Exchanges are online marketplaces where eligible individuals and small businesses can purchase health insurance. PPACA prescribes a seamless, streamlined eligibility process for consumers to submit a single application and receive an eligibility determination for enrollment in a qualified health plan through the exchange, advance payments of the premium tax credit, cost sharing reductions, Medicaid, CHIP, and the Basic Health Program (BHP), if applicable. Under PPACA, an exchange must be operational in each state by January 1, 2014. States have some flexibility with respect to exchanges, by choosing to establish and operate an exchange themselves (referred to as a state-based exchange) or by ceding this authority to HHS (referred to as a federally facilitated exchange). States choosing to establish a state-based exchange were required to submit an application “blueprint” to HHS by December 14, 2012. Subject to HHS review and approval, the blueprint detailed how the states planned to implement various functions and activities that HHS deemed essential to operating this type of exchange. HHS identified a third type of exchange states could choose, referred to as a partnership exchange. According to HHS, a partnership exchange is a variation of a federally facilitated exchange, whereby HHS establishes and generally operates the exchange and the state assists HHS with operating various functions of the exchange. States opting for a partnership exchange were required to submit an application blueprint to HHS by February 15, 2013, detailing how the state planned to implement various functions and activities. According to HHS, as of March 14, 2013, 18 states have opted to establish a state-based exchange. In another 7 states, HHS will establish and operate a partnership exchange, with states assisting in certain functions (see figure 1). HHS’s approval of these exchanges is conditional on the states’ addressing a list of activities highlighted in the state’s application blueprint. HHS will establish a federally facilitated exchange in the remaining 26 states. Regardless of the type of exchange states plan to establish, open enrollment in the exchange is to begin on October 1, 2013. See figure 2 for a timeline of key milestones under PPACA. To help states establish an exchange, federal grants are available for planning and implementation activities, as well as for the first year of an exchange’s operation. As shown in figure 2, beginning in September 2010, states could apply for up to $1 million in planning grants to conduct initial research and exchange planning activities. Establishment grants became available to eligible states to set up their own exchanges or to support activities related to the establishment of partnership exchanges or federally facilitated exchanges in the state. States could also apply for “early innovator” grants to help them develop and adapt technology systems to determine eligibility and enrollment. These grants were awarded in 2011 to states that demonstrated an ability to develop IT systems on a fast track schedule and a willingness to share design and implementation solutions with other states. Between September 2010 and March 2013, HHS awarded exchange grants totaling nearly $3.7 billion to 50 states. Of that amount, states returned over $98 million in grant awards. HHS awarded over $1 billion dollars to the 7 states in our review—New York and Oregon were awarded the largest amounts. Figure 3 shows the range of exchange grant funding by state as of March 27, 2013. PPACA and HHS implementing regulations and guidance require states and exchanges to carry out a number of key functions, for which state responsibilities vary by exchange type. A state that chooses to run its own exchange is responsible for: establishing an operating and governance structure, ensuring QHPs are certified and available to qualified individuals, streamlining eligibility and enrollment systems, conducting consumer outreach and assistance, and ensuring the financial sustainability of the exchange. A state that has created a partnership exchange may assist HHS in some of these functions, such as making QHP certification recommendations and conducting aspects of consumer outreach and assistance. A state choosing to operate a state-based exchange must establish the operating and governance structure through which the exchange will be run and managed. Specifically, the state must determine whether the exchange will be run as a governmental agency or a nonprofit organization. Regardless of whether the exchange will be run as a governmental agency or a nonprofit, the state has the authority to allow an exchange to contract with other entities to carry out one or more responsibilities of the exchange. Further, a state operating an exchange as an independent state agency or nonprofit entity established by the state must establish a governance board that meets certain requirements. For example, the board must be administered under a publicly adopted operating charter or by-laws, ensure 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 (for example, representatives of health insurance issuers), and ensure that a majority of the voting members have relevant