A health insurance exchange is a set of state-regulated and standardized health care plans in the United States, from which individuals may purchase health insurance eligible for federal subsidies. All exchanges must be fully certified and operational by January 1, 2014 under federal law.
HIX (Health Insurance Exchange) is emerging as the de facto acronym across state and federal government stakeholders, and the private sector technology and service providers that are helping states build their exchanges. The acronym HIX differentiates this topic from Health Information Exchange, which has been designated HIE.
Exchanges of this type were intended by the administration of President Barack Obama as a governmental or quasi-governmental entity to help insurers comply with consumer protections and to compete in cost-efficient ways, and to facilitate the expansion of insurance coverage to more people. Exchanges are not themselves insurers, so they do not bear risk themselves, but determine the insurance companies that are allowed to participate in them. Ideally, a well-designed exchange will promote insurance transparency and accountability, facilitate increased enrollment and the delivery of subsidies, and play roles in spreading risk to ensure that the costs associated with those with high medical needs are shared more broadly across large groups rather than spread across just a few beneficiaries. This is what has occurred in the state-run Health Connector exchange in Massachusetts. Some hope that insurance exchanges also will help to contain overall health costs.
The private health insurance industry fears that restricted eligibility and a market size that is too small could result in higher premiums, encourage "cherry-picking" of customers by insurers, and force a clearance of the exchange. That is what some believe happened in Texas and California in their failed exchanges.
One of these factors, "cherry-picking" of customers, will not be possible in the state-run exchanges mandated by the PPACA, because all insurance plans will be guaranteed issue in 2014. Furthermore, the law will bring millions of new enrollees into the marketplace by way of the "individual mandate" requirement for all citizens to purchase health insurance to help to reduce the issue of a small market size.
Although the House of Representatives had sought a single national exchange, when the Patient Protection and Affordable Care Act was passed, it split exchanges by state, in line with the bill that passed the U.S. Senate.  States may choose to join together to run multi-state exchanges, or they may opt out of running their own exchange, in which case the federal government will step in to create an exchange for use by their citizens.
On the date of enactment of the Patient Protection and Affordable Care Act of 2010, only a few health insurance exchanges across the country were up and running. Among them were the Massachusetts Connector, the Utah Health Exchange, and HealthPass, a New York-based, non-profit exchange. Advocates claim that these exchanges make these "markets" more efficient, providing oversight and structure. Supporters argue that this is because current health insurance markets in the United States are not well-organized and have to deal with wide variations in coverages and requirements among different companies, employers, and policies.
There was a long struggle between Obama's advocates and free-market health care advocates over the question of a "public option", which would have created a federal public-benefit corporation subsidized to compete with the private companies in the exchange. Republicans and their allies eventually defeated this "public option" idea by arguing that the public nature of such a company would give an unfair edge over the private organizations in the exchange and would "unfairly out-compete" the private insurers. After a group of Corporate Senate Democrats and Joseph Lieberman joined Republicans in their objections to the public option, the PPACA was passed without a public option included, ensuring the insurance exchange would be inevitably composed purely of the private health insurers.
Private health insurance exchanges
A private health insurance exchange is an exchange run by a private sector company or nonprofit. Health plans and carriers in a private exchange must meet certain criteria defined by the exchange management. Private exchanges combine technology and human advocacy, include online eligibility verification, and mechanisms for allowing employers who connect their employees or retirees with exchanges to offer subsidies. They are designed to help consumers find plans personalized to their specific health conditions, preferred doctor/hospital networks, and budget. These exchanges are sometimes called marketplaces or intermediaries, and work directly with insurance carriers, effectively acting as an extension of the carrier.
Examples of private sector exchanges include:
Health Insurance Exchanges in the Patient Protection and Affordable Care Act (ACA)
President Obama promoted the concept of a health insurance exchange as a key component of his health reform initiative. Obama stated that it should be "...a market where Americans can one-stop shop for a health care plan, compare benefits and prices, and choose the plan that's best for them, in the same way that Members of Congress and their families can. None of these plans should deny coverage on the basis of a preexisting condition, and all of these plans should include an affordable basic benefit package that includes prevention, and protection against catastrophic costs. I strongly believe that Americans should have the choice of a public health insurance option operating alongside private plans. This will give them a better range of choices, make the health care market more competitive, and keep insurance companies honest." However, the public health insurance option was ultimately dropped from the reform legislation; the insurance sold on the health insurance exchange in the United States will, therefore, now be exclusively from the private insurers.
