obama exchanges will cause 'irreversible shift

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At a glanceIn 2013, state exchanges will open for enrollment.Some states are preparedto establish their ownexchanges, but many others will look to thefederal government torun mostif not allof their exchange functions.Understanding thenuances of the public and

private exchange modelsand the new members willbe critical for businessesto succeed in this newmarketplace.

Health Insurance Exchanges: Long on options, short on time

pwc.com/hri

Health Research InstituteOctober 2012


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Table of contents

Introduction 1

An emerging customer base 2

The public and private faces of insurance exchanges 8

Health industry implications 14

The long-term outlook 17

Acknowledgements 19


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1Introduction

One year from now, 12 million Americans are expected to beginpurchasing health insurance through newly-created marketplaces known

as exchanges.1

Federal subsidies will entice many would-be participants tothe program that will offer coverage starting in 2014. By 2021, the size of the exchange market is projected to more than double, marking the singlelargest expansion of health coverage in this country since the creation of Medicare in 1965. 2

For the insurance industry, the newstate-based exchanges represent a majorbusiness opportunityan estimated$205 billion in premiums by 2021.

But thriving in this new market wont

be easy. Insurers will continue theirbattle to keep a balance of healthy andsick members to limit adverse selection.Providers and insurers will face clearchallenges in serving a new customerbase with a demographic pro le andhealth needs that differ from todaysinsured population in meaningful ways.

States will carry the responsibility tomake consumers aware of new coverageand nancial assistance options. Success will require a rm grasp on emergingpublic exchange models, a sophisticatedunderstanding of the individuals who will be purchasing coverage and theskill to help consumers navigate anincreasingly complex health system.

Private exchanges, already up andrunning in a handful of markets, may serve as innovation models in this newpurchasing environmenttargetingemployers and consumers seekinglower costs, greater transparency and convenience.

1 CBO, Estimates or the Insurance Coverage Provisions o the A ordable Care Act Updated orthe Recent Supreme Court Decision, July 2012.

2 Kaiser Family Foundation, Medicare: A Timeline o Key Developments, Available at: http:// www.k .org/medicare/medicaretimeline.c m; US Census Bureau, Historical NationalPopulation Estimates, 1900 to 1999 US Census Bureau, Projections o the Populationand Components o Change or the United States: 2010 to 2050 (Constant Net Migration).

States have until November 16 tonotify the Department of Health andHuman Services on whether they planto form their own distinct marketplacesor collaborate with the federalgovernment to operate an exchange.Many are waiting for the Novemberelection results before deciding howto proceed. This wait-and-see stanceleaves an increasingly short decision window, which in turn shortens thetime available for implementation by states and insurers.

Thus far, 13 states and the District of Columbia have issued formal letters of intent to establish their own exchanges,but not all will be ready for enrollment

by October 2013. The majority of the remaining 37 states will have thefederal government directly involved inrunning their exchangeseight stateshave already chosen to have a federally-facilitated exchange, while three haveselected an approach that divides dutiesin a state/federal partnership.

Public exchanges will create anirreversible shift in the insurancemarket that will ultimately change

the way medical care is sold in the US.


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2 PwC Health Research Institute | Health Insurance Exchanges: Long on options, short on time

The 2010 healthcare reform law extendshealth insurance to approximately 30 million Americans through twomajor mechanismsan expansion of the Medicaid program and the newexchanges. 3

States face two major decisions this fall: whether to expand Medicaid and whichtype of exchange to create. Enrollmentin the exchanges will vary depending on whether states expand their Medicaidcoverage. The new exchange members will be a combination of the newly insured, those who are no longercovered through their employer andthose who would have purchasedinsurance on their own in theindividual market. The total exchangemembership in 2021 is projected toreach 29 million25 million in theindividual exchange and 4 million inthe small group exchange, known asSHOP (Small Business Health OptionsProgram).

PwCs Health Research Institute (HRI)

analysis based on projections by theCongressional Budget Of ce (CBO)shows that 40% of the expectedindividual exchange enrollees willcome from ve statesCalifornia,Texas, Florida, New York and Illinois. 4

This is the largest open enrollmentin our careers, said Kim Jacobs, vicepresident of product and innovationat UPMC Health Plan. Individualstate exchange members in 2021 areprojected to range from 100,000 instates such as Maine to 3.5 millionin California. 5

Quali ed individuals with incomesthat fall between 100% of the federalpoverty level (FPL) and 400% FPL will receive nancial assistance fromthe government to buy insurancein the form of subsides or reductionsin cost sharing. 6

The law originally required all statesto expand Medicaid to 138% of FPL, or $15,415 for an individual or$31,809 for a family of four. 7,8 Buta landmark ruling by the SupremeCourt in late June made the expansionoptional, creating the likelihood of gaps in coverage.

States that do not expand Medicaid tothe ACA threshold could leave a groupof uninsured who fall between thestate Medicaid level and the lower limitfor exchange subsidies. Individualsoutside of this range may still purchasecoverage in the exchanges, but they wont receive subsidies.

An emerging customer base

3 CBO, Estimates or the Insurance Coverage Provisions o the A ordable Care Act Updated orthe Recent Supreme Court Decision, July 2012.

4 HRI Analysis; US Census Bureau, Current Population Survey, March 2011 Supplement; CBO,Estimates or the Insurance Coverage Provisions o the A ordable Care Act Updated or theRecent Supreme Court Decision, July 2012.

5 CBO and PwC HRI analysis.6 Subsidies are tax credits and cost-sharing assistance given to quali ed individuals in amilies

with incomes between 100% and 400% FPL to buy a ordable insurance. The amount o thepremiums that individuals/ amilies will have to pay is determined on a scale that ranges rom2% to 9.5% o annual income. More in ormation available at: http://www.k .org/healthre orm/ upload/7962-02.pd .

7 In this report, Medicaid eligibility in 2014 was de ned as individuals with incomes o up to138% o the ederal poverty level. While Medicaid is being expanded to cover those withincomes o less than 133% FPL, income is calculated using modi ed adjusted gross income(MAGI), which includes a 5% income deduction and has the net e ect o raising the incomecap to 138% FPL.

