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Embracing the state health insurance exchange

by Tony Novak   originally published January 27, 2011, revised July 25, 2011

One of the key provisions of the Affordable Care Act of 201 was the creation of a health insurance exchange in each state by the year 2014. The plan is to combine the efficiencies of online marketing and enrollment with. Freedom Benefits has operated a national online health insurance exchange since the mid-1990s.

Basic Concepts

Individuals who qualify for Medicaid or some other form of government payment or tax credit would be required to use a government-designated insurance exchange in order to receive the financial benefit when purchasing health insurance. Those who do not receive public assistance would apparently be free to use any insurance exchange or other channel to purchase health insurance. Individuals would not be allowed to elect to have no coverage at all unless the Supreme Court overturns the current law. A gradually increasing tax penalty will be phased in after 2014 and other private disincentives are likely to achieve an increase in the overall number of people with insurance. Assuming there is no change in the current law, we anticipate an improvement from about 84% of the population with insurance currently to about 91% covered by insurance by the end of 2018. We believe that it is impractical to achieve an overall insurance coverage rate of more than 95% based on the universal coverage attempts in other countries and jurisdictions.

Legislative Requirements

Guidance on the development of insurance exchange was issued in July 2011. The details are covered elsewhere in Freedom Benefits publications but are not directly relevant to this article. The prevailing overall opinion of the guidance is that the states are allowed maximum latitude in setting up all aspects of the insurance exchange. Agents and brokers are now expected to play an integral part in the marketing and enrollment functions. (Prior to this guidance and other concurrent developments it was unclear what role agents would play in the insurance exchange).

Funding initial development costs

The cost of planning, development and initial development of the insurance exchanges will be heavily subsidized by the federal government. This leads to the question of whether private insurance exchanges will be able to compete in the market against the government-sponsored insurance exchange with much larger marketing budgets. Several different insurance exchange models are still being developed so it is not possible to reach a conclusion at this time but our hunch is that private exchanges will tend to be successful in the small business market.

Freedom Benefits is funded entirely by insurance premiums paid by the users. Other commercial insurance exchanges have been able to raise capital through public and private stock offerings. While not all insurance companies use a commercial online enrollment system, a growing number of health plans do allow independent commercial insurance sites to handle enrollments. This month several western state Blue Cross/Blue Shield plans announced partnerships with a commercial insurance exchange to handle individual insurance enrollments. 

The state health insurance exchange will be funded entirely by taxpayers, at least during the development phase. Last year each state was eligible for a grant of $1 million from the federal government for initial exploration purposes. Most states have already received and spend that initial grant. The next steps will be even more costly and additional government grants will be awarded for development costs in 2011 through 2013.

Funding for ongoing operations

Once established, both the commercial and public insurance exchanges will be financed with a portion of the premiums paid by customers. Government will continue to make separate additional payments for the marketing costs of the exchange for the foreseeable future. This may be especially important in the event that individuals are not required to but health insurance; the marketing costs per policy sold on an exchange could significantly larger than earlier estimates.

In other parts of health care finance system, including state Medicare and Medicaid programs, private companies have proved more efficient than government-run programs. We do not have any tally on a state-by-state business, but it is clear that commercial firms are competing heavily for a share of the contracts for managing the multi-billion dollar public health care programs. We expect this trend to continue into the health insurance exchanges. Commercial firms are ready to offer a wide range of management, marketing and technology services to the federal and state governments to help run an insurance exchange.

Balancing public and private interests

The best way to balance public and private industry is to support different types of health insurance exchange models. Some insurance exchanges will likely focus on Medicaid-type individual insurance for those who are currently uninsured. Others will offer a portable type of small group coverage.

Current law and guidance supports the concept of an exchange that would allow employees to spend employer-provided health insurance allowance on individual portable policies. We believe that the prediction that a large number of small business employers will switch from group health plans to sponsoring employee use of the insurance exchange will prove to be accurate.

Stateline, a project of the Pew Charitable Trusts, quotes health care policy analyst Linda Blumberg of The Urban Institute on the importance of finding a balance in the health insurance marketplace "between getting carriers to participate and providing consumers with the best competitive choices. You won’t get that balance if you let all carriers in and charge anything they want.” Likewise, too many restrictions may force some insurance companies out of the exchange market. 


With a predicted 18 million new health insurance customers plus millions more changing from group-sponsored to individual insurance, the insurance exchange will have significant impact in the individual and small business market. Yet we anticipate that less than 1 in 10 Americans will use any insurance exchange before the end of the decade so the impact is still limited on a larger perspective. Changes to private group-sponsored health insurance coverage that will send larger numbers of individuals to privately-run insurance exchanges, we believe, will largely overshadow the development of the state insurance exchanges.



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