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Working Paper: Three Strategies for Implementing a State Exchange

Executive Summary

The Affordable Care Act asks states to set up insurance exchanges to “facilitate the purchase of qualified health plans.”  The primary goal of an insurance exchange is to extend affordable health coverage to low-income households via Medicaid and federal premium tax credits.  There are at least three key strategies to best connect low-income households with affordable coverage through a state-based exchange.

First, focus the exchange services on people who qualify for Medicaid and insurance affordability programs.  A “focused exchange” will help guarantee that the people who need the exchange the most will receive the highest level of service.  Asking the exchange to do more, especially in the early stages of operation, will only create competing priorities and distractions, which will diminish the quality of service an exchange offers to low-income households and, consequently, diminish the number of uninsured people who gain and maintain new coverage through the exchange.   Also important, a focused exchange allows the rest of the insurance market to carry on without being subject to the exchange’s cumbersome regulations.

Second, establish a SHOP exchange to facilitate enrollment in the individual market, while maintaining the traditional small group market.  The SHOP exchange presents one of the most challenging aspects of establishing a state-based exchange.  Various provisions in the ACA may work together to undermine the viability of the traditional small group market and, thereby, undermine the viability of a SHOP exchange that depends on this market.  Certain small employers will have incentives to abandon the small group market, shrinking the market and leaving higher, more expensive risks in the pool. In addition, there are practical challenges to enrolling individuals in the traditional small group market.  To address these problems, SHOP exchanges should be established to facilitate enrollment in individual market health coverage, not small group market health coverage.  The ACA allows states to merge both the individual and small group insurance market.  In a merged market, small group coverage would functionally become individual market coverage and each market would merge into one risk pool.  Merging the risk pools creates a larger pool, which reduces problems related to the size of the pool.  Furthermore, this market should be more attractive to employers, which will help maintain the size and risk profile of the pool.  Also, because it’s individual coverage, practical problems related to group coverage will disappear.   To smooth the transition to a merged market, states should consider merging only a portion of the small group market.

Third, facilitate broad access to insurance affordability programs and high-quality consumer support services through private brokers and private exchanges.  It will be important to guarantee that there are multiple avenues to buy health insurance with federal subsidies just as there are multiple avenues to buy nearly every other consumer product.  Doing so offers two main benefits.   First, it will increase the number of people with insurance coverage.  More sales outlets for subsidized coverage and more people with a financial incentive to connect people with coverage will clearly increase the number of people with coverage.  Second, it will increase the level of service offered by the public exchange.  Just as any business needs competition to stay on its toes, a government-sponsored insurance exchange will need competition from private brokers and private exchanges to guarantee that it maintains a high level of service for consumers.

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