8 Based on the 2012 HHS Federal Poverty Guidelines or 48 contiguous US states, http://aspe.hhs.gov/poverty/12poverty.shtml.

This is the largest openenrollment in our careers. Kim Jacobs, UPMC Health Plan


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3 An emerging customer base

9 CBO projections or exchange membership in 2021 are 25 million or the individual exchangeand 4 million or the small group exchange.

10 A college degree is de ned as a bachelors degree.11 CBO, Estimates or the Insurance Coverage Provisions o the A ordable Care Act Updated or

the Recent Supreme Court Decision, July 2012.

All states expand Medicaidto 138% FPL or above

Some states expand Medicaidto 138% FPL or above

No states expand Medicaid beyondcurrent levels

11 million enrollees $50 billion in premiums






Source: CBO and PwC HRI analysis

Figure 1. Projected exchange enrollment dependent on Medicaid expansion

Number o exchange enrollees and premium expenditures as determined by various state Medicaid expansion scenarios

2 0 2 1

2 0 1 4

As a result, exchange enrollment in theSHOP and individual exchanges may

range from a low of 11 million in 2014to a high of 32 million in 2021 (SeeFigure 1).

HRI analysis of demographic data forexchange members indicates that the25 million people slated to receiveindividual coverage have a medianage of 33 and report being in relatively good health. 9 They are mostly white,and about one in ve speak anotherlanguage at home (primarily Spanish)

compared to the currently insuredpopulation, where one in eight speak another language at home. And roughly three-fourths (76%) of the exchangepopulation will not hold a collegedegree, compared to nearly 60% of todays private insurance market. 10

When the exchange population iscombined with the ACAs new Medicaid

bene ciaries, the result is a distinctly different customer base for the healthsector (see Who are the 30 million newly insured under the ACA? ). Serving a lesseducated, racially-diverse populationthat is more likely to cycle on andoff government support will requirecreative outreach programs, moretargeted products and stronger ongoingcustomer support.

Although almost 60 percent of adults

entering the exchange market areemployed full-time, nearly nine outof 10 will receive subsidies in 2014. 11

In the earlier years, more enrolleeshave lower incomes. For example, in2014 about 60% will have incomesat or below 200% FPL ($46,100 for a


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family of four). The number drops to35% in 2021. Medicaid Managed Careorganizations, which have experienceaddressing the unique needs of a lowerincome population, may be well-equipped to initially serve the market.

In the latter years, the average incomeof exchange participants trends slightly upward as higher income individuals join exchanges. For example, in2014, HRI estimates that 16% of theindividual exchange population willhave incomes above 300% FPL. Theportion rises to 35% in 2021.

The exchange shoppers are unlikely tooverwhelm the healthcare system orsubstantially drive up costs immediately after gaining coverage. 12 However, they will be less familiar with the insurancesystem; in 2014, approximately 75%of public exchange enrollees will benewly insured. Over time, outreach andeducation efforts by states and insurers will need to match the changingneeds of exchange members as they

transition from newly-insured to moresophisticated customers.

Pricing and competitionConsumers care about price, and withall else being equal price will winandthats where health plans will startcompeting on the exchanges. Insurancecompanies must determine how to priceat the different levels of plans laid outin the ACAbronze, silver, gold andplatinumeach having cost sharing

percentages. Some plans will pricelow to attract new customers, whilesome may price higher to join the game without initially attracting only thesickest, costliest patients. Insurers are weighing several factors in developingtheir products.

We need to nd the right place onthe shelf of the exchanges, publicor private, said UPMC HealthPlans Jacobs. We can do thisby understanding what differentconsumers value. And we need to havea balanced population of the healthy and sick.

Other factors besides price will fuelcompetition as exchanges becomemore established. While the ability to differentiate products may vary depending on the health exchangeand the knowledge of the consumer,a subset of higher-priced plans with abetter tting provider network couldbeat out some lower-priced plans. Asprevious HRI research has shown,

almost half47%of consumerssurveyed indicated a willingness to pay a higher price for additional insurancefeatures such as dental or visioncoverage. 13

Even more important to consumersis the quality of insurance coverage.Consumers cited bene ts and providernetwork as their top two aspects thatde ne quality. Lower costs camein third.

12 Adults aged 18-64 represent about 83% o the newly insured.13 PwC Health Research Institute, Change the channel: Health insurance exchanges expand

choice and competition, July 2011.


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5 An emerging customer base

A cautionary tale onmeeting the needs of a

new customer base Are you feeling blue?

The story behind that seemingly simplequestion offers a cautionary tale forhealthcare organizations looking tocapture and serve the approximately 30 million newly insured customersenrolling in state insurance exchangesand Medicaid beginning next year.

At the San Francisco-based ChineseCommunity Health Plan, medicaldirector Craig Reich, MD, knows

rsthand that serving a uniquepatient population requires not only foreign language skills but a deepappreciation for cultural, educationaland socioeconomic differences.When the federal governmentsMedicare Advantage Plan Stars survey asked members whether they weredepressedAre you feeling blue?the American colloquialism didnt translate very well.

The vast majority of the health

plan members only speak Chinese. And it became apparent the phrase wasnt translating clearly. Needlessto say, the health plan, which serves30,000 customers, has been scoringpoorly on qualitywhich is madeup of approximately half consumerexperience scores and half healthoutcomes scores. Scoring low on thesurvey reduces bonus payments toMedicare Advantage plans.

If our Star scores dont re ect highquality of care, we will eventually run out of money, Reich said in aninterview with HRI. We wont be able toprovide the culturally and linguistically competent bene ts and care ourcommunity needs and is entitled to.

