The Patient Protection and Affordable Care Act refers to state health insurance exchanges as "American Health Benefit Exchanges." In theory, insurance companies will compete for business on a transparent, level playing field, which should reduce costs and give individuals and small businesses the purchasing power enjoyed by big businesses. However, health reform does many things to increase costs by covering those who are now uninsurable and by increasing mandated benefits. Many predict these factors will far outweigh any efficiencies created by the exchanges and that health insurance prices will increase. If exchanges succeed, they will create the first viable alternative to the group markets for the younger-than-65 population.

1. What happens beginning in 2014?

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• Each state is required to create an exchange (a governmental agency or nonprofit organization, established by the state) to facilitate the sale of qualified health plans (QHPs), including federally administered multistate plans and nonprofit cooperative plans. The law requires the Department of Health and Human Services to create an exchange in states that do not set up their own exchanges. However, the health reform law does not provide the federal government with adequate funding to set up or operate federal health insurance exchanges.
• States can create either one exchange to serve both small group and individual markets or separate exchanges for these pools.
• One goal is to facilitate a comparison of available health insurance options by purchasers.
• Standards for qualified coverage must include:
• Mandated essential coverage
• Cost-sharing requirements (deductibles, copayments, and coinsurance)

      – Out-of-pocket limitations

      – Minimum actuarial value of 60 percent, which means that the policy, on average, pays 60 percent of the costs for essential health benefits and the insured pays the remaining 40 percent. [The coverage levels are Bronze (60 percent), Silver (70 percent), Gold (80 percent), and Platinum (90 percent).]

• Catastrophic coverage for purchasers ages 30 and younger in the individual market.
• States must also create Small Business Health Option Programs, or "SHOP Exchanges," for small employers to purchase coverage. The states can expand the programs to include large employers beginning in 2017. 

2. What options can states offer employers?

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• Employers can choose any QHP offered in the SHOP in any tier;
• Employers can select specific tiers from which an employee may choose a QHP;
• Employers can select specific QHPs from different tiers of coverage from which an employee may choose a QHP; or
• Employers can select a single QHP to offer employees.

3. How do employers use exchanges?

There is rolling enrollment for employers, but, upon enrollment, the employer is locked into the plan for one-year periods. The plan premiums are also locked in for the same amount of time. Once the employer enrolls in a state exchange:

• The employer must offer Exchange coverage to all employees.
• The Exchange must provide an aggregate bill to the employer for all employees.
• Employers must notify the Exchange about any employee change of status, for example, adding dependents or terminating employment.
• Employers with multiple worksites can offer access to a single Exchange or to state Exchanges where employees are located.

4. Are there any issues with state exchanges?

Another issue is the interaction with cafeteria plans regulated by Code Section 125. Coverage offered through an exchange is not a permitted benefit under Code Section 125 and cannot be offered under a cafeteria plan unless the employer offers its employees the opportunity to enroll through an exchange in a group market.There are several issues that may affect a state's exchange. For example, states do not have full authority over their own exchanges. HHS has final approval authority for each exchange.

Although the law does not provide the federal government with adequate funding to set up or operate federal health insurance exchanges, exchange costs must be funded by HHS until Jan. 1, 2015. Thereafter, all exchanges must be self-funded.