By SBE Council at 10 January, 2013, 9:41 pm
(This status report was updated on April 4, 2013 to reflect the latest information on state-based exchanges)
By Karen Kerrigan-
The small business community was promised lower health coverage costs and more choices with the passage of the Patient Protection and Affordable Care Act (PPACA). To date, insurance costs continue to rise, the health care tax credits for small business are a dud, and even the federal government says that most small business owners will not be able to keep the coverage they currently provide. Furthermore, new Obamacare taxes went live on January 1, the proposed rules on “essential health benefits” will drive costs higher, and the employer mandate and individual mandate are slated to hit in 2014. The effect of these new taxes and mandates will translate into higher costs and new burdens for small business owners and entrepreneurs.
Aetna’s CEO Mark Bertolini recently remarked that health insurance rates could double for some small businesses and individuals once PPACA is fully implemented. Obviously, a doubling of cost is not sustainable for our nation’s entrepreneurs.
The state health care exchanges were touted as a mechanism to provide more affordable choices for small businesses. The exchanges will serve individuals and small businesses with up to 100 employees (up to 50 employees in some states), though states can choose to include larger employers in the future. The states are not required to establish exchanges, and if a state opts out, the federal government sets up and runs that exchange (“federally-facilitated”). The states may also choose a partnership model with the federal government, establish multiple exchanges within a state, or partner with other states.
Unfortunately, the federal regulatory framework governing the exchanges is costly and restrictive. It was rolled out haphazardly, and officials at the Department of Health and Human Services (HHS) could not or did not answer many important questions posed by the states. As of January 2013, only eighteen states and the District of Columbia have agreed to implement an exchange. Twenty-three states have decided against operating their own exchanges, which means they will default to a federal exchange. Six states will pursue a state-federal “partnership exchange,” and three states have made no official decision. (The Commonwealth Fund has an interactive map where you can view the status of each state.) The state exchanges are slated to be fully operational by 2014, with open enrollment on October 1, 2013.
The exchanges are supposed to perform like online marketplaces (run by government, or a government-approved nonprofit entity) where consumers can shop for government-approved health coverage subsidized by the federal government through premium assistance and tax credits. The exchanges will manage billions of dollars in premium subsidies, which will be distributed to private insurance companies when the transactions to buy coverage are made.
As SBE Council argued throughout the PPACA debate, imposing a restrictive federal framework on top of largely dysfunctional state marketplaces is doomed to fail. This will not curb costs and provide more choice to consumers. Like so many other pieces of PPACA, private businesses and state governments are being asked to do a lot, and at high costs, so it should come as no surprise that many states are opting out of the state-exchange scheme.
Why are States Opting Opt?
Twenty-six states have informed the HHS that they will not operate state-run exchanges. These states say the exchanges will be expensive to implement and operate. They also argue that the exchanges will not offer residents more affordable insurance choices. Moreover, states see the potential for significant federal intrusion. Because the rules governing the exchanges are ambiguous and incomplete, the states believe Washington could embed other policy priorities through the exchanges, which could put states on the hook for additional expenditures and responsibilities. Seven states have opted for a “federally-facilitated” exchange, which means the federal government will do most of the work with some level of collaboration with the state.
In the end, new costs and federal mandates are the last thing states need in the current environment. Already, they are under pressure to strengthen their fiscal competitiveness, improve the business climate and advance pro-growth policies (tax relief, for example) in order to attract and encourage investment and business expansion or relocation. They are being forced to set aside funds for growing Medicaid bills, while balancing other long-term obligations. States that have worked hard to create budget surpluses are being careful with these resources. After all,they have their own priorities. And unlike the federal government, many states are required by law to balance their budgets. They would also like to shore up reserve funds to strengthen their credit rating, or maintain the good one they have.
The Governors’ Own Words
Vague and Confusing Rules of the Road: On December 12, 2012, the state of Pennsylvania announced that it would not set up a health exchange. Governor Tom Corbett (R) cited uncertain costs, lack of clarity and guidance, and “haphazard planning” on HHS’s part in implementing the rules of PPACA.
