California launches first exchange under PPACA provisions

November 1, 2010

California is making a statement as the first state to create an oversight board for insurance exchanges, in compliance with the requirements established by the Patient Protection and Affordable Care Act

NATIONAL REPORTS-California is making a statement as the first state to create an oversight board for insurance exchanges, in compliance with the requirements established by the Patient Protection and Affordable Care Act (PPACA). At the eleventh hour before the legislative session ended, Gov. Arnold Schwarzenegger signed two companion bills into law.

An independent, five-person governing board chosen by Schwarzenegger and the California legislature will oversee the health exchange, which will allow consumers to: compare plans online based on quality and cost; enroll in a specified plan; be screened for public programs; and determine whether they qualify for subsidies or tax credits. Exchange board members also have the power to "selectively contract" with plans eligible to join the exchange.

Schwarzenegger is expected to select two members before he leaves office at the end of the year. Public accountability is ensured by provisions in the law that make the exchange meetings subject to the state's open meetings law and require public disclosure of key information and annual reports to the legislature.

Start-up funding for the exchange will come from federal dollars, with renewable $1 million grants available for five years. By 2016, the exchange should be self-sustaining through a fee assessed on participating carriers, who could potentially pass the debt onto consumers through higher premiums. No general funds are at risk, and California's independent governance protects the state from liability.

Three million people are expected to enroll in the exchange.

The Centers for Medicare & Medicaid Services (CMS) estimates that nationwide, states will spend $4.4 billion to launch the exchanges and $37.7 billion to operate the marketplaces through 2019. CMS also predicts that in the first year of the exchanges, 16 million people will enroll in a plan in the exchange, and by 2020, 30.8 million people will have purchased healthcare benefits through an exchange.

A recent poll of healthcare opinion leaders nationwide, conducted by the Commonwealth Fund, indicates that 92% of respondents support the establishment of insurance exchanges.

Patrick Johnston, president/CEO, California Association of Health Plans (CAHP), foresees the exchange adopting one of several models: providing a large provider network and wide range of benefits with an eye on price, not plan solvency; establishing a mechanism for consumers to comparison shop for healthcare based on quality and cost; and limiting the number of participating plans so that fewer plans can attract more business. Economies of scale could result in less expensive coverage if insurers are able to capture marketshare. Managed care in California is highly regulated, however.

Johnston says large insurers who already offer benefits to individuals and small employers will join the exchange, while insurers with public beneficiaries will probably not develop commercial products in order to participate. Insurers who provide benefits through the exchange also may offer products outside of it as long as the products reflect the offerings in the exchange.

Without knowing the final rules, Johnston says it is impossible at this time to predict which plans in California will join the exchange; however, he says that insurers appreciate having an option to participate.

"If plans can comply with the exchange's benefit packages and prices while remaining solvent, they are more apt to join," he says.

Because California is one step ahead, other states will consider it the test kitchen for their own exchanges under PPACA rules. Massachusetts launched its exchange in 2007, followed by Utah in 2009. If a state does not develop an exchange by Jan. 1, 2014, it can default to the Department of Health and Human Services.

PPACA requires each state to establish an exchange that facilitates the purchase of qualified health plans by eligible individuals and employers with up to 100 employees. Exchanges must provide four basic benefit categories, along with a catastrophic plan.

According to a report released in late September by the Commonwealth Fund, exchanges must develop a variety of revenue sources to fund their work, including an assessment on all insurers in the market. They also should seek opportunities to lower administrative costs for insurers and for employers.