MEMORANDUM. Members of the Senate Commerce Committee

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1 Philip Kirschner President Melanie Willoughby Senior Vice President Frank Robinson First Vice President Grassroots & Government Affairs To: From: MEMORANDUM Members of the Senate Commerce Committee Christine Stearns David Brogan First Vice President Taxation & Economic Development Christine Stearns Vice President Health & Legal Affairs Sara Bluhm Vice President Environment, Energy & Federal Affairs Stefanie Riehl Assistant Vice President Employment and Labor Andrew Musick Director of Policy & Research Date: October 1, 2012 RE: Senate Bill 2135 On behalf of the New Jersey Business & Industry Association (NJBIA), I would like to express our opposition to Senate Bill 2135, the New Jersey Health Benefit Exchange Act. Health insurance exchanges are essentially marketplaces that administer the offering of health insurance plans by private insurers to individuals and small employers, consistent with the Patient Protection and Affordable Care Act, Pub.L (PPACA). NJBIA represents over 21,000 companies in New Jersey, with over 85 percent of our member companies employing fewer than fifty employees. Therefore, we have had a strong and consistent interest in the health insurance marketplace for small employer purchasers and look forward to working with the sponsors to design a health insurance exchange that meets the needs of our state. The Association is supportive of state governance over the health insurance exchange to ensure its activities are tailored to the unique circumstances of New Jerseys health care marketplace. PPACA allows each state the option to create an exchange by January 2014 or the U.S. Department of Health and Human Services will establish and operate an exchange in that state. In the alternate, the state can opt to work with in partnership the federal government to establish and operate the exchange. NJBIA believes that New Jersey should closely examine all options. The exchange must initially focus on core, foundational issues critical to the exchange s survival, such as build a modern informational technology (IT) infrastructure, mitigate against adverse selection, ensure competition and manage key stakeholder coalitions that are invested in the exchange s success. The exchanges should focus on ease of use for individuals and employers. Purchasers of insurance should be able to input their specific needs and have insurance options that meet those needs clearly available without searching through large volumes of plans. This should be integrated throughout call centers, the Internet, customer service and any other means used to communicate regarding insurance options. The Association believes the exchange should encourage and foster the development of varying methods of providing health benefits specifically as they relate to defined contribution arrangements. Providing flexibility and innovation in delivering health benefits are essential.

2 Affordability is Critical It is also well known that the PPACA s provisions were intensely debated. We will not attempt to recap that debate but I will highlight one concern that is particularly relevant as the State of New Jersey, and our businesses, begin to implement the provisions of the law--cost control. The cost of providing health coverage to employees is one of the most significant challenges facing employers today. So as New Jersey develops the framework for a health insurance exchange, it is important to be mindful that employers seek opportunities to continue to provide health benefits to employees as they recognize the competitive value to provide in a demanding market where skilled employees can be scarce. Health insurance premiums exceeded $5,600 for individual employees and $15,700 for family coverage (2012 Kaiser/HRET Survey of Employer-Sponsored Health Benefits). These have nearly doubled in the last ten years. Rising costs, combined with the recession, are resulting in a sharp drop in the number of people covered in New Jersey s small employer market. There are more than 160,000 fewer people covered now (687,008 in 2Q2012) than there were in January 2008 (850,615), a decline that began in Unfortunately, the federal healthcare reform law offers little relief for employers struggling with rising healthcare costs. Many proponents of federal healthcare reform have touted the Small Business Health Care Tax Credit as a major benefit for small business. The maximum credit is worth 35 percent of the premium, but a business has to have ten or fewer employees with average wages under $25,000 a year to qualify. In a high wage state like New Jersey, it s unlikely that many businesses will benefit from the tax credit, certainly not the way those in other lower cost states will. Thus, New Jersey s health insurance exchange provides a critical opportunity to provide access to affordable, high-value health insurance coverage for small employers. Background on Health Insurance Exchange A health insurance exchange is a mechanism for organizing the health insurance marketplace to help consumers and small businesses shop for coverage in a way that permits easy comparison of available plan options based on price, benefits and services, and quality. New Jersey must decide to operate its own health insurance exchange, join a multi-state exchange, or let the federal government implement a regional exchange. Federal law requires the exchanges to launch on January 1, It is believed that by pooling people together, reducing transaction costs, and increasing transparency coverage will be more affordable. The exchange will have two components, an individual exchange and a small employer exchange, called the Small Employer Health Options Program, often called the SHOP. Small

