Although the 2010 Patient Protection and Affordable Care Act(PPACA) is currently under scrutiny by the U.S. Supreme Court forpossibly being unconstitutional, many states are still pressingahead with setting up insurance exchanges.

As part of the Obama health-care reform law, one of therequirements is that all states establish health-insuranceexchanges to provide a mechanism to funnel federal subsidies andmake it easier for consumers to shop for insurancepolicies.

These exchanges have significant impact to brokers andagents, especially those who primarily work on individual and smallgroups of less than 50 employees.

States may set up separate exchanges for the individual and thesmall group market, or they may combine both markets in oneexchange. The states will then approve which carriers will becertified to sell individual and small group plans through theexchange. Underwriting and pricing of these policies issubject to rules contained in the PPACA.

Initially, group insurance on the exchange will be available toemployers up to 100 employees, but states have the option to limitgroups to those with 50 employees or less. Many states areplanning to limit employer participation to those with less than 50employees. The PPACA permits states to extend exchangecoverage to larger employers beginning in 2017.

The state or federal exchanges will also administer the premiumtax credits available to certain qualifyingindividuals. Beginning in 2014, individuals with incomes lessthan 400 percent of the federal poverty level, who do not haveaffordable employer sponsored health insurance, may qualify forfederal tax credits to be used toward the purchase of individualhealth insurance.

For example, a family of four would be below 400 percent of thepoverty level if the household income is less than$89,400. This could represent a sizable portion of theAmerican population that is entitled to subsidies if affordableinsurance is not available through their employer sponsoredplans.

If the new law is struck down by the high court, federal moneywould not be available to run the exchanges or provide thesubsidies to help lower-income workers buy coverage. Thus,this new state bureaucracy will be competing for scarceresources.

Millions of taxpayer dollars will be spent to establish aninsurance market that basically duplicates what is available todaybut may have no teeth since individuals won't be required topurchase insurance. The dilemma for states is that under thePPACA provisions they have to be able to demonstrate that they canoperate an exchange by Jan. 1, 2013.

If the Supreme Court does not issue its ruling until sometime inJune, this will make it very difficult to finalize the necessarystructure of the exchange to show that it is operational unless thestates continue to work on the structure now.

Colorado, New York, Rhode Island and California havesupportive governors who plan to move ahead with theirexchanges.

If an individual currently chooses not to purchase healthinsurance, it seems unlikely they will purchase it in the future ifthere is no requirement to do so. This makes the exchange justanother voluntary insurance option which is currently availablethrough most of the national health insurance companies such asAetna, Cigna, United Healthcare and Anthem Blue Cross BlueShield.

Impact on agents and brokers

Although the exchange is providing for agents and brokers to be“navigators” to assist buyers through the exchange, many could justview the exchange as a replacement to their current agent orbroker, which means a lot of potentially lost income.

The argument lies with whether the exchange will provide a“fair” playing field against traditional insurance purchasing orwhether it will, over time, become a convenient way to cut thebroker out.

It also remains to be seen “how” you become a navigator andwhether you will be fairly compensated to be anavigator. Regardless of the exchange's ease of use,businesses will still need guidance on overall benefit designand what benefits will help attract and retain goodemployees. These are issues that the brokerage community atlarge is very concerned about. Will there be a place for themover time if the exchange becomes the primary buying source forhealth insurance?

Lessons Learned from Massachusetts

In considering a state mandated healthcare bill, it is alwaysimportant to consider lessons learned from the Massachusettsmodel:

1. With the increase in subsidies and purchase of healthinsurance, there is a significant chance that there will be a swellin demand for healthcare which could put a strain on an alreadystretched healthcare provider network.
2. This increase in demand could actually cause a surge in feescharged by providers as the demand outpaces supply.
3. The result will be higher premiums by the insurance companies.If the state tries to regulate price increases, the carriers mayexit the state.
4. Fines have not been sufficient to keep individuals in themarket. Primarily due to guaranteed issue requirements, peoplewill purchase insurance long enough to resolve their health issuesand then drop the coverage and pay the fine instead.
5. In Massachusetts, the exchange rewards people for working andearning less. This reduces tax revenues which are needed topay the subsidies for low-income earners.
6. The exchange provides for employers to drop their group healthinsurance.