American Journal of Law & Medicine

State-Run Insurance Exchanges in Federal Healthcare Reform: A Case Study in Dysfunctional Federalism

CONTENTS
I.   INTRODUCTION
II.  HEALTH INSURANCE EXCHANGES IN THEORY AND PRACTICE
     A. Health Insurance Exchanges: Pre-ACA Attempts
     B. The Structure of the ACA Exchanges
III. FUNCTIONAL FEDERALISM CONSIDERATIONS AND
     STATE-BASED EXCHANGES
     A. The Case for State-Based Exchanges
        1. Functional Factors in Favor of State Regulation
        2. The ACA Exchanges Fail to Take Advantage of the
           Benefits of State Government
     B. Exchanges Are More Appropriately Organized at the
        Federal Level
        1. Functional Factors in Favor of National Regulation
        2. Insurance Exchanges Should Be Run by the
           Federal Government
IV.  INSURANCE EXCHANGES: ANTI-COMMANDEERING LITE?
     A. The Anti-Commandeering Doctrine and the ACA Exchanges
     B. Medicaid Expansion as Anti-Commandeering: A Blueprint
        for Challenges to the Insurance Exchanges?
     C. Practical Problems with Implementation and Coordination
V.   CONCLUSION

I. INTRODUCTION

On March 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (ACA) into law, (1) resulting in the most sweeping reform of the healthcare marketplace and one of the largest expansions in access to healthcare in American history. (2) A key component to both restructuring the healthcare marketplace and improving access are the health insurance exchanges contained in the ACA. Today, individual and small group purchasers have difficulty finding affordable health insurance in the marketplace because they lack the tools to gather information about plans and because they lack the bargaining power to negotiate for affordable rates the way large purchasers can. (3) In conjunction with the individual mandate, (4) the health insurance exchanges aim to solve inefficiencies in the current marketplace by creating a centralized venue to connect insurers with individual and small business purchasers. Thus, it both creates a place for insurers to readily find customers, who are now guaranteed to be there because of the individual mandate, and provides a place for customers to shop for insurance. Rather than creating a national health exchange, and, in turn, a unified national insurance market, the ACA adopts a familiar federalist model that requires state-run exchanges to implement federal policy. (5) This Note argues that the federalist structure of the insurance exchanges contained in the ACA is inefficient and ultimately self-defeating, both from a functional federalism perspective and because of the significant constitutional and political challenges it invites.

Traditionally, healthcare, health insurance, and public health regulations were the exclusive province of the states. (6) This dynamic has changed over the course of the past century, with the federal government taking an increasingly larger role in regulating and financing healthcare, starting with the New Deal and Great Society movements and continuing on through the modern regulatory state. (7) Even with this continued encroachment into the healthcare regulatory system, the federal government has gone to great lengths to continue to share power with the states. As it stands today, most of the significant federal healthcare programs, such as Medicaid (8) and State Children's Health Insurance Program (SCHIP), (9) are governed jointly at the national and state levels. (10) "Cooperative federalism," (11) as this governmental structure is known, is based on the idea that federal policies are often best run by states in order to conform to the peculiarities of their own populace and the particular needs and desires of the citizens in any given state. (12) While there might be a good reason for this structure to exist in certain programs that benefit from the advantages state implementation offers, the insurance exchanges represent a particularly inappropriate instance in which to employ such a scheme. (13) Because the ACA envisions very little variation in the function of each individual state's exchange, the traditional advantages federal schemes bring to bear will not be harnessed. In this scenario, the exchanges would be run more efficiently by the national government because of the efficiencies it would create.

The practical problems the federal scheme creates are compounded by the odd and potentially novel set-up of the program that may lead to continued constitutional challenges and protracted political debate. Each state is expected to run its own exchange, but because Congress cannot force a state's governmental apparatus to carry out a federal scheme, the ACA calls for the federal government to establish and run an insurance exchange in any state that fails to do so on its own by 2015. (14) This set-up not only damages the potential effectiveness of the exchange program as a whole, but also potentially leaves the ACA open to continued legal challenges on anti-commandeering grounds similar to the challenge levied against Medicaid expansion. (15) At the very least, the legal challenges that are likely to arise will continue to gum up implementation of the exchanges and add to the sense of illegitimacy healthcare reform has garnered in some circles.

Part II of this Note introduces the concept of insurance exchanges and the design of the ACA exchanges and discusses how the ACA's potential failure to maximize utility of an exchange contributes to the argument against creating exchanges through a cooperative model. Part III introduces the functional federalism factors to consider when choosing between state and national governmental regulatory schemes and argues that there is not a sensible rationale for organizing exchanges at the state level. Part IV briefly addresses the potential anti-commandeering claim that could arise from the federal fallback set-up and contemplates the potential for success depending on the outcome of the current ACA litigation challenging Medicaid expansion.