Brian Cook, a spokesman for CMS,said the agency is studying ways toaddress language barriers. While thequality ratings and bonus payments arecritical, Reich sees larger lessons forinsurers and providers contemplatingcompeting for the newly-insuredpopulation, which will have a distinctly different pro le than todays market.For example, like the Chinese-speaking clientele Reich serves,20% of consumers expected to shopon the individual exchanges do notspeak English. Approximately 65% of exchange joiners wont have a collegedegree. The gap is even greater whenadding in those patients expected toqualify for Medicaid.

The needs of our members go wellbeyond health plan coverage, saidReich. Half of our member populationphysically comes into the center forcustomer service inquiries and ourmember services staff needs to be ready to handle life needs, such as questionson their telephone bill.

The staff is all local, understands

the community and can relate tocultural and language intricacies to getappropriate care for a member basethat is predominantly on Medicareor Medicaid. The health plan is asubsidiary of Chinese Hospital andactively searches for physicians who canprovide regular care in a way that tstheir members.

Georges Benjamin, a physician andexecutive director of the AmericanPublic Health Association, said that thenewly-insured population could posea number of challengesnot the leastof which is stability of providers. Inmany cases these folks are cared for by someone right now, he said. Someof them are in a clinical practice evenif that provider isnt currently gettingcompensated.


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Children who are uninsured all the way to seniorsnearing Medicare age may not ood the healthcaresystem or substantially drive up costs soon after they obtain coverage under the Affordable Care Act. In factan overwhelming majority, 88%, will be in relatively good healthdata that suggests providers wont beimmediately overburdened by the newly insuredonce coverage is offered to virtually every American.

But the pro le of this incoming group of customerssuggests distinct challenges for the health sector, as well as the patients themselves trying to navigate araft of new regulations in todays fragmented system.

The newly insured will be a less educated, morediverse group. One in four will be black, Asian, Native American or multi-racial compared to 21% of thecurrently insured. And more than a quarter of thenewly insured under the ACA30%will speak a language other than English. Today about 12%of the insured dont speak English as their primary language. (Both gures may include undocumentedimmigrants who will not be covered under the ACA.)

HRI analyzed two federal databases to draw a fullerportrait of the approximately 30 million uninsured Americans, under age 65, who stand to gain coverageunder the law.

The analysis found that the majority of the newly

covered in 2021 will enter the healthcare systemrelatively young, single and in good shape, thoughsigni cantly less educated and more likely to beunemployed or underemployed than the currentinsured population. Many will cycle betweenMedicaid and the subsidized exchanges, a phenom-enon known as churn. If all states participate in theMedicaid expansion, about 38% of individuals willmove between the two categories four or more timesover the next four years, according to one analysis. 14

Over time, subtle differences in how the two groupscompare may have a big impact on how patients are

treated a decade from now. One of the most telling

factors can be found among the minority populationprojected to gain insurance.

Race and ethnicity often in uence a patientsaccess to certain medical treatments. Fewer African Americans, for example, receive routine cancerscreenings or procedures to treat heart diseasecompared to whites, according to data compiled by the Agency for Healthcare Research and Quality. 15 If such statistics hold, then it is more likely thatproviders will treat potentially higher-acuity patientsthan they do now.

Other differences are more nuanced. The newly insured will be slightly older than those who arecurrently insured; they will be less likely to have a fulltime job, 42% compared to 59%. Not surprisingly, thenew group earns less, with a median income of 166%of the federal poverty level compared to a medianincome of double that.

From an education standpoint, much of the emerginginsured population will have to tackle a complexrange of options and enrollment responsibilities without a college degree. Roughly 86% wont havea college degree compared to 63% of the currently insured population, HRI analysis found. 16

Such income and education indicators paint a hazy future for providers. The ACAs coverage expansion

means doctors and hospitals will have many morepaying customers than now. But the new patientpopulation is more likely to have dif culty withEnglish and be unaccustomed to deciphering the vagaries of the health system. And although thenew group reports feeling healthy, physicianssuspect there will be a range of undetected medicalissues to address.

Even the initial health care assessment might be aproblem for some of those patients and providers,said Georges Benjamin, a physician and executivedirector of the American Public Health Association.

Because they may not have seen a physician recently,they will require more hours of assessment and care.

Who are the 30 million newly insured under the ACA?

14 Chris Fleming, Frequent churning predicted between Medicaid and Exchanges, Health A airs Blog, February 11, 2011; http:// healtha airs.org/blog/2011/02/04/ requent-churning-predicted-between-medicaid-and-exchanges/.

15 Agency or Healthcare Research and Quality, Addressing Racial and Ethnic Disparities in Healthcare: Fact Sheet; http://www.ahrq.gov/research/disparit.htm. Accessed September 2012.

16 A college degree is de ned as a bachelors degree.


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7

32% 40%

52% 29%

16%31%

Newly Insured Currently Insured

Married Single Child

61%

35%

17%

18%

8%

11%

11%

24%

3% 13%


High School Degree or Less Some College (No Degree)

Associates Degree Bachelors Degree

Graduate Degree

69%88%

24%7%5% 4%

1% 1%


English Spanish Other Language Unknown

27% 24%

42%59%

17%12%14%

5%


Not in Labor Force Employed, Full-time

Employed, Part-time Unemployed

26%37%

29%

33%

33%21%

9% 6%3% 2%


Excellent Very Good Good Fair Poor

...more likely tobe non-white

...more likely to beadult and single

...less likely to havea college degree

Race

...less likely to rankself in excellent orvery good health

...more likely tospeak a languageother than English

...less likely tohave full-timeemployment

Marital status

Educational attainment

Health status

Language

Employment status

75% 79%

16% 13%2% 1%5% 5%2% 2%


White Black Native Am/AK/Pac Isl Asian Multi-Racial

Median age: Median income:Newly insured: 33Currently insured: 31

Newly insured: 166% FPLCurrently insured: 333% FPL

An emerging customer base

Figure 2: Portrait o the newly insured

A comparison o individuals gaining coverage against those who already have coverage across several categories

Children account or a smaller portion o the newly insured than o the currently insured. This decreases the median age o the currently insuredpopulation. Limiting the population to adults ages 18 to 64 results in a median age among the newly insured o 38 and a median age o 42 amongthe currently insured population.