health care experience (for example, health benefits administration or public health). States choosing to operate their own exchange must ensure the exchange will be capable of certifying qualified health plans (QHP) and making them available to qualified individuals. A state opting for a partnership exchange may choose to engage in this function. In a partnership exchange, health insurance issuers will work directly with the state to submit all QHP issuer application information in accordance with state guidance. An exchange may only offer health plans that are certified as a QHP. To be certified, a health plan must meet two categories of requirements: (1) the health insurance issuer must be in compliance with minimum certification requirements as defined by HHS; and (2) the availability of the health plan through an exchange must be in the interest of qualified individuals and employers. To meet the minimum certification requirements, health insurance issuers must, for example, (1) be licensed and in good standing in each state in which the insurance coverage is offered, (2) comply with quality improvement standards, and (3) ensure their plan networks are adequate and include essential community health providers, where available, to provide timely access to services for predominantly low-income, medically underserved individuals. How an exchange determines whether a plan is in the interest of qualified individuals and employers may depend on how the state organizes its market. The state may choose to organize its market as an “active purchaser” or as a “passive purchaser.” As an active purchaser, the state will decide which health plans can be offered in the exchange on the basis of such factors as select criteria, quality, and price. As a passive purchaser, the state may permit all QHPs to participate in the exchange. In order to be certified as a QHP, plans will also need to meet certain coverage requirements. Specifically, PPACA requires that QHPs provide essential health benefits (EHB) which include coverage within 10 categories: 1. Ambulatory patient services, 2. Emergency services, 4. Maternity and newborn care, 5. Mental health benefits and substance abuse disorder services, including behavioral health treatment, 6. Prescription drugs, 7. Rehabilitative and habilitative services and devices, 8. Laboratory services, 9. Preventive and wellness services and chronic disease management, 10. Pediatric services including oral and vision care. In addition, within an exchange, health insurance issuers may offer QHPs at one of four levels of coverage that reflect out-of-pocket expenses for an enrollee. The four levels of coverage correspond to a percentage paid by a health plan of the total allowed costs of benefit designated by metal tiers: 60 percent (bronze), 70 percent (silver), 80 percent (gold), and 90 percent (platinum). At a minimum, however, a health insurance issuer must offer QHPs at both the silver and gold levels of coverage. States may choose to identify a benchmark plan for their state that, at a minimum, covers the EHB. According to HHS, the benchmark plan reflects the scope of services and limits offered by a “typical employer” plan in the state. HHS identified four plans that a state could choose: (1) one of the three largest plans in the state’s small group market health insurance plans; (2) one of the three largest state employee health benefit plans; (3) one of the three largest national plans offered through the Federal Employees Health Benefits Program; or (4) the largest commercial non-Medicaid health maintenance organization operating in the state. If the state does not select a benchmark plan, the state will default to the largest plan by enrollment in the largest product by enrollment in the state’s small group market. States also have the option of requiring QHPs to offer benefits in addition to EHB. If they choose to do so, states must identify which specific state- required benefits are in excess of the EHB. Under HHS regulations, if a state required QHPs to cover benefits beyond EHB on or after January 1, 2012, the state would be responsible for defraying the cost of these services. States operating their own exchanges generally must ensure that the exchanges will be able to determine an applicant’s eligibility for QHPs, as well as for Medicaid and CHIP. Specifically, under PPACA and implementing regulations, states must establish an electronic, streamlined, and coordinated system through which an individual may apply for and receive a determination of eligibility for enrollment in a QHP, Medicaid, CHIP, or Basic Health Program, if applicable. Exchanges must be able to use a single application that can be completed online, by mail, over the telephone, or in person. This means that no matter how an individual submits an application or which program receives the application, an individual will use the same application and receive an eligibility determination, without the need to submit information to multiple programs. Thus, state IT systems must be interoperable and integrated with an exchange, Medicaid, and CHIP to allow consumers to easily switch from private insurance to Medicaid and CHIP as their circumstances change.