On July 11, 2011, the U.S. Department of Health and Human Services (HHS) issued two proposed rules – Establishment of Exchanges and Qualified Health Plans and Standards Related to Reinsurance, Risk Corridors and Risk Adjustment – related to the establishment and operation of health insurance exchanges under the Patient Protection and Affordable Care Act and maintenance of premium stability in the exchanges once they are up and running. Exchanges are state-based virtual health insurance marketplaces where individuals and small businesses can shop for and buy health insurance. By 2014, every State must have an Exchange. Tax credits will be available for certain individuals, families and small businesses to help them purchase health insurance in the exchanges.

The first of these two proposed rules sets forth the requirements for states in establishing and operating the insurance exchanges; outlines the minimum requirements for health insurance issuers who wish to participate in the Exchanges and offer qualified health plans; and provides the minimum standards for small employers to participant in the Small Business Health Options Program (SHOP). According to the notice to be published in the Federal Register, the intent of this proposed rule “is to afford States substantial discretion in the design and operation of an Exchange.”

The proposed rule does not address all of the health exchange provisions set forth in the Affordable Care Act. Notably, as outlined in an HHS guidance document, the regulations do not address the following:

• The process for eligibility determinations for Exchanges, premium tax credits, cost-sharing reductions, and other public programs along with appeals for those determinations;
• Standards with respect to ongoing Federal oversight of Exchanges and actions necessary to ensure their financial integrity, including program integrity requirements;
• Benefit design standards for qualified health plans, including essential health benefits and calculations of actuarial value;
• Quality data reporting requirements; and
• Standards outlining the Exchange process for issuing certificates of exemption from the individual responsibility requirement.

According to the HHS, these issues will be addressed in subsequent rulemaking.

The first portion of the proposal provides information to states on setting up the health insurance exchanges, which are slated to begin operation in 2014. The second part of the proposed regulations – which is the portion applicable to health insurance issuers – addresses certification of a health plan as a Qualified Health Plan (QHP), which is the first step in being eligible to participate in an Exchange. Certain minimum standards regarding a plan’s marketing, network adequacy, and health plan service area must be met in order to be considered a QHP. Although the Affordable Care Act sets forth these minimum standards, the proposed rule provides that each Exchange will be responsible for determining whether a health plan seeking to participate meets these minimum requirements and will have the discretion to set additional standards to ensure that offering the plan through that Exchange is in the best interest of consumers. For example, as discussed in an HHS fact sheet, the proposed regulations permit exchanges to collaborate with health insurers in structuring QHP choices, accreditation deadlines, plan network design and marketing practices. In addition, Exchanges would have the flexibility to determine what role agents and brokers will play in the Exchange.

As for the minimum standards, the proposed regulations discuss in great detail what the Affordable Act requires of each QHP, and how the HHS plans to define and/or codify these requirements. For example, the proposal describes a QHP’s issuer participation standards and rate and benefit information, including rate justification and variation. Generally, each QHP must offer enrollment when individuals experience changes such as losing employer-based coverage or moving; have service areas that do not avoid high-cost or minority populations; and offer the essential health benefits, adhere to cost-sharing limits, and meet the levels of coverage described in the Affordable Care Act. The proposed rule also, among other things:

• Mandates that any QHP issuer offering a non-catastrophic health plan in the Exchange must offer the identical plan as a child-only health plan, available to individuals under the age of 21.
• Codifies the transparency in coverage requirements articulated in the Affordable Care Act;
• Requires QHP issuers to comply with any applicable state laws and regulations regarding marketing by health insurance issuers, and prohibits QHP issuers from employing marketing practices that have the effect of discouraging enrollment of individuals with significant health needs. According to the HHS, the agency has considered setting detailed and uniform federal standards prohibiting specific marketing practices across all QHP issuers, but is “concerned about the interaction with current state marketing rules or unintentionally creating ‘safe harbors’ that might allow issuers to technically comply with specific requirements without meeting the spirit of the broader marketing protections”;
• Describes the minimum criteria for network adequacy that health plans must meet to be certified as QHPs;
• Requires a health insurance issuer to provide information to potential enrollees on the availability of in-network and out-of-network providers;
• Mandates that QHP issuers include in their provider networks a sufficient number of essential community providers, where available, that serve low income, medically-underserved individuals. The agency is seeking comments on how to define a sufficient number of essential community providers;
• Establishes basic standards for the format of applications and notices provided by the QHP issuer to the enrollee;
• Proposes that a QHP issuer may only terminate coverage as permitted by the Exchange in accordance with §155.430(b), which includes non-payment of premium, fraud and abuse, and relocation outside of the service area among other situations.

