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Michigan's Progress on Establishing a Health Insurance Exchange

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Gary J. McRay & Nicole E. Stratton
Foster Swift Health Care Law E-News
November 2011

A key element of the Patient Protection and Affordable Care Act ("PPACA") was the creation of health insurance exchanges.  Health insurance exchanges are required to be in place by 2014 and will allow individuals and small businesses (those with 100 or fewer employees) to purchase qualified health coverage.  The exchanges should be particularly advantageous to individuals who cannot obtain health insurance through their employer.  Small employers may also benefit since many lack access to appropriate insurance products for businesses their size.

Michigan's legislature, like 15 other state legislatures, has proposed legislation to create its own insurance exchange.  The Michigan exchange is to be called the "MIHealth Marketplace," pursuant to Senate Bill No. 693 ("Senate Bill"), which was passed by the Senate on November 10, 2011.  The Governor, the Michigan Association of Health Plans, Blue Cross Blue Shield of Michigan and many other groups have encouraged the State to pass this legislation to establish the state exchange with Michigan attributes instead of a federally mandated exchange.  Most believe that a Michigan designed exchange will allow for greater flexibility and tailoring to meet the needs of Michigan citizens, employers, and insurers.

The MIHealth Marketplace, as established by the Senate Bill, would be a non-profit corporation with seven voting members on its board of directors.  The composition of this board is so important that a Michigan health care coalition of more than 80 member organizations, including AARP and Detroit Wayne County Health Authority, wants the Senate Bill changed to allow for more consumer representation on the governing board.  Currently as drafted, the Governor appoints five directors to the governing board, with the advice and consent of the Senate.  The Senate Majority Leader and the Speaker of the House of Representatives shall also each appoint one voting member to the board.  The Office of Financial and Insurance Regulation ("OFIR") Commissioner will serve as a non-voting ex-officio member of the board.  Under Section 207 of the Senate Bill, the board will appoint an executive director to manage the exchange.

The Senate Bill must be enacted into law soon since PPACA includes the following strict deadlines:

  1. January 1, 2013 - the exchange must be certified by the federal government;
  2. October 1, 2013 - open enrollment begins; and
  3. January 1, 2014 - MIHealth Marketplace must go live.

Moreover, the MIHealth Marketplace will have to follow other federal guidelines. Included in such guidelines are four mandatory coverage options:

  1. a Bronze plan where the plan covers 60% of the costs of essential health benefits (40% are paid by the individual);
  2. a Silver plan where the plan  pays 70% of the cost,
  3. a Gold plan where the plan pays 80%, and
  4. a Platinum plan where the plan pays 90%.

Additionally, the exchange must offer health plans to both individuals and small employers.  For years 2014 and 2015, small employers will be considered as those with 2 to 50 employees.  Effective January 1, 2016, small employers will be those with not more than 100 employees during the preceding calendar year.

While many health plans who wish to participate will put up with some federal regulation in order to compete for the business that will presumably flood into the exchange, there will be additional state requirements to consider as well.  Under Section 215 of the Senate Bill, each qualified health plan offered through the exchange must be certified by OFIR.  This means that a health plan offered by an HMO or an insurer must have its (i) premium rates and (ii) contract language approved by OFIR and must offer, pursuant to federal law, both a silver plan and a gold plan.  It is the intent of the exchange to allow individuals and small businesses to shop each category of health plans (bronze, silver, gold or platinum) through an internet website and be able to compare prices, deductibles, copayments and co-insurance.  This has been likened to shopping for travel arrangements on websites such as Priceline.com or Orbitz, where all options are available in one central location.

It is the further intent of the legislation that the exchange be operated without a subsidy from the State.  Instead, it is to be funded through assessments or user fees levied on the health carriers and insurance companies who are selling their products on the exchange.  This, according to the State, is not unreasonable as the exchange will allow insurers to gain access to an estimated 520,000 potential customers along with an additional 500,000 customers who may be Medicaid-eligible.

The size of the new market that might access the exchange will depend on various factors.  Some low income individuals will be attracted to the exchange due to new federal government subsidy programs, which can only be accessed by purchasing coverage through the exchange.  In addition, certain employers may decide to drop or refrain from offering health insurance to their employees and instead encourage them to purchase coverage through the exchange.