The Patient Protection and Affordable Care Act (ACA) sets up insurance exchanges in each state known as American Health Benefits (AHB) Exchanges. Implementation of the individual exchanges changes the practice of insuring individuals. The expansion of this market is the major focus of President Obama s Patient Protection and Affordable Care Act. Studies have shown that increases in health care costs are driven by increases in per case cost, not merely the overall prevalence of disease, thus driving the need for greater access to health coverage.
Major requirements affecting insurers in the individual exchanges:
- Guaranteed issue: insurers will not be permitted to refuse to insure any individuals
- Limit to price variations: prices will vary based on four factors and not beyond a total factor of approximately 10
- Plans will be offered in four comparable tiers ranging from bronze to platinum with limited out of pocket expenses
- Lifetime and annual limits eliminated
In the individual market, sometimes thought of as the residual market of insurance, insurers have generally used a process called underwriting to ensure that each individual paid for his or her actuarial value or to deny coverage altogether. The House Committee on Energy and Commerce found that, between 2007 and 2009, the four largest for-profit insurance companies refused insurance to 651,00 people for previous medical conditions, number that has increased significantly each year (49% increase in that time period). These 651,000 and others who might not have received insurance under previous industry practices are guaranteed insurance coverage under the ACA. Hence, the insurance exchanges will cause a greater amount of financial risk to be placed upon the insurers, and will help to share the cost of that risk among a larger pool of insured. The same memorandum said that 212,800 claims had been refused payment due to pre-existing conditions and the insurance firms had business plans to limit money paid based on these pre-existing conditions. Thus, the individual insurance exchange s guaranteed issue requirement lays a far greater amount of financial risk on insurers than they had previously born.
This condition of the Health Benefits Exchanges will begin in 2014. Until that time, the ACA provides funds for state-run high-risk pools for those with previously existing conditions.
Limit to Price Variation
Premiums in the individual private insurance exchanges could not exceed ~10x the cost of the lowest cost premium plan .
- Cost Factors Accounted for:
Thus, insurers are prohibited from using higher costs to offset the risks brought on by the guaranteed issue requirement.
Comparable Tiers of Plans
Within the exchanges, insurance plans are to be offered in four tiers designated from lowest premium to highest premium: bronze, silver, gold, and platinum. The plans covered ranges from 60% to 90% of bills in increments of 10% for each plan. Proponents of the health reform believe that allowing comparable plans to compete for consumer business in one convenient location will drive prices down. Having a centralized location increases consumer knowledge of the market and allows for greater conformation to perfect competition. Each of these plans will also be limited in its out of pocket expenses at $5,950 for individuals and $11,900 for families.
Regulations on Rescission
The House Committee on Energy and Commerce found that between 2007 and 2009, the four largest insurers (Aetna, Humana, UnitedHealth Group, and WellPoint) refused to pay 212,800 claims because of pre-existing conditions. This practice will be outlawed in the new reform.
Lifetime and Annual Limits Eliminated
The ACA eliminates lifetime and annual limits from plans in the individual Health Benefits Exchanges. This effectively eliminates the ceiling on financial risk for individuals in the individual exchanges.
Additional Cost Management
Beyond the lifetime and annual benefit limit elimination, individuals within income range between 133% and 400% of the federal poverty level (FPL) are able to receive federal subsidies in the form of tax credits to purchase this insurance . This money is meant to come from penalties of the individual mandate.
Economics of Health Insurance Exchanges: The Individual Mandate
The reason America s Health Insurance Plans were willing to accept these constraints on pricing, capping, and enrollment is the individual mandate. The individual mandate requires that all individuals purchase health insurance. This requirement of the ACA allows insurers to spread the financial risk of newly insured people with pre-existing conditions among a larger pool of individuals.
Additionally, a study done by Pauly and Herring estimates that individuals with pre-existing conditions in the 99th percentile of financial risk represented 3.95X the average risk (mean). Figures from the House Committee on Energy and Commerce would indicate that approximately 1 million high-risk individuals will pursue insurance in the Health Benefits Exchanges. Congress has estimated that 22 million people will be newly insured in the Health Benefits Exchanges. Thus the high-risk individuals do not number in high enough quantities to increase the net risk per person from previous practice. It is thus theoretically profitable to accept the individual mandate in exchange for the requirements presented in the ACA.
Despite economically profitable projections, there are possible problems inherent in the implementation of the exchanges. One of the primary concerns is that of adverse selection. This means that only sick individuals will enroll when they need care, and others will wait to enroll until they also need care. The result of this potential phenomenon would be an influx of high-risk individuals without the corresponding pool of healthy individuals over which to distribute risk. One possible solution is to create open enrollment periods in which all of the constraints of the ACA apply, but allow underwriting at other times. This places the imperative on consumers to buy into the exchanges before there are health concerns.