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Remember the People Outside of the Exchanges

There has been a substantial amount of focus on the recently released draft regulations governing state-based health insurance exchanges under the Affordable Care Act (ACA). And that’s appropriate, since the exchanges have the important roles under reform of providing consumers with easier access to insurance and facilitating tax credits and cost-sharing subsidies that make coverage more affordable.

But, as central as exchanges will likely be, it’s important to remember that there are other key provisions that help shape the reformed marketplace. Insurers will still be able to sell insurance to individuals and small businesses outside of the exchanges, and the health reform law applies new consumer protections to plans sold in that outside market, too. Beginning in 2014, insurers will be required to sell coverage to everyone even if they have pre-existing health conditions, insurance will have to cover the essential health benefits, and coverage will be standardized into tiers that vary by the amount of patient cost-sharing. Also, a risk adjustment system which redistributes funds from plans enrolling healthier-than-average people to those covering a sicker-than-average population will operate throughout the individual and small business insurance markets, inside and outside of exchanges.

Exchanges play the role of organizing information and facilitating the decisions about purchasing and qualifying for financial assistance. The more general market reforms have a different function, regulating rating, underwriting and marketing practices to protect consumers and create a fair basis for insurer competition, whether they offer plans inside or outside of exchanges. Indeed, exchanges won’t function effectively if the broader market rules are not well implemented and enforced.

To be sure, most individual purchasers will probably buy coverage through the exchanges. This is because premium tax credits and cost-sharing subsidies will only be available to those purchasing coverage through exchanges, likely providing a substantial enrollment boost. The Congressional Budget Office (CBO) estimates that 22 million individuals will be buying coverage through the exchanges by 2016, and that 18 million of them will be receiving federal tax credits to help them pay for their premiums.

This leaves a substantial market for non-group and small-group coverage outside of the exchanges. CBO projected during the congressional health reform debate that about 9 million people would continue to buy coverage on their own, not through the exchanges. Also, CBO expects that few small businesses will buy insurance through the exchanges, covering about 2.9 million workers out of a total small group market of about 25 million people. This makes sense because the premium tax credits for small businesses available through exchanges are temporary and targeted towards the smallest businesses with low wages. Looking at the non-group and small-group markets combined and extrapolating the CBO projections, more people will likely be getting coverage outside of the exchanges (about 31 million) than inside (about 25 million).

Recognizing that there will be a sizable insurance market outside of the exchanges has important implications for reform implementation. While the same basic ground rules apply inside and outside of the exchanges, federal law applies certain additional provisions (such as those relating to performance standards and choice of some health care providers) only to plans in the exchanges. States also have flexibility in how they review and oversee insurer rates, policies, and practices. If plans offered outside of the exchange are subject to fewer standards or less scrutiny, they may have a price advantage or, perhaps more worrisome, attract healthier enrollees, which would increase exchange premiums and potentially federal subsidy costs as well. Risk adjustment could compensate for this  adverse selection but it’s not likely to do so perfectly.

Exchanges serve an important role under the health reform law in providing a mechanism for people to obtain subsidies to make insurance more affordable, and they may help to bolster competition in the insurance market and improve value for consumers. But their success will depend on a market test the choices that individuals and small businesses make and on the regulatory decisions made at the federal level and in the states as implementation proceeds.

- Larry Levitt and Gary Claxton