There are two subsidy programs offered by PPACA.  The first is a premium tax credit to reduce the cost of insurance coverage for households with incomes from 133% up to 400% of the federal poverty level ("FPL") (i.e., up to $74,120 for a family of three).  A person is not eligible for the premium tax credit unless the employer's health plan fails to meet certain benefit and affordability standards.  PPACA guarantees that the cost of purchasing an exchange's second lowest cost plan (the silver plan) will not exceed a fixed percentage of a household's income.  If the cost does exceed the fixed percentage of a household's income, then the difference between the cap on the premium and the actual cost will be the value of the premium tax credit.

The second federal subsidy involves offering a cost sharing credit to enhance the coverage level for households from 133% up to 250% of the FPL for the second lowest cost plan offered on the exchange (i.e., up to $46,325 for a family of three).  Full-time employees of large employers will typically not qualify for benefit subsidies, since the plan offered will not pass the benefit and affordability standards.  So with these federal subsidies, some individuals will move to the exchanges when employers do not offer a comparable health plan.

In addition, public or private employers with 50 or more full-time equivalent employees will be subject to what is often called the "play or pay rules."  Play or play rules require the employer to achieve certain benefit levels that are offered to employees at a cost that does not exceed certain premium levels (i.e., they must pass both the benefit test and an affordability test).  Consequently, an employer must offer full-time employees a health plan that covers "essential benefits" as defined under PPACA and provides at least $750,000 of coverage.  This coverage price rises to $2 Million in 2012.  All plans must also eliminate annual limits on essential benefits in 2014.  To meet the benefit test, PPACA requires that the actuarial value of what is offered by the plan equal approximately 60% of the health care expenses, on average.

For the affordability test, PPACA prohibits the premium cost charged to the employee for joining the employer's health plan from exceeding 9.5% of household income, which may be difficult to calculate.  If the employer does not "play" by offering the proper health plan, then it "pays" a penalty for its failure.  If the employer does not offer any health plan, then there is a large mandated penalty of $2,000 per year for each full-time employee (after a deduction for the first 30 employees).  If an inadequate plan is offered, the penalty is $3,000 per year for each full-time employee that purchases health insurance through the exchange and receives a tax credit (presumably a smaller penalty).  It may be a complicated calculation for employers to decide whether to keep existing health plans or whether to provide modest health plans and pay the penalty for shifting some or all of their employees over to the exchange.  However, it is not just the cost of the health insurance versus the penalty paid to the government that must be considered.  If an employer does not offer any health insurance as a fringe benefit, the employer, to be competitive, will often have to raise wages to offset the lack of pre-tax fringe benefits, such as health care, and the end result may still put the employer at a competitive disadvantage.  However, the movement of people purchasing their health insurance through the exchange will still be significant.

Since the exchange is non-exclusive, most of the large insurance carriers will, most likely, try to capture a share of this new market.  However, the participation by many insurers in the Michigan exchange may not drive prices down for consumers in the early years.  Other exchanges, such as California's, have found that its exchanges did not produce lower prices for consumers, nor has it been necessarily advantageous for insurers.  Insurers in California have had underwriting issues with insuring high risk individuals instead of all of the employees of various employers.  An entire employer group reasonably ensures the insurer of some lower-risk healthy individuals alongside higher-risk individuals.  It could avoid adverse selection and guide the underwriting assumptions due to the health cost experience of the employees.  The exchange will, at first, offer more uncertainty to the insurers and this could keep prices higher than the government hopes.

Nonetheless, Michigan's Senate Bill is an important piece of legislation, especially for the insurance industry.  It will be needed since the timelines for implementing the federally mandated exchange are critical and require early implementation of the Senate Bill. Many legal experts believe that if the Supreme Court eventually concludes that PPACA is unconstitutional, that only the individual mandate will be affected and the balance of PPACA, including the concept of the exchanges, would still be implemented.  We expect that Senate Bill No. 693, authorizing MIHealth Marketplace, will soon become law and the exchange will become a reality offering small employers and individuals new and more transparent access to health insurance.

If you have any questions, please contact a member of the Foster Swift Health Care Law Group.