Making the Grade

A Scorecard for State Health Insurance Exchanges

When it comes to health care, there are few magic-bullet solutions for the many problems consumers face in the marketplace: insurers don’t compete for their business, leading to higher prices and lower quality. Important information about coverage is buried in the fine print, making it hard to know what’s really covered or which plan is right. And costs are continuing their unsustainable rise.


U.S. PIRG Education Fund

When it comes to health care, there are few magic-bullet solutions for the many problems consumers face in the marketplace: insurers don’t compete for their business, leading to higher prices and lower quality. Important information about coverage is buried in the fine print, making it hard to know what’s really covered or which plan is right. And costs are continuing their unsustainable rise.

Yet there are policy solutions that can make a difference and give consumers a better deal on health care. One of the most important of these is the creation of new state-based health insurance marketplaces, called exchanges. These exchanges, authorized by 2010’s health reform law, offer the states the chance to address the twin problems of cost and quality, and help consumers get a fair shake when buying insurance.

Exchanges give individuals and small businesses the same advantages that large businesses generally enjoy when it comes to buying health insurance. Large businesses have strong negotiating power, allowing them to get a lower rate for coverage as insurers compete for their business. They also benefit from economies of scale that lower administrative costs, and have sophisticated human resources departments and brokers at their disposal, making it easier for employees to understand their options and decide which plan is right for them.

In much the same way, exchanges give individuals and small businesses the ability to band together and gain the same benefits of size, negotiating power, and information. By providing better options and better information, and negotiating on behalf of its enrollees, the exchange can level the playing field for consumers.

States thus have an important opportunity to improve their health care marketplaces through the creation of an exchange. And the health reform law gives the states substantial leeway to define critical aspects of the exchange, including who is eligible to buy coverage through it, how aggressively it will set standards and negotiate with insurers, and who will run it. A weak exchange could wind up taking its cues from the insurance industry, not consumers, and do little to shift the fundamental problems in most states’ health care markets. A strong exchange, though, can be just the tool states need to revolutionize their health care systems and improve quality while lowering costs.

As of this writing, several states have already taken this opportunity and established their exchanges. But not all exchanges are created equal, and many states have yet to commit to establishing one. This report assesses the progress that the states have made, and for the states that have begun to set up their exchange, evaluates them on the myriad policies and criteria that will determine whether it is ultimately successful in improving health care for consumers.

Grading the Exchanges

Our scorecard breaks exchanges down into four major areas: First, the governance and overall structure of the exchange; second, the ability of the exchange to negotiate on behalf of consumers and drive lower rates and higher quality; third, the overall consumer experience and ease of use when searching for and buying coverage on the exchange; and fourth, the stability of the exchange and its protections against the risk of adverse selection.

Within governance, key policies include:

Exchange structure: the exchange should be an independent public agency, to maximize its flexibility and accountability.

Board makeup: the board should be run by consumers and their representatives, not the insurance industry
Conflicts of interest: board members should not make decisions that implicate their personal or financial interests.

Size of the exchange: the exchange should be open to larger businesses so more consumers can see its benefits.
Stakeholder input: consumers should be consulted as the exchange forms its policies.

For negotiating power and driving value, our criteria are:

Active purchasing: the exchange must have the power to negotiate with insurers and push them to deliver higher-value care.

Delivery and payment reforms: by promoting innovations like emphasizing primary care and paying for quality rather than quantity, the exchange can reduce premiums and improve value.

Rate review: the exchange should be integrated into the state’s rate review system.

Standardization of products: to help make consumers’ choices more understandable, the exchange should be able to standardize plan offerings.

Important points for the consumer experience include:

Navigators: exchange Navigators will help consumers choose and enroll in coverage; they should have strong relationships with communities with a high number of potential enrollees, and the program should not be limited to brokers.

Rating tools: the exchange website should provide robust tools to allow consumers to make apples to apples comparisons and pick the plan that’s right for them.

Eligibility and enrollment systems: applicants to the exchange should experience a seamless eligibility determination process, and if they’re eligible for other public programs, they should be automatically enrolled in them instead.

Privacy protections: the exchange must safeguard the personal information of enrollees.

Language access: exchange materials must be available in the primary languages spoken by enrollees.

To ensure the exchange remains stable, states must take these actions:

Ongoing monitoring: to protect the exchange from adverse selection, which would make the exchange’s risk pool sicker and more expensive than the outside market, the exchange must monitor the danger and recommend legislation if necessary.
Prohibitions on steering: to prevent insurers or brokers from segregating high-risk enrollees onto the exchange, the state should prevent steering.

Restrictions on off-exchange plans: limiting the availability of high-deductible “catastrophic” plans off the exchange, and requiring high-benefit products to be offered both on and off the exchange, allows the state to mitigate the risk of adverse selection.

Financing: ensuring that fees apply to all insurance plans in the state will mean neither insurers nor consumers will have an incentive to avoid the exchange.

Twelve states have so far established exchanges with sufficient detail to allow us to score them using these criteria. Different states have pursued different models, each with their own strengths and weaknesses, and states that have yet to take action have a variety of examples to look to in crafting an exchange that will work best for them.

Getting an Incomplete

Beyond these twelve, many other states have yet to take action to create their exchange, giving them an Incomplete on our scorecard – they have not yet made the decisions necessary to judge whether or not their exchange will be pro-consumer – or, indeed, whether the state itself will run the exchange, or if the federal government will step in to establish it.

In general, most states are pursuing the creation of their own exchange, or at least are exploring the tradeoffs of running it themselves as against leaving its operation to the federal government. Only two states appear to have entirely rejected the idea of creating an exchange – Louisiana and Florida, while twelve other states have officially expressed their intent to create a state exchange, or created a formal study committee to weigh their options.

There will be many policy decisions that must be made, and much infrastructure that must be created, to ensure that the exchange is open and ready to do business in 2014. With the states that have already taken action providing a guide to the remaining states, it’s past time for those that have yet to set up their exchange to get the ball rolling.