For more methodology in ormation, see About this research .

Sources: HRI Analysis; US Census Bureau, Current Population Survey, March 2011 Supplement; Agency or Healthcare Research and Quality, 2009Medical Expenditure Panel Survey; CBO, Estimates or the Insurance Coverage Provisions o the A ordable Care Act Updated or the RecentSupreme Court Decision, July 2012.


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Under the ACA, states can run theirown exchange, partner with the federalgovernment or have the Departmentof Health and Human Services operateits federal exchange in the state. Whileall three models follow a commonbasic framework, each will vary inoperational structure and oversight andcarry different implications for insurers,providers and employers.

The concept of an insurance market-place is not entirely new. Today privatepurchasing exchanges run by insurersor third parties offer a banquet of

options to employers and individualconsumers. These exchanges are eitherrun by a single health insurer or anindependent private company thatbrings in multiple carriers in a privatepurchasing marketplace. In addition tomultiple health plans, consumers canchoose from other products such asproperty and life insurance or discountson wellness products. The variation inprivate exchanges makes it dif cult toquantify the exact number.

Private exchanges are in many waysthe precursor to the public exchangesenvisioned in the ACA. And in thefuture, private exchanges will createan alternative both for employers andfor individuals who do not qualify forgovernment-subsidized insurance.(See Figure 4.)

Public exchangesStates that run their own exchanges will be responsible for setting eligibility standards, customer service, planoversight and nancial management. 17

The complex eligibility process will

require use of a combination of dataprovided by the enrollee and federaldatabases to identify who is eligible forenrollment and subsidies, as well as forMedicaid and CHIP.

States must also decide if they will beactive purchasers, selecting whichplans may compete in the marketplace,or passive purchasers by allowingan open marketplace. Massachusetts, which currently has nine insurers in itsexchange, is an example of an activepurchaser. 18 California, Oregon andConnecticut have indicated they will beactive purchasers. Several other states,including Utah, Colorado and Hawaii,follow the passive purchaser model, which accepts all quali ed health plans.

The customer service aspectcannot be ignoredStates must set up websites, call centersand consumer outreach to enable widespread participation. States willalso have the power to determine whichhealth plans qualify to participate intheir exchange, and to a certain extentthey will monitor the bene ts offeredand rates charged.

States have the option of running theirown risk adjustment and reinsuranceprogramsdesigned to insulateinsurers from high-cost individuals. Thefederal government will administer therisk corridor program, which limits the variation in gains and losses by healthplans that participate in the exchange.

In the federally-facilitated exchange ,HHS will oversee all ve major exchangefunctionsenrollment, eligibility,customer service, plan management

and nancial management. Guidanceissued by the administration in May follows four principles: providingconsumers access to quality insurance ina seamless manner, parity in insurancemarkets inside and outside the exchange,continuity with state policies andcollaboration with many stakeholders.

In state-federal partnerships , states will split oversight duties with HHSalthough the term partnership may not necessarily mean a 50-50 divisionof labor. The state in this model ismore of the store front, interacting with consumers and employers.States that choose this option areceding the more technical aspectsof exchange activity to the federalgovernment but can retain controlof insurer oversight and consumerassistance, said Joel Ario, managingdirector of Manatt Health Solutions andthe former head of insurance exchangeplanning at HHS.

The federal government will run all

functions except for plan managementand certain elements of the customerservice function. States can choose torun one, or both, of these functions. 19

If states choose to oversee planmanagement, they will be responsiblefor certi cation, recerti cation anddecerti cation of quali ed healthplans, data collection and insureroversight. If they choose to run thecustomer services function, they will

lead all in-person customer assistance, while HHS will operate a call centerand website. 20 The federal government will oversee eligibility, enrollment and

nancial management.

The public and private faces of insurance exchanges

17 CMS presentation, Exchanges: A Proposed New Federal-State Partnership; State Exchange Grantee Meeting, September 19-20, 2011.18 Massachusetts Health Connector Authority. Health Re orm Facts and Figures, Summer 2012.19 CMS. Guidance on Federally- acilitated Exchanges, May 16, 2012.20 CMS presentation, Working Together to Implement Exchanges. Health Insurance Exchange System-Wide Meeting, May 12-13, 2012.


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9The public and private aces o insurance exchanges

21 Ibid.22 Kaiser Family Foundation State Exchange Pro les. Available at: http://healthre orm.k .org/State-Exchange-Pro les-Page.aspx.23 Ibid.24 HHS. Creating a New Competitive Marketplace: A ordable Insurance Exchanges. http://www.healthcare.gov/news/ actsheets/2011/05/

exchanges05232011a.25 Kaiser Family Foundation State Exchange Pro les. Available at: http://healthre orm.k .org/State-Exchange-Pro les-Page.aspx.26 Ibid.

In the partnership model, states may administer their own reinsuranceprogram. The federal government will operate the risk corridorprogram and the permanent risk adjustment program. 21

State progress

State-run exchangesThirteen statesincluding New York, Vermont and Kentuckyand theDistrict of Columbia have declaredtheir intent to establish a state-basedexchange. New York has moved forward

rapidly since the governor signed anexecutive order in April 2012. The statehas received more than $183 millionin grantswith about 75% spent ondevelopment of an IT system that willbe fully integrated with the Medicaidprogram, and the remainder onexchange staff and exploratory analysesof models and the new population. 22

Danielle Holahan, director of policy and planning for New Yorks exchange,said that the states biggest challenges

to implementation have been theaggressive timeline and delayed federalguidance. The tight deadline howeverhas helped jump start health datacoordination activities in the state.

There are activities weve started,like an all-payer database that werecommitted to and will continueregardless of the ACAs fate, saidstate insurance commissionerNirav Shah, MD.

In 2011, Vermont passed a law that

puts it on a course to establish asingle-payer healthcare system by 2017. Its exchange will help smooth

that transition, and retain most majorfunctionality including enrollment,eligibility and consumer education. Thebiggest difference will be turning off theconnection to carriers, said exchangedeputy commissioner Lindsey Tucker.But in terms of the system components,the infrastructure will remain the same.

