Governor Schwarzenegger Signs California Health Benefit Exchange Legislation

California became the first state to enact legislation creating an exchange under the Patient Protection and Affordable Care Act on September 30th when Governor Arnold Schwarzenegger signed into law AB 1602 (authored by Assembly Speaker John Perez) and SB 900 (by Senator Elaine Alquist). The two bills create the California Health benefit Exchange. In signing the bills Governor Schwarzenegger stated “Choice and competition have the power to improve health care quality and reduce health care costs for California consumers. With the California Health Benefit Exchange, we will be able to create a competitive marketplace where consumers can choose among qualified health plans – all without relying on the state’s General Fund.”

The five-person Board created by the legislation are tasked with creating an exchange to present health plan options to individuals and small businesses beginning January 1, 2014. Concurrent with Governor Schwarzenegger’s signing of the bills, the Obama Administration announced a $1 million grant to the state “to fund the costs of preliminary planning efforts related to the development of the Exchange.” Further federal funds are expected to become available to the California Health Benefit Exchange in 2011. After 2014 the Exchange is designed to be supported entirely from fees paid by health plans and insurers, meaning no general revenues will be allocated to the entity.

Some carriers supported the legislation; others urged the Governor to veto it. The concern of many opponents was the power given to the Exchange’s Board to exclude accept or exclude carriers from the Exchange. The fear, which is demonstrated on a weekly basis by local, state and federal agencies every day, is that the Board will use the carrot of being included in the Exchange as a lever to dictate what insurers do (and what plans they offer) outside the Exchange. Giving this power to an independent Board (one that is exempt from significant oversight by the legislative or executive branches of government) is seen as a threat to the private marketplace.

Supporters argue that this power is essential if the Exchange to going to fulfill the desired (and desirable) goal of negotiating lower health insurance premiums for consumers and businesses buying through the Exchange.

Brokers have had another concern about AB 1602 and SB 900. The federal health care reform envision exchanges that include “navigators” to help consumers and business owners explore their health insurance options. However, the PPACA leaves it to states to define the actual specifics of the navigator role. Will they simply be a “help desk” answering questions about how to use the exchanges or will they be actively engaged in providing advice and guidance on which plan a consumer or business should select? The California laws leaves these details to the Exchange Board. What’s of concern, however, is that language that would have required the California Exchange’s navigators to be licensed was removed from the now-signed legislation shortly before it was passed by the Legislature.

And there’s a sentence in Governor Schwarzenegger’s press release touting his signing of AB 1602 and SB 900 that is at both once reassuring and of great concern. “The Exchange will work in partnership with agents and brokers, community organizations and other “navigators” to help consumers make informed decisions based on the price, quality and value.” While it’s reassuring the Schwarzenegger Administration recognizes that agents and brokers need to be involved with the Exchange, it’s of concern that they consider licensed professionals to be on an equal footing with unlicensed community organizations and others.

What will be important for the California Association of Health Underwriters, the leading organization representing independent producers, and other agent groups to work through with the Legislature and the Exchange Board is that there is a difference between licensed, regulated brokers and others. Each can play a role. When it comes to publicizing the Exchange and providing general advice about how to use it, non-licensed individuals and entities can play an important and valuable role. Helping consumers select the health plan that best suits their unique needs and then providing ongoing service to purchasers once they’ve obtained coverage, however, is best performed by licensed and regulated professionals.

The statement in the Governor’s press release is consistent with this division of labor, but only because it lacks details. Follow-up legislation and explicit regulations will be needed to assure consumers have access to qualified professionals. The National Association of Insurance Commissioners sees a continued role for brokers as an essential consumer protection. In a resolution adopted during their August 2010 meeting, the NAIC noted that “employers and consumers will need professional guidance even more in the future” as a result of health care reform. 

While Governor Schwarzenegger’s signing of AB 1602 and SB 900 directly impacts only Californians, other states are likely to study these bills as they contemplate the design of their own exchanges – another reason why legislation to clarify brokers’ role in the state’s Exchange should be introduced and enacted quickly in the next legislative session. So this California development could have repercussions across the country.

In some of the comments posted on this blog, some have suggested that Democratic states are likely to create anti-broker exchanges while more Republican states will create broker-friendly ones. This view, however, ignores the facts that Republican’s health care reform proposals are as those of Democrats to increase health care costs while undermining brokers’ role in the system. Consider Republican support for mandating carriers to offer health insurance coverage to all applicants (“guarantee issue”) and their opposition to requiring all consumers to purchase coverage (an “individual mandate”)  No surer recipe for skyrocketing health insurance costs exists than imposing guarantee issue without an individual mandate. Assuming lawmakers will do the right thing just because of the political party they are in is naive. What’s required is a strong political and educational push by people who understand the current system, who sees its flaws, and have practical and meaningful ideas on how to fix it. Put another way, brokers must stay involved and engaged regardless of which political party holds the majority of seats in their state’s legislatures.

