The New Health Dialogue

California was quick out of the blocks and has gotten off to a very fast start in creating the state’s insurance exchange.  The legislation that establishes the California Health Benefit Exchange is actually two bills, a Senate bill that sets the government structure, and an Assembly bill that outlines the activities of the exchange and establishes the regulations that apply to plans offering products both inside and outside of the exchange.  The expectation is that these bills will be passed before the end of the legislative session which is to say by August 31^st. (We should be clear that this creates the basic structure for the exchange; it won't be fully up and running as a health insurance marketplace until 2014 when the federal health reform legislation goes into effect.)

Generally, the design of the exchange is informed both by California’s own experience with its small business insurance exchange, Pac Advantage, as well as by the experience of Massachusetts.  Jon Kingsdale, the former executive director of the Commonwealth Health Insurance Connector Authority in Massachusetts, was contracted to consult with the legislative staff and consultants who are crafting the bill.

According to the current legislation, separate individual and small group exchanges will be governed by a single five-person board, which will include the Director of the California Department of Health and Human Services, two members appointed by the Governor, one by the Senate Rules Committee, and one by the speaker of the Assembly.  The California Health Benefit Exchange will be its own entity within state government, not a part of another department. The executive director will serve at the pleasure of the board and will not be subject to the state’s civil service requirements.

One critical issue is that the exchange is still designed to be an active purchaser that will develop a competitive process to select the insurers who will participate in the exchange.  Since the exchange will negotiate with plans and many of the people who participate in the exchange will receive subsidies, the individual exchange may end up playing a very similar role to the health benefits exchange for state employees, CalPERS. 

The structure of this new exchange, however, will be critical.  The current legislation attempts to create a coherent and better functioning market through requiring insurers to offer products at each of the tiers and empowering the exchange board to require insurers to offer new products.  All plans that sell insurance within the exchange must offer the same products outside of the exchange (but federal subsidies won't be available in the outside market).  The difference between the products offered inside and outside of the exchange was one of the main reasons that the state’s own small business exchange failed. Businesses with older or sicker workers went into the exchange, while good risks stayed out, creating a classic adverse selection problem.

California is off to a fast but very good start.  The passage of the bills is not yet assured and there is furious lobbying going on in Sacramento on just about every provision.  We’ll bring you an update as soon as the bills pass.

(For a bit more context on California's implementation efforts and how it compares to other states, read this American Prospect article.)