State of cials in Kentucky fully intendto have its state exchange up andrunning by the January 2014 HHSoperational deadline. Developing theexchange has given us the opportunity to take a hard look at the bene ts forall populations including Medicaid,

small group and the uninsured, said Audrey Haynes, secretary of the cabinetfor Health and Family Services. Wevebeen watching every dollar to see how it

ts in with short and long term goals.

State/Federal partnershipThree statesArkansas, Illinois andDelawarehave announced that they will pursue state/federal partnershipexchanges. (See Figure 3.) Arkansashas been moving toward a partnershipexchange since late 2011, and hasmade notable progress to build outits capabilities around plan oversightand customer service. 23 The statecreated a steering committee to provideoversight, and has received nearly $9 million in grants to design andconnect Medicaid and exchangeenrollment, develop consumerassistance programs and build out thestates plan management functions. 24

Federally-facilitated exchange

Eight states have indicated that they do not intend to develop a state-basedexchange, and consequently will

turn over the program to the federalgovernment. For example, in July 2012,Texas Governor Rick Perry announcedthat his state would not establish anexchange. The state received $1 millionin planning grants, but has sincereturned all but $100,000. 25

UndecidedMany states remain undecided.Tennessee, for example, hasannounced it is awaiting the outcomeof the November elections. In themeantime, the governor has directedstate of cials to conduct exchange

contingency planning, even thoughthe state lacks formal legislativeauthority to establish one. If the ACA remains intact, the state will eitheraggressively set up a state-basedexchange or participate in the FFE.

One of our biggest concerns is toreduce confusion for families thathave multiple health plans and

Reinsurance program: attempts tooffset individual high-cost outliers from

2014 2016. All health insurers, andthird-party administrators on behalf of self-insured group health plans, will makecontributions based upon percentage of premium to support payments to insurersthat cover high risk individuals.

Risk corridor program: run by federalgovernment and focuses on accurate ratesetting and creates a way for insurers andthe federal government to share risk.

Risk adjustment program: permanentprogram run by federal government, which aims to neutralize the effect of risk differences among health plans. 26

For more information, see HRI's brief on Health Insurance Exchange Final Rules: Movingahead to 2014


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State-run exchange State/Federal partnership exchange Federally- acilitated exchange

VermontGrant unding: $158.9M*Medicaid Expansion: Working and Jobless150% FPL

Enacted in 2011 as part o law to establish asingle-payer system

Exchange alls under states Medicaid o ce Investing signi cant resources to design and

build a new IT in rastructure State plans to keep current Medicaid levels

DelawareGrant unding: $4.4MMedicaid Expansion: Working 110% FPL,Jobless 100% FPL

In July 2012, governor announced statewould pursue partnership exchange

Has conducted initial assessments,including IT gap andessential health bene ts analyses

Leaning toward ull Medicaid expansion

FloridaGrant unding: $1.0M (returned)Medicaid Expansion: None

In July 2012, governor announced thatFlorida would not implement a stateexchange

Moving orward to create a newmarketplace or small businesses calledthe Florida Health Choices Corporation

Not likely to expand Medicaid

Kentucky Grant unding: $66.6MMedicaid Expansion: None

Established in 2012 by executive order Executive director has been appointed Exchange will be governed by an

advisory board Held public orums on state exchange Leaning toward ull Medicaid expansion

IllinoisGrant unding: $39.0MMedicaid Expansion: None

In July 2012, governor indicated statewould pursue partnership model

Plans to move toward a state-basedexchange by 2015

Passed exchange legislation, conductedinitial analysis, and began IT development

Undecided on Medicaid expansion

AlaskaGrant unding: $0 MMedicaid Expansion: None

In July 2012, governor announced that Alaska would not create a state exchange

Only state in nation that did not apply orexchange planning grant

Evaluating options and nancial impactor a state- unded exchange

Not likely to expand Medicaid

New YorkGrant unding: $183.2MMedicaid Expansion: Working and Jobless100% FPL

Established in 2012 by executive order Several stakeholder analyses conducted on

exchange design Moving orward with plans or integrated

IT in rastructure Leaning toward ull Medicaid expansion

ArkansasGrant unding: $8.9MMedicaid Expansion: None

In December 2011, governor endorsedpartnership model concept

Has released exchange ramework Leaning toward ull Medicaid expansion

TexasGrant unding: $1.0M, ($0.9 returned)Medicaid Expansion: None

In July 2012, governor announced thatTexas would not establish an exchange

Prior to announcement, state had usedederal unds to identi y subcontractors or

preliminary analysis/planning Not likely to expand Medicaid

13 states and the District o Columbia havedeclared to HHS that they will create state runexchanges. These states have received 76%o ederal grant unding. Most o the money isbeing used to develop an IT in rastructure, withthe remainder ocused on sta ng, consultingand stakeholder engagement.

3 states have announced that they areplanning or a partnership exchange.These states have received 3% o ederalgrant unding. Money is being used tode ne business and in ormation systemrequirements and develop operational plans .

8 states have announced that they will notcreate state exchanges so will be governedby the FFP. These states have receivedapproximately 2% o ederal grant unding.Money is being used to study current marketsand structures.

26 states have not announced their intentions.* Grant unding includes $36m in early innovator money received as part o the New England States Collaborative or Insurance Exchange.

Sources: Kaiser Family Foundation, HealthCare.gov, interviews with Vermont, Kentucky, and New York state exchange o cials.

Figure 3: A snapshot o public exchanges

These nine states have announced that they will ollow a particular exchange model


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individual eligibility changes, saidBrian Haile, exchange director.Tennessee is considering a bridgeoption which would allow familiesto stay on the same insurer with thesame card regardless of whether they have Medicaid, CHIP or subsidies andregardless of eligibility changes. Ina state where all Medicaid and CHIPbene ciaries are in managed care,Tennessee believes, if structuredcorrectly, it can fold in exchangeconsumers to reduce potentialconfusion over coverage.

