. Nearly all plans offered through exchanges qualify as minimum essential coverage. As follows, most individuals who have coverage through an exchange will meet the requirements of the individual mandate. Other coverage, such as employer-sponsored insurance and Medicaid, is also considered minimum essential coverage for the purpose of the individual mandate, so an individual does not have to enroll in an exchange plan to meet the requirements of the mandate.

Certain individuals will be exempt from the individual mandate. For example, some individuals will qualify for an exemption based on the affordability of coverage while others will qualify because of their religious beliefs. In screening applicants for eligibility for QHPs and IAPs, exchanges are required to determine whether an individual is exempt from the mandate and issue certificates of exemption accordingly.

Employer Requirements

While employers are not required to offer health benefits to their employees, certain large employers may be subject to penalties whether or not they offer health insurance. Large employers who do not offer health insurance may be subject to penalties if any of their full-time workers enroll in exchange plans and receive premium credits. While most employers who do offer health benefits will meet the law's requirements, some also may be required to pay a penalty if any of their full-time workers receive a premium credit.

In the latter scenario, one way that workers with an employer offer of health benefits may be eligible for premium credits is if the employer plan does not provide minimum value; that is, has an actuarial value that is less than 60%. So while employers are not required to offer coverage through the exchanges, certain large employers may be subject to a penalty if they offer coverage with an actuarial value lower than a bronze-level plan and one of their full-time workers enrolls in an exchange and receives a premium credit.

Exchanges are responsible for notifying an employer if an employee has been found eligible for advance payment of premium credits or cost-sharing subsidies. The exchange must identify the employee, indicate the employee's eligibility, explain that the employer may be subject to penalty, and notify the employer of the right to appeal the determination.

Reforms to Private Health Insurance Markets

ACA includes a number of private market reforms that impose requirements on health insurance carriers and others. Such reforms relate to the offer, issuance, generosity, and pricing of health plans, among other requirements. For example, ACA requires most health plans to extend dependent coverage to children under age 26, with exception. Given that health insurance carriers will be offering plans through the exchanges, ACA's private market reforms will apply to exchange plans.

As discussed under the " Plan Management Responsibilities " section of this report, one of the responsibilities of exchanges will be to certify that plans meet the criteria for a qualified health plan, and, therefore, may be offered through an exchange. While the certification process will consider plan marketing requirements, provider network adequacy, and other features, as specified in the law, the market reforms are requirements imposed generally on insurance companies. Since states remain the primary regulators of health insurance, even post-ACA enactment, states would enforce ACA insurance requirements.

Medicaid

While Medicaid is generally beyond the scope of this report, ACA's Medicaid and exchange provisions were originally designed to work in tandem with each other to provide a continuous source of subsidized coverage for low- to middle-income individuals and families, beginning in 2014. As previously discussed, exchanges are responsible for facilitating enrollment in Medicaid.

As originally enacted, ACA required states to expand Medicaid to certain individuals who are under age 65 with income up to 133% of the federal poverty level (FPL), beginning in 2014. This reform not only expanded eligibility to a group that generally is not eligible for Medicaid (low-income childless adults), but also raised Medicaid's mandatory income eligibility level for certain existing groups to 133% of the FPL. States were required to do this mandatory expansion as a condition of receipt of Medicaid federal financial participation. Given that premium credits would be available through all exchanges at the same time as this Medicaid expansion, the law envisioned that all individuals with income up to 400% FPL would have access to subsidized coverage, regardless of their state of residency.

On June 28, 2012, the United States Supreme Court issued its decision in National Federation of Independent Business v. Sebelius . The Court held that the federal government cannot terminate current Medicaid program federal matching funds if a state refuses to expand its Medicaid program to include non-elderly, non-pregnant adults under 133% of the federal poverty level. If a state accepts the new ACA Medicaid expansion funds, it must abide by the new expansion coverage rules, but, based on the Court's opinion, it appears that a state can refuse to participate in the expansion without losing any of its current federal Medicaid matching funds. All other provisions of ACA, including the entire Health Care and Education Reconciliation Act (HCERA, P.L. 111-152 ), remain intact. Given that some states may choose not to expand Medicaid, there is a possibility that some individuals will not have access to either Medicaid or the premium tax credits.

Regardless of whether or not a state expands its Medicaid program, the rules for coordination and facilitating enrollment between exchange plans and Medicaid will still apply. For example, an individual exchange may decide to determine eligibility for Medicaid. If a person who has applied for exchange coverage is determined eligible for Medicaid, the individual exchange must enroll the person in Medicaid and share the person's information with the state Medicaid agency.

Appendix. Risk Mitigation Programs Under ACA