Heritage Report: Funding State Health Exchanges

The Heritage Foundation, a private research and education institute based in Washington, D.C., has released a new Web Memorandum that examines funding options for state health insurance exchanges. The memorandum, listed as Web Memo Number 1573 and authored by Greg D'Angelo and Edmund Haislmaier, was released July 30, 2007.

In "State Health Reform: How to Fund a Statewide Health Insurance Exchange," D'Angelo and Haislmaier explain that a health insurance exchange "…performs the administrative functions associated with individuals choosing and paying for health insurance within the context of employer-sponsored coverage…." This mechanism allows individuals to get health insurance under federal laws dealing with employer-sponsored plans while participating states handle the administrative aspects of the health plans.

The first step, according to the authors, is for the state to establish a new health insurance market that merges the positive aspects of individual and group markets. Currently, individual and group markets are separate and distinct. Once this hybrid market is established, the health insurance exchange can be created to manage the new system. Employers would be able to join the arrangement voluntarily, enabling their employees to purchase their health insurance coverage through the exchange using their pre-tax income.

As state officials plan for these health insurance exchanges, the memorandum says, five primary components should be considered. The first is the set of core competencies to be executed by the exchange. This could include billing and collecting insurance premiums, payroll withholding to ease the process, transmission of payments to insurers, management of commissions paid to those bring groups or individuals into the exchange, and the preparation and distribution of enrollment forms and informational materials concerning the exchange and its functions. The best way to pay for these core costs, the authors say, is with a fixed fee added to the premiums charged when health insurance is purchased.

Next, state officials must estimate what premium costs will be by referring to insurance rules codified in state law. For commissions, the report says, the health insurance exchange would manage the payment of monies to those earning the commissions. Additionally, the authors note, state officials may want to outsource some government functions to the exchange, but these additional responsibilities must be funded separately using funds from the state's budget. Finally, the costs required to establish the exchange must be considered, including sources of funding for these costs. Some sources could include appropriations from the state, lines of credit, and donations from philanthropic foundations.