Private exchangesPrivate exchanges run by insurers,

retailers or another third party, offerthree other types of exchanges.

In the insurer-run model, individualinsurers or groups of insurers operateexchanges that are designed to show-case plan choices. The insurer may partner with employers to customizeplan options.

In 2011, Minnesota-based insurerMedica partnered with Bloom Health,a company that offers online shopping

with in-person customer support toproduce a private exchange. The My Plan by Medica exchange now servesmore than 50 employers and 15,000people. It is built on a business modelthat allows employers to tailor theirMedica plan designs and overlay them with different provider networksto bring more plan options to theiremployees. 27

Theres a huge latent demand for

employers that want a cost solution while keeping their employees happy,

Abir Sen, CEO of Bloom Health, said,explaining the growth of the rm. Ourgoal is to better manage costs whileproviding a better experience.

Humana is another insurer thats

been working on its private exchangefor the past year with a strong focuson the customer experience, usinga data gathering system to create auser experience that mirrors that of retail shopping.

We believe the new retail purchasingenvironment requires a deep under-standing of consumer preferences, said vice president of market and businesssegment operations Lois Gargotto, whois leading Humanas private exchangedevelopment. Our personal pro le toolcollects data directly from the consumerduring enrollment so that we can offercustomized product bundles with intel-ligent messaging for the consumer.

The retailer-run model encompassescompanies outside of the healthindustry that sell their own insuranceproducts, cobranded products and buy up packages, or bundles of additionalproducts and services such as healthand wellness products. These products would be customized for the retailer ormarket generic.

Insurers are also considering howto build consumer-facing privateexchanges that highlight their productsas well as direct members to the publicexchanges if they are subsidy eligible.The concept of merchandising willbe brought to the forefront, includingcross selling other products, upselling

and suggestive selling. Personalization will be another important aspect of retail exchanges.

The retail marketplace is still in develop-ment, but consumers can expect to see afocus on convenience as the purchasingexperience is lead by familiar companies.

In the third party-run model, an

external administrator links consumersto a variety of plan choices acrossmultiple insurers, and may be eitherfor-pro t or non-pro t. Large brokersand bene t rms are two examples.

California based CHOICE Administratorshas been in the private exchangebusiness since the early 1990s andfocuses on small employers with lessthan 100 employees.

In an exchange, employees spend

money differently than employersthink, said Ron Goldstein, presidentand CEO of CHOICE Administrators.Individuals often buy up when they understand their choices. Choicescan currently include services such as vision, chiropractic service or morecoverage for family members. Weverelied heavily on the broker network to educate the individuals and as morechoice is introduced into the system, well need the brokers to continue toplay that educator role, he added.

Another dimension of the privateexchange model is the way that choiceis brought to the customersthroughmoney and bene ts. In the de nedcontribution model, employers givespeci c dollar amounts on behalf of their employees to purchase coverage, with any remaining contributionsavailable for additional coverage and/or other health expenses. In the de ned

bene ts approach, employees choosefrom a variety of bene t options basedon a budget set by the employer.

27 Conversation with Abir Sen, CEO o Bloom Health, August 30, 2012.


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Public exchanges

State run State/Federalpartnership

Federally-FacilitatedExchange (FFE)

State is responsibleor oversight and

execution o vecore unctions

Federal governmentoversees some unctions;states have choice otwo core unctions oradministration

Federal governmentis responsible oroverseeing all 5core unctions

Eligibility Applications In ormation veri cation Coordination: Medicare/CHIP Redeterminations and appeals

Enrollment

Enrollment Payments

Customer service Consumer support Education/outreach Navigator unction Call center Website

Plan management Plan selection (active v. passive) Plan rate, bene t analysis Monitoring and oversight o insurers Data collection/analysis

Financial management User ees Support o risk adjustment,

reinsurance, risk corridor programs Financial integrity

Risk adjustment Protects health plans in individual and

small group markets rom adverse selection Both inside and outside exchange State-run exchanges may operate

Reinsurance Operates rom 2014-2016 (possibly to 2018) Protects issuers rom high-cost members States have option or sel - or HHS administration

Risk corridors Will limit variation in gains/losses by QHPs Intended to stabilize market Operates rom 2014-2016 Administered by HHS

Link into ederal data hub (APTC/CSR) Link to ederal data hub to help determine Advance

Premium Tax Credit, Cost Sharing Reduction Federal data hub links to DHS, SSA and IRS

Link to State Medicaid/CHIP Program Eligibility data or Medicaid/CHIP is transmitted

to state Medicaid o ce or enrollment

F i v e c o r e

f u n c

t i o n s

R i s k M a n a g e m e n

t

Figure 4: Anatomy o an exchange

Two categories o exchanges will exist: public and private. On the public side, there are state-run, state- ederal partnership andederally- acilitated exchanges. On the private side, insurers, third parties and retailers operate exchanges. Public exchanges

per orm ve core unctions. Mechanisms to neutralize risk or insurers and the government are either managed by the state orother agencies. Each public exchange must connect to a ederal data hub and state Medicaid and CHIP programs.

E x t e r n a

l l i n k s


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State unction

State or Federal unction

Federal unction

Private exchanges

Insurer Third party Retail

Run by insurer(s) Promotes group plans rom that carrier Allows employee to select rom several

options, provides comparison tools

and support Less ability to control pricing

Run by a third party such as a vendoror bene ts company

Multiple insurers participate Potential incentive to keep pricing

lower (not as much as governmentrun exchanges)

Run by retail company Promotes selection o retail health

products, including insurance andother products

Partner with insurers to create instore distribution channels

May use either o the ollowing approaches i exchange is employer ocused v. an individual exchange

Defned ContributionEmployer provides set amount o money on behal o employee. Employee chooses plan via exchange and uses remainder to pay

or expenses or additional insurance.

Target: Employers seeking to maintain coverage but control costs.

Defned BeneftExchange presents a range o plan options or employees to select rom. Employer shares cost with employees, but does not use de nedcontribution. Exchange may work with employer to customize products.

