Choosing a Health Exchange for Rhode Island

This article was produced as part of The College & University Research Collaborative, an innovative project to bring academic research and expertise to Rhode Island policymakers.

In the five years since the passage of the Affordable Care Act (ACA), the national health care landscape has undergone constant, and at times tumultuous, transformation. Republicans in Congress have repeatedly voted to repeal the law.¹ In 2012, the Supreme Court decided that the Medicaid expansion was optional for states, and recently the Supreme Court heard another challenge to the law, this time about the legality of awarding subsidies on the federal exchange.² States have shown varying levels of support for the ACA, as they have made choices about whether or not to expand Medicaid and whether to introduce their own health insurance exchanges or participate in the federal exchange. Ongoing challenges to the law, together with the new Republican majority in Congress, create an environment of uncertainty about the future of the Affordable Care Act.

In contrast to the divisions that characterized the national conversation, in Rhode Island, state and industry leaders were early and enthusiastic adopters of health reform.^(a) The state opted to expand its Medicaid program to cover adults with incomes up to 138% of the poverty level and created its own insurance exchange, known as HealthSource RI (HSRI). HSRI has gained a national reputation as one of the success stories of health reform by working relatively smoothly, exceeding enrollment targets, and keeping premiums low.^(b) Its future, however, is uncertain. The initial federal funding for HSRI is set to expire this year, and future financing for the program has yet to be determined. The need to transition HSRI into a permanent state entity has provoked questions about its value and whether or not its functions can be delivered more efficiently and cheaply by the federal exchange, Healthcare.gov.⁴  

There has been significant debate in Rhode Island recently around the costs and benefits of operating a state exchange versus joining the federal exchange.^(c) This research brief examines the academic literature on health care exchanges, what we know about the implementation of HealthSource RI and Healthcare.gov to date, and what options have been proposed for Rhode Island going forward. The author also shares findings from her ongoing qualitative research on consumers’ experiences enrolling in coverage in Rhode Island (through HSRI) and Florida (through Healthcare.gov).  

Insurance Exchanges: The State versus Federal Option  

Under the Affordable Care Act, all states must make a health insurance exchange available to residents. Exchanges are the virtual marketplaces where individuals, families, and small businesses shop for health insurance coverage and access federally-funded tax credits and cost-sharing subsidies. The exchanges are mandated to carry out eligibility determinations, process enrollments, provide consumer assistance, and perform certain plan management and financial oversight functions. They also determine Medicaid eligibility and facilitate Medicaid enrollment.⁴

The law offers states a choice about how to implement the exchanges. States can create their own exchange, join the federal marketplace, or negotiate a state-federal partnership wherein the federal government assumes some functions and the state government takes responsibility for others. Though most states were expected to create their own exchanges, so far, the majority of states have decided to use Healthcare.gov.¹ For 2015, 14 states are hosting their own exchange while 27 are participating in the federal exchange; there are also 10 states involved in federal-state partnerships of different kinds.⁶

The federal exchange, HealthCare.gov, experienced a rocky rollout in the fall of 2013. Since then, its information technology infrastructure has vastly improved and the second year of open enrollment proceeded much more smoothly.⁷ As of February 22, 2015, 8.8 million people signed up for health insurance coverage for 2015 through Healthcare.gov and nearly 2.9 million enrolled through state exchanges.⁸ However, while many of Healthcare.gov’s early technical problems have been ironed out, ongoing legal challenges^(d) call into question whether premium subsidies – a critical part of the ACA – can be granted to enrollees who use the federal marketplace. Without the subsidies, millions could lose coverage and the federal exchange itself could fail (the decision is not expected to impact state-run exchanges).

HealthSource RI was created by an executive order from Governor Lincoln Chaffee in September 2011.¹⁰ Rhode Island built HSRI as part of a larger Unified Health Infrastructure Project (UHIP). UHIP is a technology platform designed to integrate disparate government programs, including Medicaid and the insurance exchange, under one eligibility and management system.^(e) Almost all HSRI funding to date has come from the federal government, which has provided a total of $153 million in grants so far.¹¹However, federal funding will be phased out in 2015 and the state will need to step in if HSRI is to continue.

