In crafting insurance exchange, Minnesota should strive to protect what works

By Peter J. Nelson

Peter J. Nelson is the director of public policy for Center of the American Experiment, which describes itself as "a nonpartisan, tax-exempt, public policy and educational institution that brings conservative and free market ideas to bear on the hardest problems facing Minnesota and the nation." This article is adapted from a version on the center's website.

The Minnesota House and Senate have introduced legislation to establish a state-based health insurance exchange. The exchange is meant to be a new online marketplace to facilitate the purchase of health coverage, especially for people and small employers who qualify for federal subsidies.

The Dayton administration has already spent millions of federal dollars developing an exchange to meet the requirements of the federal health care law — the Patient Protection and Affordable Care Act (ACA). This legislation is the final touch necessary for the state to move forward with a state-based exchange.

In a nutshell, the legislation would establish an exchange as a new state agency governed by a seven-person board appointed by the governor, the majority leader of the Senate, the speaker of the House and the commissioner of human services. The board would have broad authority to manage the exchange and to establish procedures and requirements for health plans, brokers and consumers who use the exchange.

Unfortunately, it appears the Legislature is moving in the wrong direction. As many feared, it is creating a new layer of government bureaucracy, which will mean higher costs, less choice and little to no accountability to consumers.

Here are some specific concerns with the legislation:

It provides little accountability for board decisions. One of the more eye-popping aspects of the legislation is the fact that it exempts the exchange from the administrative procedures act. That means the board can write its own rules and issue its own orders exempt from the procedures that were written in state law to guarantee accountability, fairness and due process. In fact, current law specifically states that if a rule is exempt from the administrative procedures act, "the rule has the force of law." Incredibly, in place of the administrative procedures act, the exchange is tasked with establishing its own procedures to hold itself accountable. An open question here is whether this exemption also limits access to judicial review.

It gives the board open-ended power to regulate. While the legislation includes specific requirements on what the exchange must do, there is little that specifies what the exchange cannot do. To further its broad mandate, the exchange will be free to develop its own rules and regulations — over and above anything already established by the Department of Commerce — to govern the health plans, brokers, navigators and anyone else who wishes to participate in the exchange. Considering the state estimates that 80 percent of the individuals who purchase coverage will do so through the exchange, a new regulation on the exchange is essentially a new regulation on that entire market. And that being the case, the exchange may end up with more power to regulate insurance than the Department of Commerce.

It grants the board the specific power to restrict choice and competition. The legislation specifically states the exchange board "has the power to select carriers and health benefit plans for participation in the [exchange]" from among those that already meet certification requirements. Even if a health plan is certified, it can still be banned from the exchange if the exchange board determines that the health plan is not "in the interests of the individual consumers and employers." Thus, instead of consumers choosing the plan that is right for them, the exchange can step in and limit the health plans that are available. If plans are excluded, they will no doubt be the more affordable plans with higher cost sharing. And if true, less choice will mean higher costs.

It creates a path for the exchange to be a new burden on the state budget. Initially, the exchange would be funded by up to 3.5 percent of the insurance premium. As such, there is a limit on the exchange's funding source, which will require the exchange to find alternative funding if 3.5 percent turns out to be too little. The legislation allows the exchange to "seek and accept money ... from government agencies," which may create a path for funding from a state budget perennially in deficit.

In addition to the above issues with the actual text of the legislation, there are number of things missing from the legislation. Understandably, the proposed legislation is just a starting point. We can hope that many of the missing parts identified below are already being addressed. So, what's missing?

Nothing outlines how to establish a Small Business Health Options (SHOP) exchange. The state establishes both an individual market exchange and a small group market SHOP exchange. How to establish a SHOP exchange is one of the most difficult policy questions tied to the exchange. The federal regulations require a SHOP exchange that provides employees a choice among different health plans in the small group market. However, the small group market generally does not offer choice. One of the positive outcomes of establishing an insurance exchange could be developing a framework where employers can provide employees a lump-sum payment to buy their own insurance policy that would be portable from job to job. Portability is one goal identified by the exchange legislation. Considering the failure of the Massachusetts exchange — as reported by Wake Forest Professor Mark Hall — in meeting the needs of the small group market, this issue should be a central focus of the legislation and not left to the exchange board.

There is no clear requirement to allow brokers and private exchanges to use their own sales tools to enroll people in subsidized health plans. There should be multiple and competing sales outlets for people to purchase health insurance. Multiple and competing sales outlets will provide more pathways to coverage for the uninsured and increase the level of service offered by the public exchange because it will need to compete. If the exchange becomes the only sales outlet, then choice, competition and affordability will suffer. So long as brokers follow certain rules, the state should specifically allow them to enroll people in subsidized health plans using their own tools to inform, guide and engage consumers.

Experts who work in the insurance market are not allowed to participate on the board. The legislation requires the exchange to establish advisory committees to get input from experts in the industry. However, these advisory committees cannot take the place of active participation in board matters. While folks with an academic understanding of the industry will provide great insight, they simply cannot have the same depth of knowledge as industry experts on how board decisions will affect the market. Understandably, board members who work in the industry will have a conflict of interest. There are ways to limit the conflict. At the very least, representatives who work in the industry should be allowed to participate as nonvoting board members.

A couple of concluding points are in order regarding how the state is preparing for the full implementation of the ACA on Jan. 1, 2014. First, lawmakers need to slow down and take the time necessary to carefully enact a thoughtful bill. Lawmakers claim they need something passed by the end of March to get approval from the federal government. But, at least when it comes to timing, the federal government has shown a willingness to be flexible. Furthermore, it's entirely likely that the whole implementation of the ACA gets delayed, considering all that must be accomplished at the federal level.

Second, the state should be using its willingness to establish a state-based exchange as a point of leverage to gain flexibility and exemptions from other parts of the ACA. Instead of being a slave of federal implementation, the state should start making specific demands. Most importantly, the state should demand to be free to continue covering people with pre-existing conditions through the state's successful high-risk pool versus adopting the ACA's guaranteed-issue and community-rating regulations. Moving from a high-risk pool model to the ACA's regulations could radically disrupt our current insurance market. In effect, Minnesota is being forced to move from what works to what's untested. That should be unacceptable to both Republicans and Democrats. Other policies, like the employer mandate and essential health benefits requirements, should also be revisited.

The ACA was passed in an extremely partisan and haphazard manner. It's no surprise that a number of serious flaws have been revealed. More are sure to come once the law is fully implemented. For a state like Minnesota — a state with possibly the best health care system in the country — the ACA poses a big risk to what's working.

To date, state leaders have not stood up to protect what works. It's time they do so, and the exchange could be the leverage they need.

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