Target: Employers satisfed with status quo that wish to provide employees with better decision-making tools.

States can choose to run consumer assistance unctions, including education and outreach as well as a navigator program.

State chooses i HHS will determine enrollment eligibility or provide data or state decision. OPM administers multi-state plans.

Sources: Center or Consumer In ormation and Insurance Oversight, Robert Wood Johnson Foundation, PwC Health ResearchInstitute Analysis, 2012.


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Within the rst seven years of operation, state insurance exchangesare projected to translate into a$205 billion market opportunity for the health sector. 28 After statesmake people aware of the factthat subsidized insurance exists,companies that want to capturethe new business must develop aclear understanding of these futurecustomers and how to forge longer-lasting relationships with them.

Insurers

Uppermost on the minds of many insurers are the issues of pricing andrisk selection. Insurers will be focusedon nding the sweet spot in productpricing and managing the in ux of enrollees pro tably.

Larger insurers may have an advantageover smaller insurers in turning a pro tunder the small margins, said Joel Ario, managing director of ManattHealth Solutions and the former headof insurance exchange planning atHHS. Large-scale acquisitions are alikely outcome. However, in somemarkets, where there are fewer players,regional insurers and accountable careorganizations that know their customerbase and can be competitive on priceand bene ts could provide toughcompetition to the larger companies.

The pace of state exchange planningalso poses challenges for insurancecompanies that are evaluating whichmarkets to enter or exit. The timelineto begin qualifying health plans beginsin October but no state is ready. High-progress states such as California and

New York hope to begin health plancerti cation in early 2013. Participationin all 50 public exchange markets may not be realisticor worthwhilefor allbut a few players. Insurer participation will depend on how each state exchangeis run, the parameters that are setaround a quali ed health plan and thestructure of essential health bene ts,including how similar those standardsare across states.

Plans will compete head-to-head in theexchanges and against plans operatingoutside of the exchanges. Increasedcompetition and pricing transparency will put further pressure on insurers tocontrol costs while maintaining bene tsand quality. As the insurance exchangepopulation becomes more demanding,plans will need more than price to enticenew members or retain existing ones.

If insurers decide to compete on anexchange they must keep a careful eyeon administrative costs. Plans mustalready keep these costs below 15-20%

of premiums under the ACAs medicalloss ratio requirements. Even if thecompany does well, it will be requiredto relinquish a portion of pro ts above3% for the rst few years as part of the so-called risk corridor function, atemporary program that limits gainsand losses by insurers operating in theexchange. And while there are controlsin place to limit plan loss and liability from high-cost members, there are noguarantees of long-term pro tability. 29

In addition to public exchanges,insurers continue to eye opportunitiesin the private exchange world,including with small businesses.

Health industry implications

28 CBO and PwC HRI analysis.29 Kaiser Family Foundation, Focus on Health Re orm: Explaining Health Care Re orm, February

2012 and Robert Wood Johnson Foundation, Health A airs: Health Policy Brie , August 30, 2012.


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15Health industry implications

Insurers may work to create their ownsingle carrier exchanges or chooseto participate in broader third-party exchange networks. As the environmentshifts to a direct-to-consumer market,segmentation will be an importantmeans to offer differentiated productsto consumers and potentially alsomanage risk. Winners will likely nd a way to communicate with consumersin a manner that non-healthcareprofessionals can understand.

ProvidersProviders should prepare for anincreased number of patients whomay arrive for their rst checkup in years, some with a pent-up demand

for services and undetected illnesses.Insurers, in the new outcomes-basedenvironment, will in turn put pressureon providers to deliver value over volume. Hospitals and physician groupsmust think critically about how toimprove information management,demonstrate quality and improvecare coordination.

Enrollment in exchanges could speedup new expectations of care such asmore online capabilities, improvedtransparency and an increased focuson customer experience.

Providers will also face an uncertainpayment landscape and new payermix. Enrollment in the exchanges andincreased participation in Medicaid will shift the balance of insurersandproviders should seek to capitalizeon this change by reevaluating theirreimbursement and billing structures.

Provider-owned health plans and ACOscould be well positioned. Once theexchanges are established, expect tosee provider organizations developingproducts to compete with insurerson all lines of business, said healthindustry investor Stephen Jackson.They will be able to offer lower-costproducts with the advantage of localname recognition/reputation andinsurers could become the backroomfor these organizations.

EmployersEmployers of every size and shape arecontemplating the role of exchangesin the futureand whether they offer a viable alternative to employer-sponsored coverage. While the ACAs$2,000 per full-time employee penalty for dropping coverage may seem smallrelative to the cost of providing healthinsurance, it masks a more complexpicture. 30 Employers eliminatingcoverage would likely face increased

30 Kaiser Family Foundation: The penalty is $2,000 annually times the number o ull-timeemployees minus 30. The penalty is increased each year by the growth in insurance premiums.

Once the exchanges are established, expect to see provider

organizations developing products to compete with insurerson all lines of business. Stephen Jackson, health industry investor


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pressure to raise wages. Numerous taxbene ts from offering health bene ts would also be lost if a rm decides todrop coverage. And, employees viewhealthcare as a valuable bene t one that can give businesses acompetitive edge.

The decision to drop insurance coverageis most likely to be considered by rms with high concentrations of lower- wage workers who will qualify forfederal subsidies through the individualexchange markets if affordable healthbene ts are not provided. More broadly speaking, private exchanges offer anew alternative for employers to movetoward a de ned contribution approachthat caps costs while facilitating accessto a wider array of bene ts.

Starting in March 2013, employers willbe required to notify employees aboutthe new exchanges, providing detailedinformation on services offered andsubsidy eligibility. 31 The business mustalso clarify that it will not provide a

contribution toward coverage if theemployee enrolls in an exchange plan.

Pharmaceuticals andlife sciences As newly-insured consumers gain accessto healthcare services and products,pharmaceutical and life sciencescompanies will gain new customers.However, manufacturers will have toexpand and diversify market accessstrategies as health exchanges areimplemented and evolve in order

to gain nancial rewards from theexpansion in health coverage.