HealthSource RI: The First Two Years

Since its launch, HealthSource RI has made significant progress toward achieving its stated goals. More than 98,000 people – almost one in ten Rhode Islanders – signed up for coverage through HSRI in its first year of operation. This number includes 28,000 people who enrolled in a private plan, more than double the initial target for private plan enrollment.^(f) Though official data on the current uninsured rate is not yet available, Rhode Island’s uninsured population numbered 120,460 in 2013, before the launch of the exchange, so the uninsured rate is likely to have decreased significantly due to these enrollments.¹²

In 2014, 39% of Rhode Islanders who were eligible for a private marketplace plan actually enrolled in one, the fifth-highest rate in the nation and higher than the national average of 28%.¹³ In its second year of operation, HealthSource RI enrolled and received payment from 30,001 private plan customers, including 9,150 new enrollees.¹⁴ Consumers responded well to new products and more competitive pricing, with almost two-thirds of renewing customers switching plans.^(g)

Insurance premiums have been relatively stable in Rhode Island since the launch of HSRI. The average price for a 40-year-old non-smoker enrolled in a Rhode Island “Silver Plan” in 2015 is $284, compared to $314 nationally.¹⁵ Though a complex mix of factors, including the prolonged recession, have contributed to slower premium growth, HSRI has certainly played a role by offering more choices to enrollees and facilitating the entry of new issuers into the individual insurance market. The premium for the benchmark Silver Plan in Rhode Island actually decreased by 12% from 2014 to 2015, while premiums for the same plan held steady nationally.¹⁵ This is quite impressive considering that previous years saw double digit increases in premiums on the individual insurance market. Nonetheless, insurance affordability continues to be a challenge: those who did not qualify for subsidies on HSRI (and therefore would have had to pay full price for coverage) were less likely to purchase coverage than those who did.¹⁶  

Overall, the rollout of HealthSource RI was smoother than that of the federal exchange. Though there were some glitches, HSRI did not face the same technological problems as HealthCare.gov.¹⁷ The website was able to process customers during the entire open enrollment season in 2014, and over 560,000 people visited the site.¹⁸ Rhode Island also had a fully functioning small business exchange (the Small Business Health Options Program, known as SHOP) with innovative offerings like full employee choice, which was not available through the federal exchange.

My qualitative research suggests that, so far, HSRI may have provided a better customer experience than Healthcare.gov. Many consumers I interviewed in Florida, a state that participates in the federal exchange, were unsure where to go for help and ended up speaking by telephone with representatives located in other states who were not familiar with their local plan options and networks. In contrast, HealthSource RI has two brick-and-mortar contact centers where consumers can speak with specialists familiar with the available plans and the health care landscape in the state. These walk-in centers received nearly 17,000 customer visits for help with 2015 enrollments. 14 HSRI also carried out 357 outreach events between July 2013 and March 2014.¹⁶  

In my interviews with enrollment assisters who help consumers navigate the exchanges in Rhode Island and Florida, I was struck by the higher level of job satisfaction among HSRI employees. Enrollment assisters in Rhode Island reported feeling that they were actually able to help people in their community get connected to insurance coverage. In Florida, some assisters felt stymied by an enrollment system that was difficult to use, problems getting their questions answered, and negative interactions with frustrated customers who had been given limited or incorrect information.^(h)  

Funding the Exchange

The single largest rationale for switching to the federal exchange is its price tag. If Rhode Island were to revert to the federal exchange, the fiscal burden shouldered by the state would be reduced, though the exact amount of money that would be saved is subject to debate.

Healthcare.gov is financed from federal sources plus a 3.5% surcharge on each plan purchased on the exchange. The fee is charged to the insurance companies, then passed on via increased premiums on products sold to individuals and small businesses both on and off the exchange. Since about 8.8 million people accessed coverage for 2015 on the federal exchange, it is able to operate with a considerable economy of scale that brings down the cost on a per beneficiary basis.⁸ Even so, the federal government estimates that the 3.5% fee is insufficient to cover its costs.²⁰  

Exchanges in small states like Rhode Island will have a hard time achieving a strong economy of scale. Rhode Island’s market is not large enough to spread the assessment in a way that would be viable for consumers, so financing HSRI exclusively through an assessment on plans sold on the exchange would make coverage prohibitively expensive.

However, the law gives states quite a bit of flexibility when creating the funding model for a state-based exchange. Eight states fund their exchanges in the same manner as Healthcare.gov, by charging an assessment on plans sold on the exchanges. Five states charge an assessment on plans sold both in and outside of the marketplace, and one state (New York) has funded its exchange primarily through state appropriations.²¹ Other funding mechanisms that have been proposed include some combination of fees on all commercial insurance products sold in a state, a new tax or assessment,⁽ⁱ⁾ or contributions from hospitals, which stand to increase earnings as more residents have insurance coverage.^(j)  

In her budget proposal for fiscal year 2016, Governor Gina Raimondo proposed financing $6.2 million of HSRI’s $30.8 million budget through an assessment (also referred to as a premium tax) on plans sold to individuals and small businesses both on and off the exchange.^(k) The remaining $24.6 million in costs would be financed through federal grants. The majority (88%) of HealthSource RI enrollees on the individual exchange receive federal tax credits, which would cover most, if not all, of the user fee.