In a media statement, Governor Corbett said his administration posed important questions to HHS about the exchanges over the past two years, but there was “little acknowledgement” from the department up until five days before the December 15, 2012 deadline given to the states to make a decision about running an exchange:
“Until this week, less than five days before the deadline for a state-based exchange decision and blueprint, we received little acknowledgement of those questions. Even HHS Secretary Sebelius recently admitted on a call with governors that the regulations released a few weeks ago were not final and that more drafts are to be expected.
“Healthcare reform is too important to be achieved through haphazard planning. Pennsylvania taxpayers and businesses deserve more. They deserve informed decision making and a strong plan that responsibly uses taxpayer dollars.
“Therefore, I have decided not to pursue a state-based health insurance exchange at this time. It would be irresponsible to put Pennsylvanians on the hook for an unknown amount of money to operate a system under rules that have not been fully written.”
(See Governor Corbett’s statement here: Governor Corbett Announces State-Based Insurance Exchange Decision)
High Costs and Lack of Flexibility: A key concern for many governors who opted not to run state exchanges was the request by HHS that states begin development without fully knowing the federal regulatory terrain that will govern their operation. Specifics are still (as of this writing) being determined, such as mandates and rules that will ultimately determine the cost of insurance plans offered in the exchanges, and other details that may have guided the decision-making process. Such rules and specifics are important factors for governors who must determine the feasibility and costs of an exchange, and whether an arrangement will produce a positive outcome for state residents.
Governor John Kasich (R-OH) expressed his concern about the high costs of exchange implementation and operation when he notified HHS on November 16 about Ohio’s decision to forgo implementation. As Governor Kasich noted in his letter, “HHS is asking states to make final decisions on fiscally and economically significant and pivotal issues without promised federal guidance and rules for issue such as essential health benefits, market reforms, multi-state health insurance plans and more specifics regarding the federally-facilitated exchange.”
A fact sheet distributed by Governor Kasich’s office highlighted the expense of setting up and running an exchange: “It would cost as much as $63 million for Ohio to set up an exchange and as much as $43 million to run it every year.”
Governor Nathan Deal (R-GA) noted the “one-size-fits-all” approach to the federal framework governing the exchanges when he informed the HHS that Georgia would not establish a state exchange.
“We have no interest in spending our tax dollars on an exchange that is state-based in name only,” Governor Deal said in media release on November 16, 2012. “I would support a free market-based approach that could serve as a useful tool for Georgia’s small businesses, but federal guidelines forbid that. Instead, restrictions on what the exchanges can and can’t offer render meaningless the suggestion that Georgia could tailor an exchange that best fits the unique needs of its population,” added Governor Deal.
Governor Deal also noted the “many unknowns” about the state exchanges due to a lack of communication and specifics from HHS.
A Bad Trade-Off and States Lose Control: In his notification to HHS that Wisconsin would not run an exchange, Governor Scott Walker (R-WI) writes that the state would give up significant control over their market if they opted to establish an exchange. He believes the state itself is in the best position to serve its residents. The Governor notes: “Wisconsin taxpayers will not have meaningful control over the health care policies and services sold to Wisconsin residents.” In addition, Governor Walker points out that over 90 percent of Wisconsin’s residents are already covered.
Governor Walker said that all options presented by HHS to set up an exchange lead to federal government control. Therefore, as he concluded in his letter, “operating a state exchange would not provide the flexibility to meet our state’s unique needs or to protect our state’s taxpayers.”
Governor Rick Perry (R-TX) also expressed concerns about giving the federal government extensive control through the exchanges. In a July 9, 2012 letter to HHS, Governor Perry contends PPACA does not “truly allow states to create and operate their own exchanges.”
As he explains further in his letter: “Neither a ‘state’ exchange nor the expansion of Medicaid under this program would result in better ‘patient protection’ or in more ‘affordable care.’ They would only make Texas a mere appendage of the federal government when it comes to health care.” In essence, PPACA treats states “like subcontractors through which the federal government can control the insurance markets and pursue federal priorities rather than those of the individual states.”
