(l-r) Steven Davis, Kristin Jones, and Adam Petitt, of Stradley Ronon Stevens & Young.

On July 2, Gov. Tom Wolf signed into law a bipartisan bill creating the Pennsylvania Health Insurance Exchange Authority to operate and maintain a state-based health insurance exchange. In less than one month, with Pennsylvania’s Insurance Commissioner Jessica Altman at the helm, the bill (first introduced to the House Insurance Committee on June 4) navigated a labyrinth of legislative scrutiny with near unanimous support and approval. With the aim of lowering premiums and increasing access to health insurance, the newly created exchange will assist individuals with the purchase of health insurance plans in the individual and small group markets. This momentous effort brings Pennsylvania in line with around a dozen other states that operate their own health insurance exchanges.

The legislation proposed by the Pennsylvania Insurance Department was introduced by Rep. Bryan Cutler, R-Lancaster, who serves as House majority leader. Rep. Anthony DeLuca, D-Allegheny, proposed similar legislation in 2013 and 2015, but neither bill received approval from the House Insurance Committee. (In 2015, Pennsylvania received conditional approval from the federal government to create a state exchange, but after the U.S. Supreme Court clarified that states could continue to provide subsidies on the federal exchange, Pennsylvania paused its pursuit of a state-based plan.)  Since Rep. DeLuca’s bills were introduced, vendors have developed technologies to facilitate the operation of a successful exchange, which has significantly reduced the costs associated with establishing a state-based exchange.

While many individuals receive health insurance from their employers or government programs such as Medicare, nearly 400,000 Pennsylvanians purchase health insurance on the individual market. The exchange—also known as a health insurance marketplace—provides individuals with a place to shop for health insurance. It also matches individuals with federal subsidies, which can offset the costs associated with purchasing health care.

State-based exchanges provide the same services as the federal exchange and, in some states, even use some parts of the federal exchange to operate. Some states use the federal exchange to process applications and enrollment or simply use the federal platform to run the technology underlying the exchange. Regardless of the model, state-based exchanges give the states the ability to conduct plan management and provide consumer assistance.

Pennsylvania’s exchange will be fully operated by the state, using its own technology. State-based models have historically been less vulnerable to low enrollment than the federal exchange. State-based models also tend to attract more healthy (low-risk) applicants, and enrollment of healthy people is critical to stabilizing premium costs. Although it remains unclear why enrollment is better with state-based models, it may be attributable to the states’ outreach efforts. The federal government has drastically cut back its investment in advertising the exchange and customer assistance, which likely reduces enrollment.

Pennsylvania has relied on the federal health insurance exchange since the implementation of the Affordable Care Act to provide its citizens with access to health plans on the individual market. However, with the advancements in technology, Pennsylvania can now operate its own exchange more efficiently and as a result provide more affordable health care options for its citizens. Indeed, the proposal of Pennsylvania’s bill was a direct result of the realization that the federal exchange was too expensive. It is estimated that the federal government spent approximately $88 million per year to operate its exchange. Because Pennsylvania will charge on-exchange insurers an exchange user fee (presently set at 3% of total monthly premium for on-exchange policies, to be collected by the Exchange Authority), early estimates suggest the state’s cost to operate its exchange will be closer to $30 million.

In addition to saving money, a state-based exchange will allow Pennsylvania to exercise more control over plans on the exchange. Among other things, states operating their own exchanges are able to:

• Set stricter limits on short-term coverages than the federal government.
• Extend the open enrollment period.
• Access more data that can be used to regulate the market.
• Determine which insurance issuers are qualified to offer plans on the exchange or mandate issuer participation.
• Require issuers to offer plans in additional tiers, beyond the requisite Gold and Silver tiers.
• Standardize plan design and set network adequacy standards for qualified health plans.
• Develop their own application forms and website features (e.g., ability to browse plans before applying or to add filters and sorting functionality).
• Synchronize the exchange with the state’s Medicaid enrollment system.

“Running our own exchange also means we can tailor our outreach campaigns, open enrollment period, and other aspects of the exchange to meet the specific needs of Pennsylvanians, enabling us to better serve the needs of our individual and small group health insurance market,” Altman added.

In addition to creating a new state-based exchange, through a Section 1332 waiver of the ACA, the law also establishes the Commonwealth Health Insurance Reinsurance Program. Often labeled “insurance for insurers,” the reinsurance program is expected to bring stability to the market by allowing insurers to offset high-cost health claims—an inevitable risk in the individual marketplace. Consumers are expected to directly benefit from the reinsurance program in the form of lower premiums. Once created, the reinsurance program will be funded in part by the nearly $50 million in savings the commonwealth will receive a state-based exchange more efficiently than the federal exchange. The remaining funds will come from federal subsidy savings. While the reinsurance program lowers premiums, federal subsidies available to individuals will be proportionally lowered. The federal government’s savings from the lowered subsidies is expected to be around $145 million to $190 million and will further reduce premiums by covering high-cost claims which ordinarily would be spread across the entire market. The combination of the reduction in cost and the reinsurance program is expected to reduce premiums by 5% to 10%. This reduction in premium costs provides specific benefits to middle-class applicants who are not eligible for federal subsidies.

“We will use the significant savings from running our own exchange to lower premiums for all consumers in the individual health insurance market, as opposed to what premiums would have been without the reinsurance program,” Altman said. “This will especially help the roughly 80,000 to 100,000 Pennsylvanians buying individual plans who make too much to qualify for subsidies.”

Beginning in 2020, the Pennsylvania Insurance Department plans to operate the state-based exchange using the existing federal platform. By 2021, the department expects the exchange will be running on a state platform and the reinsurance program will be fully operational. Contemporaneous with Pennsylvania’s adoption of a state-based health insurance exchange, New Jersey adopted legislation establishing its own state-based health insurance exchange, which is expected to be fully operational by 2021.

Steven B. Davis is a nationally recognized insurance regulatory and coverage practitioner at Stradley Ronon Stevens & Young. As chair of the firm’s insurance practice, Davis helps manage the firm’s insurance-related regulatory and coverage dispute engagements.

Kristin J. Jones chairs the firm’s health law practice and provides regulatory, compliance and reimbursement counsel to health care providers (including hospitals, health systems and physician practices) and insurers.

Adam J. Petitt is a trial lawyer in the firm’s health law practice who counsels health insurance carriers, providers, hospitals and health systems in complex commercial civil and regulatory matters, white-collar defense and compliance.