The issue of how to finance the exchange is connected to questions about how broadly the costs should be shared. Who benefits from the health care exchange? Who should pay for it?   Some people consider the population impacted by HSRI – and by any potential move to the federal exchange – to be relatively small: the 30,001 people who enrolled in a plan on the individual market together with the 487 employers and 3,477 individuals covered on the small business (SHOP) exchange (enrollment numbers for 2015).²³

However, when you add in the people who enrolled in Medicaid and CHIP through UHIP, the proportion of Rhode Islanders who have used HSRI to access coverage is much higher. A total of 194,890 individuals were determined eligible for Medicaid or CHIP between October 1, 2013 and February 15, 2015.²³ Altogether, 228,368 Rhode Islanders have used the UHIP/HSRI system to get connected to coverage, a number that represents roughly 22% of the state’s population. Furthermore, the number of people using the exchange at any one time is deceiving: people move in and out of insurance coverage according to their employment status, marital status, state of residence, family composition, and income level.

There are also arguments that everyone in the state benefits when more Rhode Islanders are covered. There is evidence that higher levels of health insurance coverage boost economic growth.²⁴ More widespread coverage also puts less strain on hospitals and providers to provide uncompensated care, the costs of which get passed onto consumers in the form of higher insurance premiums.²⁵ As more people enter coverage, these benefits will be widely shared in the entire insurance market.

However, not everyone agrees that the bill for operating HSRI should be spread as widely as possible. Some business groups have argued that any fees should only be paid by HSRI users.²⁶ Many employers are already struggling to continue offering health insurance coverage in the face of the long-term trend of rising costs.

The question of how to fund the exchange also depends on whether HSRI can control costs. The exchange has been in growth and creation mode for the last few years and has benefited from $153 million in federal funds for its establishment. If HSRI focuses on long-term operations and sustainability, there may be opportunities for reducing costs. For example, HSRI has opted to take on billing functions even though these are not required by law. The new director of HSRI has expressed an interest in “right-sizing” the system and proposed budgets that are dramatically lower than in the past (see Figure 2). It’s still unclear if these dramatic reductions can be accomplished without compromising the high level of service and performance that consumers have come to expect from HSRI.

The alternative to HSRI, Healthcare.gov, comes with its own costs. How much would it cost to transition to the federal exchange? HSRI estimates a one-time state cost of $2.7 million over two years, primarily for de-coupling HSRI and UHIP. Not included in the estimate are the costs to insurance companies who have invested considerable time and resources into working with HSRI and aligning their information technology infrastructure with the UHIP system. HSRI estimates these costs to be around $4 million, which would be passed on from the insurance companies to consumers in the state. Once the transition is complete, participating in Healthcare.gov would cost the state government around $240,000 annually. There would also be an estimated $8.6 million a year in user fees assessed on plans purchased by Rhode Islanders on the federal exchange.¹¹  

Benefits of the State Exchange

While the federal exchange offers advantages when it comes to cost, a state-operated exchange provides a number of other benefits. It gives states more flexibility in managing and regulating their health insurance market. Each state can determine the structure of the exchange (state agency or non-profit), whether to let large businesses (more than 100 employees) purchase coverage on the small business exchange, how actively to regulate the plans sold on the exchange, and how to finance the exchange. By keeping operations local, states can exercise more control over customer service, consumer education, and outreach efforts. If it returned the exchange to the federal government, Rhode Island would potentially miss the opportunity to coordinate reforms at the state level, such as expanding the SHOP exchange or exerting more pressure to transition away from fee-for-service reimbursement systems.

In Rhode Island in particular, the health insurance exchange has been part of an on-going and coordinated reform effort to increase administrative efficiency and simplify the process for families. HSRI has been integrated with other state programs and operations, especially Medicaid eligibility processing through UHIP. This provides a one-stop shopping experience for enrollees, something that is particularly valuable for the many families with members eligible for different programs.^(l) HSRI has also been working closely with other stakeholder groups in the state, including insurance carriers, hospitals, providers, community health centers, small businesses, and patient advocacy groups. Any change to the exchange should consider how these groups will be impacted.

At the moment, the future of consumer tax credits and cost-sharing reductions is more secure with a state-based exchange. The King vs. Burwell case currently being deliberated by the Supreme Court could result in a ruling that premium subsidies on the federal exchange are illegal. That would mean a loss of $66 million in federal subsidies for insurance coverage in the state if Rhode Island were using Healthcare.gov, as well as significant premium increases.²⁷

Weighing Costs & Benefits

There are a number of issues to consider in determining whether Rhode Island should continue operating a state-based exchange or should transition to using the federal exchange. The long-term costs for state government are lower with the federal exchange. However, Rhode Island would lose out on the benefits of a state-run exchange, such as more control over how the exchange is run and financed and greater opportunities for administrative efficiency and streamlining. HSRI also gives the state the opportunity to set its own agenda and lead in the implementation of health reform.

Whether Rhode Island chooses a state or federal exchange, one thing is clear: If the long term trend in health care away from employer-based coverage continues, a strong, well-run, and efficient exchange is essential to making coverage available to residents and making Rhode Island competitive for business owners.