Unfinished Business and Important Issues
Some States Going Overboard: It is interesting to note how states are using the exchanges to impose new rules on their residents or state insurance markets. Under PPACA, states are required to pass enabling legislation to set up the exchanges along with governing entities. The District of Columbia’s “Health Benefits Exchange Authority” is already flexing its muscle. In October 2012, the authority voted to abolish the private marketplace for businesses with 50 employees or less and force small businesses to buy health coverage through the DC government-exchange only. No brokers allowed. Businesses and associations with 100 employees or fewer will also be required to exchange shop starting in 2016. Year-after-year, the District has ranked at or near the bottom of SBE Council’s “Small Business Survival Index”(although they were not included on the most recent version of the Index), and certainly this policy move could give businesses yet another reason to flee to business-friendly Virginia. It is estimated that the DC Authority’s move will tack another 3.5% to the cost of health insurance. Vermont will also require individual and small business plans (now merged into one market) to be sold through the state’s exchange. So much for “more choice.”
Legal Questions and Issues: Cato health care expert Michael Cannon has urged states to forgo exchanges (for many reasons) and believes the employer mandate cannot be legally enforced in those states that opt out of running an exchange. As reported by Forbes, David Hogberg of Investor’s Business Daily discovered that a drafting error in PPACA could leave people who signed up for insurance in the federally run exchanges ineligible for subsidies. The law reads that “premium assistance” subsidies are provided to individuals through state exchanges, with no mention of “federally-facilitated” ones. The U.S. Treasury has created (or invented) a regulation to cover both state and federally-run exchanges, but as Cannon and Jonathan Adler, Professor of Law and Director of the Center for Business Law and Regulation at Case Western Reserve University, write in the Wall Street Journal, “federal agencies lack the authority to unilaterally revise statutory mistakes.” That is, and in this case the IRS, cannot “create tax credits at will just because it thinks that’s what Congress meant to do.” So, while the Treasury Department has created a regulation that allows subsidies to be offered via federally run exchanges, Cannon and Adler assert that the Obama administration has no legal authority to do so. (Read more on this by Adler here.)
With regard to how this is tied to the employer (and individual) mandate, it is argued that making a penalty payment is not provided for in the statute given the law’s silence on access to subsidies in “federally-facilitated” exchanges. Therefore, these mandates are not enforceable. Oklahoma has filed a lawsuit questioning both the legality of the funding mechanism for federal exchanges as well as the mandates. (For a look at both sides of the issue, please see an article in The New Republic.)
The Emergence of Private Exchanges: The market and investors are keenly aware that state exchanges may fail, or simply fail to serve the needs of small business and individual consumers. Therefore, “private exchanges” are being developed in preparation for a restructuring in how health benefits may be (or will be) delivered by employers. As Greg Scandlen, Senior Policy Fellow, Citizen’s Council for Health Freedom notes in a recent study on the emergence of the private exchange market: “Employers will no longer be doing business the way they have in the past. They will be moving decisively to a Defined Contribution approach to health benefits, just as they did with pension benefits in the past. Private Health Insurance Exchanges are the essential facilitator in this transformation.” While private exchanges are still evolving and developing, one can see how they could meet an important need by providing an innovative framework through which employers offer and provide health benefits. Certainly, private exchanges face policy barriers, yet their advancement in the marketplace demonstrates their potential, particularly if government exchanges are a bust.
As the many parts of PPACA are implemented and refined, including the health care exchanges, innovators in the market are working to help individuals and employers work through and around its constraints and costs by testing and offering models that will allow them to access and provide health benefits they can afford.
As SBE Council has been arguing for many years, true competition is the answer – a national marketplace that frees consumers and small businesses from the limitations and high costs of state monopolies. One that allows employers and entrepreneurs to choose health benefits and plans that fit their financial and personal needs. Unfortunately, PPACA’s health care exchange framework offers little flexibility for states and piles on new costs and mandates.
Business owners and entrepreneurs can anticipate the emergence of new models and approaches to help them provide benefits for their employees. While these benefit models may differ greatly from what they currently provide or offer, the reality of PPACA’s costs, restrictions and effect on our health care system will pave the way for new alternatives. The only question is whether government will support the innovative approaches, or get in the way.
Karen Kerrigan is President & CEO of the Small Business & Entrepreneurship Council, a nonprofit advocacy, research and education organization dedicated to protecting small business and promoting entrepreneurship.