Fortunately, there’s still time (even in California) to make a difference. As noted, CAHU is already working on needed changes to AB 1602 and SB 900. Meanwhile, the National Association of Health Underwriters is deeply involved in working with state legislatures and insurance commissioners to help them develop exchanges that implement the letter and spirit of the Patient Protection and Affordable Care Act while preserving consumers’ access to qualified, professional producers.

In any change of the consequence and complexity presented by health care reform there will be advances and setbacks. The nice thing about politics and legislation is there’s always another election and another legislative session coming up. The key is to avoid giving in to despair with each setback, but rather to persevere until one achieves the next advance.

California Exchange Legislation Greatly Flawed and Should be Vetoed

How states implement exchanges will have a tremendous impact on the efficacy of the Patient Protection and Affordable Care Act. States can create exchanges that educate consumers, bring them innovative products, increase choice in the marketplace and encourage competition. On the other hand exchanges can be designed to drive consumers to handpicked carriers, stifle innovation, strangle competition, and reduce choice. Fashioning smart exchanges (that would be the first type mentioned) won’t be easy. Fortunately, states have time to get it right.

Which makes the California Legislature’s decision to create an exchange that will do more harm than good even more dismaying. Governor Arnold Schwarzenegger will need to decide whether to sign into law AB 1602 and SB 900 or veto the bills by September 30th (they can become law without his signature if he takes no action by that date). He should veto the bills and require the legislature to start over. There’s time and the need for a more thoughtful approach to California’s health insurance exchange.

AB 1602, authored by Assembly Speaker John Perez and SB 900, authored by Elaine Alquist, invests in a five member board the authority to create and operate the California Health benefit Exchange. The legislation law was supported by a broad coalition including Health Access, AARP, Blue Shield of California, Kaiser Permanente, Consumer’s Union and the SEIU. As originally drafted the legislation raised concerns, but took a more reasonable approach.

They were amended, however, in the last days before the California Legislature adjourned, in ways that will ultimately harm California consumers. The exchange board was given broad authority to set its own budget, sign contracts and create rules and regulations behind closed doors and without oversight. These concerns that are front-and-center in the efforts of the California Association of Health Underwriter’s and others to persuade Governor Schwarzenegger to veto AB 1602 and SB 900.

Other problems with the legislation is the empowerment of Navigators to assist consumers enrolling through the exchange. These individuals could wield great influence on individual’s purchasing decisions, but they are not required to be licensed. In addition, many are concerned that the exchange board could prevent independent brokers from participating in the exchange. Changes made at the last minute changed the legislation in ways that seem to run counter to a resolution recently enacted by the National Association of Insurance Commissioners which which calls on policy makers to “acknowledge the critical role of producers” and to include a role for them within exchanges.

Lawmakers need to determine the role of exchanges and strike a careful balance. Exchanges are generally regarded as a tool for simplifying the health insurance market. But simplify too much and through bureaucratic fiat as opposed to market demand, and the result will inevitably stifle innovation, depriving consumers of access to new and better plan designs.

Consider what would have happened had a five member board been empowered to determine product designs 10 years ago. Would they have created HSAs, one of today’s fastest growing types of health plans? Doubtful. And if they even considered the concept the decision would probably have been made on political grounds as much as economic ones. Would they have introduced value-based plans that reward consumers for visiting their doctors and taking healthy actions? Highly unlikely. (Full disclosure here, one of my consulting clients is SeeChange Health, a new insurance company that recently began offering just such value-based plans in parts of California).

AB 1602 and SB 900 empower the board of the Health Benefit Exchange a great deal of power to determine not just the types of plans offered within the exchange and which carriers can offer them, but also a tremendous amount of influence over what happens outside the exchange. One tremendous lever they’ll have to do so is their ability to determine, without public scrutiny or review, which insurers may participate in the exchange. They also have the ability to adopt major changes governing insurance coverage without public comment or legislative oversight.

Much has been written about how signing AB 1602 and SB 900 could be an an important part of Governor Schwarzenegger’s his legacy. Much has been written about how vetoing the exchange bills would reflect far better on the Governor’s service. Given his desire to fix what he frequently called “California’s broken health care system” the Governor no doubt would like to sign the legislation. And there’s nothing inherently wrong in giving the exchange board the ability to negotiate with carriers on behalf of those enrolling for coverage through the exchange. But those powers must be delegated in an appropriate way with an eye enhancing choice and innovation. AB 1602 and SB 900 fail to accomplish this.

All states need to be moving forward with creating their exchanges soon. It will take time to establish these operations, staff them and get them ready for business. However, lawmakers should also take the time necessary to get the legislation right. California lawmakers, in accepting last minute changes without public hearings, failed to do so. Starting over in January will still give them plenty of time to develop an exchange for the nation’s largest state that not only accomplishes the goals of such exchanges, but does so in a way that will nurture innovation over time.