Health Law Explained

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By Matt McKillop and Christine Vestal

A linchpin of the 2010 federal health law is the requirement that nearly everyone sign up for a health insurance plan – whether it’s Medicaid, other federally subsidized insurance, or private coverage. To make that easier to do, the law calls on states to set up health insurance exchanges where small businesses and individuals can choose the policies that best fit their needs at a price they can afford. The exchanges are meant to be one-stop marketplaces, mostly websites, where customers will be able to shop for private health plans beginning in January 2014.

To make sure consumers don’t buy plans with inadequate coverage, the Affordable Care Act called on the U.S. Department of Health and Human Services to define a level of coverage for “essential benefits” that must be included under any small group or individual insurance policy inside or outside an exchange. The law also said states requiring insurance companies to provide a broader range of benefits than the national standard would have to make up the cost difference for those policies.

But on December 16, the Obama administration announced its intention to let states determine their own “essential benefits” for plans sold within their boundaries—rather than setting one national benefit standard. Secretary of Health and Human Services Kathleen Sebelius said the approach would “protect consumers and give states flexibility … to meet their unique needs.”

This is how the new approach will work:

How much freedom have states actually been given in setting benefit levels?

Not total freedom, by any means. The national health law lists 10 categories of health care that all insurance policies must cover: hospitalization, emergency care, out-patient services, maternity and newborn care, mental health and substance abuse services, prescription drugs, laboratory testing, preventive and wellness care, pediatric services (including dental and vision examinations), rehabilitative care and habilitative care such as services for children with developmental disabilities.

But within those categories, the federal government is allowing each state to determine its own basket of essential benefits by choosing a “benchmark” package offered by any of a variety of insurers. They can pick from:

  • One of the three largest (by enrollment) small group plans in the state;
  • One of the three largest state employee health plans;
  • One of the largest federal employee health plan options;
  • The largest HMO plan offered in the state’s commercial market

If a state does not select any of these, the largest plan in the small group market will be the default. If a state selects a benchmark which does not cover one or more of the 10 required categories, it would need to “supplement” the benchmark to include all 10.

How are states likely to use their new flexibility?

Under the new essential benefits announcement, they will be able to allow insurance companies participating in an exchange to provide the same kind of coverage the companies already include in most group plans. This will be true within any one state regardless of what other states may choose to cover.

The Obama administration had little choice but to permit this. Otherwise, it would have faced a dilemma: how to include all state-mandated services — which differ across the country — in one national package, without making the whole package unaffordable. The current array of state insurance systems is simply too diverse to make a national mandate practical.

For example, 35 states and the District of Columbia required some level of mental health coverage to be offered in small group plans as of January 2010, whereas 15 states had no such provision, according to the Kaiser Family Foundation.  It’s possible that some states with relatively generous mental health coverage could have found themselves with a substantial extra burden if the Department of Health and Human Services had eliminated some mental health services states require from a national benefits list.

The same would have been true for any other benefits mandated by some states but not others. Had they been excluded from federal benefits, the states currently mandating them would have had to either defray the costs of coverage or eliminate the requirement altogether.

What input did the Obama administration receive in advance of its decision?

Under the 2010 law, the Secretary of Health and Human Services is required to ensure that the essential health benefits provided under an exchange are “equal to the scope of benefits provided under a typical employer plan.” To determine what a typical employer plan covers, the U.S. Department of Labor surveyed employer-sponsored plans. That survey was completed in April 2011.

What the survey revealed was that employer-provided plans tend to be fairly consistent in the range of services covered. The differences are in the way costs are shared between employers and employees. To address those discrepancies, the law continues to place limits on cost-sharing between employers and employees in the form of deductibles, co-payments, and other out-of-pocket consumer expenses.

In addition to the Labor Department survey, a report by the Institute of Medicine, an arm of the National Academy of Sciences, concluded in October that the essential benefits package should be keyed to what the average small business can afford to provide. The Obama administration appears to have followed this advice in issuing its December ruling.

Are state officials happy with the ruling?

Yes. State insurance officials say the ruling will allow them to craft a set of required benefits based on what their residents prefer.

In California, which was the first state to adopt a law initiating an exchange, Insurance Commissioner Dave Jones said that the decision “will assist us in bringing more of the long-term benefits of the federal Affordable Care Act to individuals and families.” Howard “Rocky” King, executive director of the Oregon Health Insurance Exchange, is said to have told state lawmakers that the decision “gives the state of Oregon the ability to look at what its citizens want and need and to frame choices for the Oregon marketplace, rather than let somebody in Washington, D.C. do it.”

Is the decision final?

In legal terms, no. The announcement from the Obama administration came in the form of a “bulletin,” and therefore does not carry the weight of a formal rule. But for all practical purposes, the issue is settled for quite a while. Once the Department of Health and Human Services issues a set of regulations implementing the December 16 decision, sometime this year, it does not plan another look at them until at least 2016. At that time, a determination may be made about which state-mandated benefits are actually essential.

What’s next?

HHS is encouraging public input on this proposal, which must be submitted by January 31, 2012. Additional bulletins will be issued in the coming months on cost-sharing features, such as deductibles and co-payments.

At the state level, policy makers will need to establish a process for selecting which benchmark package to adopt. These discussions will occur alongside deliberations in legislatures across the country where states that intend to operate their own exchanges have yet to adopt the necessary legislation. As of December 2011, only 13 states had taken that first step, according to data from the Kaiser Family Foundation. Two other states, Utah and Massachusetts, already operate exchanges.


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