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updated: 12/14/2012 6:45 PM

Most states opt out of health exchanges

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  • Sonia Limas, an illegal immigrant, makes cookies at her home in Texas. When healthcare reform has been fully implemented, illegal immigrants will make up the nation's second-largest population of uninsured, or about 25 percent.

    Sonia Limas, an illegal immigrant, makes cookies at her home in Texas. When healthcare reform has been fully implemented, illegal immigrants will make up the nation's second-largest population of uninsured, or about 25 percent.
    Associated Press/Sept. 6

Bloomberg News

WASHINGTON -- More than half of the state exchanges to be created under the 2010 U.S. health-care overhaul are expected to be run by the federal government, offering insurers and consumers uniform criteria in at least those areas.

While a final tally won't come until at least Saturday, 32 states have either said they'll let the U.S. build all or most of their exchanges or are expected to, according to Avalere Health, a Washington-based consultant. That puts the onus on the Obama administration to set up and maintain the marketplaces that sit at the heart of the Affordable Care Act's mandate to expand medical coverage to as many as 30 million people.

The first six states to win U.S. approval for their exchange are split down the middle on what their programs will look like, with some requiring insurers to compete for access based on pricing and products. For the states likely to adopt the federal exchange plan, U.S. health officials have said any insurer can offer services if minimal standards are met.

"This enables the federal government to ensure there's some level of consistency nationally," said Dan Mendelson, chief executive officer of Washington-based consultant Avalere Health. "From that perspective, they see that as a positive."

As of Thursday, 14 states, including California, Colorado and New York, had confirmed they'll run their own exchanges, the Department of Health and Human Services said. About a half- dozen more may join them by the end of the day.

"State versus federal isn't the issue," said Jay Angoff, a former Obama administration health official who is now a partner at Mehri & Skalet in Washington. "The issue is, will the exchange be strong or weak. That is, will the exchange use the bargaining power that it has to drive down rates."

Four states, Delaware, Illinois, Iowa and North Carolina, plan to contribute some services to a federally built exchange in a partnership with the Obama administration, according to Gary Cohen, who directs the U.S. Center for Consumer Information and Insurance Oversight. Those states may take on functions such as plan selection and customer assistance, while the federal government builds the websites and other infrastructure.

Iowa Gov. Terry Branstad, a Republican, confirmed the arrangement in an announcement Friday.

Iowa "intends to minimize the federal government's intrusion into the regulation of insurance," Branstad said in a letter to Obama's health secretary, Kathleen Sebelius. "We will continue to regulate insurance plans in Iowa and retain control over our Medicaid and Children's Health Insurance Plan eligibility."

Avalere projects that the number of states in partnership with the government may eventually reach 12. The deadline for states to declare whether they'll assist the government on exchanges is Feb. 15.

Under the law, the exchanges are designed to allow consumers who don't have medical coverage through their jobs beginning in 2014 to easily compare health plans, and then buy coverage online and through telephone services. The U.S. is subsidizing the cost for those who can't afford coverage.

While federal marketplaces would create a standard for the exchanges in states with widely different demographics from New Jersey to Nebraska, they will also face initial budget constraints that aren't an issue for states building their own marketplaces.

Funding for states to build their own exchanges is essentially unlimited, and the U.S. has given $1.8 billion so far, including to some states that have said they won't complete the work, Cohen said in prepared remarks for a congressional hearing on the issue Thursday.

Money for the federal exchange is in shorter supply, coming mostly from a $1 billion appropriation made by the health law.

States that build their own exchanges will still have to come up with their own money to run the marketplaces. Estimates of those costs vary. Nebraska Gov. Dave Heineman, a Republican, said it would cost about $81 million a year to run an exchange while the federal government could do the same job for about 27 percent of that amount.

Connecticut anticipates a cost of about $30 million a year, said Kevin Counihan, the CEO of the Connecticut Health Insurance Exchange. Maryland's exchange is expected to cost about $35 million in its first year, declining to $32 million in future years, said Rebecca Pearce, its executive director.

Politics, not practical concerns, has driven most Republican governors' decisions to opt out of building an exchange, said Robert Blendon, a health policy professor at the Harvard School of Public Health in Boston. Kansas Gov. Sam Brownback decided to let the federal government build his exchange against the recommendation of the state's insurance commissioner, Sandy Praeger, who is also a Republican.

"The majority of his voters really do not favor the Affordable Care Act," Blendon said. "For a number of Republicans, they still have some uncertainty that this thing could just sort of fall apart -- that when they try to set it up it's not going to work, it's going to be too expensive."

Angoff said the Republican governors are caught between two constituencies: conservative voters and insurance companies.

Insurers "want Republican governors to establish exchanges in their states, particular conservative governors, because they know those governors will make sure the exchange is weak," Angoff said in an interview. "The exchange will allow insurers to sell whatever policies they want and charge whatever they want and doesn't use the bargaining power they have."

The governors also can wait to see if exchanges work, Blendon said. The law lets them take over their state exchange any year after 2014, allowing them "to watch this without taking a great political risk," he said in a phone interview.

"If these things are working and people who favored them do well in the 2014 election, I think these governors will just discover it's worth having and the legislature will think it's worth doing because of practical reasons," he said.

At least one state, Idaho, is caught in the middle on the decision to build their own exchange and may present a challenge to federal regulators.

The governor, Republican Butch Otter, announced Dec. 11 that his state would build its own exchange. He can't sign contracts to begin work, though, before winning approval from the state legislature, which doesn't convene until Jan. 7, according to Bill Deal, the state's director of insurance.

"Time is our enemy at this point," Deal said in a telephone interview.

If Idaho's plans aren't immediately approved, it can take over the federal exchange at some future time or pursue the partnership.

"If you take a federally facilitated exchange then basically, as we understand it, it's pretty much a one-size-fits all," Deal said. "I just would rather be at the table, working with them, than not have that opportunity."

Cohen's agency awarded a $93.7 million contract to CGI Group Inc. in September 2011 to build the federal exchange, Bloomberg Government reported. Quality Software Services Inc., a unit of UnitedHealth Group Inc., the largest U.S. insurer, has a $69 million contract to build a system that states and the federal exchange will use to verify customers' eligibility for insurance subsidies.

Insurance companies have, in the past, encouraged states to build the exchanges, partly because "it enables a nice level of communication" with the people who run them, Mendelson said. "If you're operating the Blue Cross Blue Shield company in that state you also get a close familiarity with all the legislators who are setting the rules."

Rules for the federal exchange aren't yet final. So far, insurers are pleased that the government won't limit the number of plans allowed into the exchanges, as long as they meet federal standards, said Robert Zirkelbach, a spokesman for America's Health Insurance Plans, an industry lobbying group.

"That should be permanent," he said in a telephone interview. "That encourages more plans to participate."

Congressional budget projections show that more than half of the 30 million uninsured targeted by the Affordable Care Act will eventually buy subsidized plans through the exchanges and 11 million will become eligible for Medicaid, the state-federal insurance program for the poor.

The next step for the U.S. is to certify by Jan. 1 that states that will build their own exchanges meet an Oct. 1 deadline to begin enrollments. The Obama administration appears to be on schedule, Avalere's Mendelson said.

The government said today that Washington, D.C., New York and Kentucky had won conditional approval as meeting requirements for their exchanges, adding to the six states announced Dec. 10.

"The exchanges are a major legacy item for the president and he is not going to let up on that," Mendelson said in a telephone interview. "The administration will find the resources to get done the things they need to get done."

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