Congress Faces Insurance Exchange Dilemma

One provision that most likely will be included in the healthcare reform bill is the insurance exchange—an entity that initially lets individuals and small businesses purchase health insurance at reasonable prices. But getting there may not be so simple since the House and Senate bills remain divided on what type of a exchange—state or federal?

The House bill calls for a national exchange with a provision for state opt-out. The Senate bill, though, specifies state exchanges with provisions for a federal intervention—if the state fails or refuses to create an exchange.

The House and Senate bills actually do have a number of points in common, said Timothy Jost, a professor of law at Washington and Lee University. For instance, they are similar in that the exchanges would be open to individuals in the non-group market and for employees of small businesses, said Jost, at a recent Alliance for Health Reform briefing in Washington.

Both bills will provide premium subsidies that will cover more than half of the uninsured in the non group market, Jost said. "Both give the exchange some discretion over whether or not to offer health plans and thus some bargaining power with insurers."

In addition, both bills generally outlaw risk underwriting by insurers and pre existing condition exclusions, and both have a program for "reallocating risk among insurers"—although the programs in the two plans for risk allocation "are very different," he said.

Differences are that the House bill would put responsibility for creating exchanges on the federal government. However, this national exchange would allow states to opt out and create alternative exchanges—similar to the model now found in Massachusetts. The Senate bill, on the other hand, would place the responsibility for forming exchanges specifically on the states.

These state exchanges, though, would be considered "an unfunded mandate" since no federal money would be available to create them. "[The states] are going to have to pay for them themselves—presumably by taxes that will be imposed on insurers," Jost said. "The [Senate] bill provides only startup funds for the exchanges and expects them to be self supporting once they are underway."

State based exchanges have certain advantages, such as better knowledge of local insurance markets and regulatory environments. "But national markets offer larger risk pools and greater efficiency,” he added. "You don't have to set up 50 exchanges—each with its own program."

Also, a major difference is that the House bill includes a public plan option, which does not appear to be going anywhere in the current congressional debate. The Senate bill, on the other hand, layers one exchange on top of another exchange, "which can lead to some interesting dynamics," Jost said.

Still, the exchanges—no matter which one is selected—can have many variables. "There's more that we don't know than that we do know about how the House and Senate versions' visions would actually play out," said Jon Kingsdale, who heads up Massachusetts' exchange—the Connector Authority.

One "major issue" that the exchanges will need to guard against is adverse selection, Kingsdale said at the briefing. One way to avoid this is to make sure claims based risk adjustment is done "across the entire market segment," he said. "If you're risk adjusting for small group, you can't just do it in the exchange. You have to do it across the entire market."

So what to expect? President Obama told House Democrats earlier this month that he intends to use the Senate bill as the launching pad for the final legislation though Speaker of the House Nancy Pelosi said this week that the Senate bill doesn't have enough support in the House. Additionally, Obama has said he would support the national exchange plan proposed in the House bill.