The proposal notes that many of the definitions contained in the rule are identical to those set forth in the Affordable Care Act and/or other regulations. However, to avoid confusion with the term “essential health benefits,” the proposed term “benefit design standards” is used to mean “essential health benefits package” as defined in the Affordable Care Act. “Benefits design standards” refer to the set of health plan requirements, rather than only “essential health benefits.”

As for the SHOP, employers with up to 100 employees would be eligible to purchase insurance through this program, although states can limit participation to businesses with up to 50 employees until 2016. The proposal permits states to decide whether businesses with more than 100 employee can purchase large group coverage through the SHOP beginning in 2017. Certain small employers may be eligible for a tax cut to participate in the SHOP. According to a fact sheet on this program, the purpose of the SHOP is to reduce a small employer’s burden and costs of enrolling employees in small group plans, and provide these employers with many of the cost advantages and choices enjoyed by large employers. A state can merge a SHOP with the individual market exchange or operate the SHOP separately. Under the proposal, an exchange may (1) allow employees to choose any QHP offered in the SHOP at any level; (2) allow employers to select specific levels from which an employee may choose a QHP; (3) allow employers to select specific QHPs from different levels of coverage from which an employee may choose a QHP; or (4) allow employers to select a single QHP to offer employees. To simplify the administration of health benefits among small employers, the proposed rule specifies that the SHOP allow qualified employers to receive a single monthly bill for all QHPs in which their employees are enrolled and to pay a single monthly amount to the SHOP.

As discussed in a separate fact sheet, the second proposed rule implements standards for three programs established by the Affordable Care Act designed to protect insurers against risk selection and market uncertainty. Specifically, the Act establishes temporary reinsurance and risk corridor programs “to give insurers payment stability as insurance market reforms begin, and an ongoing risk adjustment program that will make payments to health insurance issuers that cover higher-risk populations . . . to more evenly spread the financial risk borne by issuers.” The Act’s risk adjustment program is intended to “end the incentive for issuers to avoid the sick and market only to the healthy by transferring excess payments from plans with lower risk enrollees to plans with higher risk enrollees,” according to the fact sheet. The HHS Secretary, in consultation with states will “establish criteria and methods to be used by states in determining the actuarial risk” of plans within that state. The new regulation on this issue proposes that “a constant set of data for risk adjustment be considered, preventing a health insurer that offers qualified health plans [ck quote] in different states from having different reporting requirements.” In essence, risk adjustment calculations would occur at the state level, although a federal risk adjustment methodology will also be developed as an alternative.

The proposed rule also simplifies the transitional reinsurance program, which requires all health insurance issuers, and third-party administrators on behalf of self-insured group health plans, to make contributions to a nonprofit reinsurance entity to support reinsurance payments to individual market issuers that cover high risk individuals. Under the proposed rule, the HHS will base reinsurance on high-cost enrollees’ claims instead of a set list of conditions.

Finally, the proposal addresses standards related to “the risk corridor program.” According to the HHS, the Affordable Care Act stipulates that “from 2014 through 2016, qualified health plan issuers with costs that are at least three percent less than the issuers’ costs projections will remit charges for a percentage of those savings to HHS, while qualified health plan issuers with costs greater than three percent of cost projections will receive payments from HHS to offset a percentage of those losses.” The HHS’s proposed rule “aims to align the data and payment policies for this temporary program with other programs to promote simplicity and efficiency.”

Comments on either rule must be submitted within 75 days after their publication in the Federal Register, which is scheduled for July 15, 2011. The first rule must be identified with the code: CMS-9989-P; the second: CMS-9975-P. Comments may be submitted electronically through the federal eRulemaking portal, sent by regular mail to: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9989-P (or CMS-9975-P), P.O. Box 8010, Baltimore, MD 21244-8010; by express or overnight mail to: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-9989-P (or CMS-9975-P), Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850; or by hand-delivery to: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, S.W., Washington, DC 20201.

More information on these rules, including fact sheets, can be found here.