States will have considerable exibility in de ning the requirements thatparticipating plans must follow whendesigning their bene t structure andformularies. Current federal guidancestipulates only that exchange plansmust offer at least one drug per class. 32 Depending on the type of benchmark plan selected by states, manufacturers will be confronted with a spectrum of pharmacy bene t structures rangingfrom restrictive formularies to acomprehensive bene t similar to thatoffered through the Federal EmployeeHealth Bene ts Program (FEHBP).

Manufacturers will have to accountfor state-level variation in developingstrategies around market access.Drug companies can initially drawupon their experience and resourcesdevoted to other managed marketssuch as Medicaid. Over time, quali edhealth plan participation rules may

impose additional requirements such asevidence that demonstrates superiority to medications and devices already covered in a therapeutic category.

If more states choose to adopt the FEHBPopen formulary design as a default,this could be a boon for branded drugmanufacturers looking for continuity and maximum pharmaceutical coverage.On the other hand, more limitedformularies would further drive usage

of generic medications.

31 IRS, http://www.irs.gov/uac/A ordable-Care-Act-Tax-Provisions.32 The Kaiser Family Foundation: Health Re orm Source. Private Insurance Bene ts and Cost-

Sharing Under the ACA, February 28 2012.


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17The long-term outlook

The long-term outlook

Generous purchasing subsidies builtinto the ACA provide a large and rapidcash injection into the burgeoninghealth insurance exchange market.With the law and its subsidies,exchanges have the potential torevolutionize the health insurancemarket by shifting the focus to theindividual and prompting the sellersof insurance to think in a more retail-oriented manner. There will be apush for clarity in products and their value, convenience for buyers andcompetitive prices.

Yet the 2010 law is neither the rstnor the last word on the future of exchanges. Even if a future Congressand administration scale back orrepeal the law, exchanges remain a hotprospect, as evidenced by the privatesector entering this new market.

While states may establish theirexchanges as passive open markets,they are likely to shift to the activepurchaser approach as they gain

enrollees, plan participants and

ultimately buying power over the longrun. 33 Investors such as Jackson view2014 as the start of a major new trendin the US health systemaway fromemployers managing coverage to arobust, open marketplace.

Ongoing cost concerns will continueto spur change, both in the form of commercial innovation and moretraditional government pressure. Underthe ACA, regulators already have MLR limits on premiums and the powerto review rate increases. In addition,states may follow Massachusetts inimplementing all-payer pricing systemsfor providers.

Private, employer-focused exchangeshave much to gain in this process.Unbound by public exchangerequirements, private exchanges willhave the exibility to experiment withdifferent approachesand adaptrapidly to meet consumer demands.They may lead the way in the quality of customer experience.

33 Interview with Joel Ario, managing director o Manatt Health Solutions and the ormer head oinsurance exchange planning at HHS, September 10, 2012.


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Health Research Institute

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David Chin, MDPrincipal (retired)[email protected](617) 530 4381

Ceci ConnollyHRI Managing [email protected](202) 312 7910

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Christopher KhourySenior [email protected]

(202) 312 7954

PwCs Health Research Institute provides new intelligence, perspectives and analysis on trends a ecting all health- related industries. The Health Research Institute helps executive decision makers navigate changethrough primary research and collaborative exchange. Our views are shaped by a network o pro essionalswith executive and day-to-day experience in the health industry. HRI research is independent and not

sponsored by businesses, government or other institutions.

Advisory team

Je rey GitlinPrincipal

je [email protected](860) 241 7056

Sandra [email protected](415) 498 5365

Jack RodgersManaging Director

[email protected](202) 414 1646

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Kristen [email protected](202) 346 5143

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[email protected](860) 241 7448

Health Industries marketing

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19

Acknowledgements

About this researchThe HRI analysis utilizes a combination of data from the Current Population Survey,Medical Expenditure Panel Survey and Congressional Budget Of ce publications. Itre ects the previously insured, newly insured populations and projected health insuranceexchange members up through the age of 64. The data assumes full implementation of the ACA in 2021. For educational attainment and work force status, the analysis is restricted toadults, ages 25-64, and ages 18-64, respectively. HRIs research also included interviews with 15 health industry and government leaders.

Joel ArioManaging DirectorManatt Health SolutionsFormer DirectorO ce o Insurance ExchangesDepartment o Health and Human Services

Carrie BanahanExecutive DirectorO ce o the Kentucky Health Bene t Exchange

Georges BenjaminExecutive Director

American Public Health Association

Lois Gargotto Vice PresidentMarket and Business Segment OperationsHumana

Ron GoldsteinPresident and CEOCHOICE Administrators

Darin GordonDirector and Deputy CommissionerTennCare, Department o Finance and

AdministrationState o Tennessee

Brian HaileDirectorTennessee InsuranceExchange Planning InitiativeState o Tennessee

Audrey HaynesSecretaryCabinet or Health and Family ServicesState o Kentucky

Danielle HolahanDirector o Policy and PlanningNew York State Health Bene t Exchange

Stephen JacksonHealthcare Investor

AlignCare

Kim Jacobs Vice President, Product andConsumer InnovationUPMC Health Plan

Craig Reich, MDMedical DirectorChinese Community Health Plan

Abir SenCEOBloom Health

Nirav Shah, MDCommissioner o HealthState o New York

Lindsey TuckerDeputy CommissionerHealth Bene ts Exchange DivisionDepartment o Vermont Health Access

Acknowledgements


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pwc.com/us/healthindustries pwc.com/hritwitter.com/PwCHealth

To have a deeper conversationabout how this subject may affect your business, please contact:

Jeffrey GitlinPrincipal [email protected](860) 241 7056

Sandra [email protected](415) 498 5365

Stacy [email protected](801) 537 5238

Ceci Connolly HRI Managing [email protected](202) 312 7910

obama exchanges will cause 'irreversible shift

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