II. HEALTH INSURANCE EXCHANGES IN THEORY AND PRACTICE

Precursors to the ACA exchanges were conceptualized as active participants in the marketplace and, indeed, some examples of successful exchange-like entities exist today. The ACA exchanges, on the other hand, are more of a certification board and venue for the sale and purchase of insurance. (16) They do not have a large role in defining the insurance marketplace. Ultimately, while the ACA exchanges should increase market efficiency by bringing providers and purchasers together, they are limited in scope and power. In turn, the inefficiencies resulting from the federal structure of the exchanges may magnify their lack of flexibility to affect the marketplace on a large scale because any positive effects will only be felt at the state level. Moreover, if states opt not to create an exchange of their own because of perceived deficiencies, this adds credence to the argument that a federalist approach to the creation of exchanges is unnecessary. The more likely a state is to opt to allow the federal government to create an exchange for it, the less reason there is to want states to create their own exchanges in the first place. This section first considers the health exchanges and their history and practice pre-ACA by looking at four precursors to ACA exchanges. It then considers the structure of health exchanges in the ACA.

A. HEALTH INSURANCE EXCHANGES: PRE-ACA ATTEMPTS

The concept of a health insurance exchange has been a major part of health insurance reform proposals in the United States since the late 1980s. (17) In short, a health insurance exchange is an organized market for health insurance that, ideally, should create an easier process for consumers, decrease administrative costs through centralization and economies of scale, and reduce insurance costs overall by wielding market power through aggregating purchasers and stabilizing risk pools that are otherwise spread out in the individual insurance market. (18) As it currently stands, individual and small group purchasers simply do not have the resources to collect pricing and policy information the way large group providers do, nor do providers have an incentive to distribute their information to such a limited and disparate marketplace. (19) Insurance exchanges, in theory, are meant to correct this information gap and provide negotiating leverage that an individual or small group does not have on its own, lowering prices in the process. (20) In practice, however, an exchange may take a number of different forms and could conceivably have a number of different particular functions. (21) That is, an exchange may be a primary participant in the market, actively seeking more efficient and cost-effective plans for individuals and groups, or it may be more like a clearinghouse for information that is set up to provide increased transparency and centralization for purchasing health insurance. (22) Different models have been proposed nationally and adopted at the state level over the years, all of which may serve as important tools for understanding what it is the health insurance exchanges might do and how they can be effectively operated moving forward. (23) The best examples of active exchange systems are the Federal Employee Health Benefits Program (FEHBP) (24) and President Clinton's failed Health Security Act (HSA), (25) which was largely based upon the FEHBP.

While it is not exactly an independent or government run exchange, the FEHBP is the largest single purchaser of health insurance in the United States (with eight million federal employees and their dependents as members), affording it considerable leverage in the marketplace. (26) The FEHBP centrally offers four different plans that each participant may select from. (27) Each of these four plans has a premium and benefit package negotiated by the Office of Personal Management (OPM). (28) While the OPM does not set a minimum benefit package, nor is it charged with leveraging its market power to lower premiums, it has some degree of authority that allows it to negotiate for benefit packages and limit premium growth. (29) The negotiating function of the FEHBP alone provides the OPM with significant power to find affordable coverage for its members and ensure premiums do not grow out of control. In effect, the FEHBP acts in a similar manner to large group purchasers on the marketplace, but does so by conglomerating all federal employees into one group.

The HSA included a particularly robust and active version of insurance exchanges, dubbed "health alliances," that built upon the basic structure of the FEHBP. (30) The health alliances would have conglomerated all individual health insurance purchasers not enrolled in Medicare and all businesses under 5000 employees (or those who were in multi-employer union plans with 5000 or more employees) into state or regional (31) health alliances where individuals could select from a choice of plans. (32) Simply put, if one wanted to purchase insurance and was not an employee of a large company, they would have been forced to purchase their insurance through their local health alliance. (33) In doing so, health alliances would have provided increased purchasing power, by increasing leverage through sheer numbers that would be guaranteed to be a part of the purchasing pool, reducing administrative costs and spreading risk across larger populations--something that simply cannot be done on the individual insurance market. (34) Again, the idea was that larger groups wield market power and can purchase cost-effective insurance in the same manner as large purchasers like large corporations, Medicare, or the FEHBP. Health alliances were designed to be direct participants in the marketplace, not merely a vehicle within which the marketplace operates.

B. THE STRUCTURE OF THE ACA EXCHANGES

In contrast to the FEHBP, the insurance exchanges created by the ACA use the Massachusetts Commonwealth Health Insurance Connector Authority ("Connector") as a model. (35) Structured this way, insurance exchanges serve as a clearinghouse that provides information about health insurance and brings providers and purchasers to a common marketplace. (36) Scholars have made the comparison that the Connector is "like a stock exchange," in that it is simply a market designed to make it relatively easy and inexpensive to purchase an insurance plan, all while providing transparency and trustworthy options for an otherwise complicated process. (37) To be sure, the Connector is a government agency and participates in the marketplace principally by helping to inform individuals about their eligibility for government assistance. (38) It actively operates to identify the uninsured and bring them into a single purchasing group within the exchange, whether it is through encouragement, subsidization, or automatic enrollment. …

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