3 businesses with up to 100 employees can purchase health coverage for their employees in an exchange. Beginning in 2017, the states may allow businesses with more than 100 employees to purchase coverage in the exchange. Only U.S. citizens and legal immigrants who are not imprisoned will be eligible to purchase a health plan in one of the exchanges. Starting in 2011 and continuing through 2014, states can receive financial assistance from the federal government to help pay for the cost of creating the exchange. Each of the health plans to be offered will include an essential set of benefits that provide comprehensive health care services with different levels of cost sharing. While states are permitted to offer benefits in addition to the essential health benefits defined by HHS, the state would be responsible for defraying the cost of any additional required benefits. With the numerous existing health benefits mandate laws that currently exist in New Jersey, this will require a careful review. The benefit categories will include: Bronze Plan: provides essential health benefits and pays for 60 percent of the costs of the plan with the Health Savings Account (HSA) out-of-pocket limits Silver Plan: provides essential health benefits and pays for 70 percent of the costs of the plan with the HSA out-of-pocket limits Gold Plan: provides the essential health benefits and pays for 80 percent of the costs of the plan with the HSA out-of-pocket limits Platinum Plan: provides the essential health benefits and pays for 90 percent of the costs of the plan with the HSA out-of-pocket limits Catastrophic Plan: available to those up to age 30 or to those who are exempt from the mandate to purchase coverage Plans offered both within the exchange and outside the exchange will be required to conform to various market rules, including: 80 percent minimum loss ratios for individual and small group plans. 85 percent for large group. (This means that at least 80 cents of the premium dollar is expended on claims payment, with balance going toward administrative costs and profits). Modified community rating will ensure that all enrollees in a plan are charged the same, except rates can vary based on geography, plan design, age and tobacco use. If a purchaser cannot afford to purchase a plan in an exchange, he or she may be eligible for a subsidy from the government based on income and family size. If the purchaser s yearly income is higher than 133 percent of the federal poverty level but less than 400 percent of the poverty level (about $43,000 for an individual), a tax credit may be available to pay health plan premiums and out-of-pocket expenses. Various provisions of PPACA have tasked the exchange with a wide array of duties. Many of the components of the exchange will have a direct and indirect impact on the purchase of small group/individual health insurance. Some examples include: Establish the SHOP: The exchange is required to create the SHOP for small employers. Simplified enrollment: A standard enrollment form and single electronic interface will be used to determine eligibility and enroll in the exchange, Medicaid, FamilyCare and the Basic Plan, if implemented.

4 Certifying Plans: The exchange will certify whether plans qualify to participate in the exchange based on a determination of what is in the interests of qualified individuals and qualified employers. PPACA requires certification criteria to include: marketing, healthcare provider network adequacy, accreditation and quality improvement requirements. Quality Ratings: The exchange may exchange quality measures or a rating system to evaluate health benefit plans. Such measures should not duplicate existing state efforts and should be based on nationally recognized, consensus-developed quality standards that can be consistently applied across plans. Navigators: PPACA requires the exchange to establish a Navigator program and to award grants to outside Navigator entities that will conduct public education efforts and facilitate enrollment in an exchange. Website: The exchange must maintain a website offering comparable plan information, an on-line calculator that shows premiums and available subsidies and operate a toll-free consumer hotline. Key concerns New Jersey Health Benefit Exchange Act The authorizing law must provide the Board a certain amount of flexibility to implement the insurance exchange to ensure that it will be able to be nimble in responding to changing market conditions and evolving federal rules. Any overly proscriptive enabling statute could stifle the Board s innovation as circumstances change in the coming months and years. The nature of the exchange and its broad range of responsibilities may best be served by an entity that is accountable to the public yet carried out by an adaptive and flexible Board and professional staff that can effectively implement the law in an ever-changing marketplace. The state has several key decisions to make about how the exchange will be designed that are of great interest to small employers. The following are some key issues that the Association wanted to highlight. Role of Employers in Exchange Governance: The exchange will need to be administratively efficient in order to compete effectively in the small employer marketplace and will need to make a number of key operational and financial decisions early in the process that will affect the long-term viability of the exchange. Therefore, governance is critical. The governing board would benefit from the inclusion of a representative of employers. (Section 5) One of the minimum functions of an exchange is to assign ratings based on relative quality and price. Employers should be involved in the process to determine the rating, as employers have been managing the value of health plans for decades. The knowledge of the value of health care systems is best known by organizations, such as employers, who have modified their plans to increase value and quality year after year. The rating must be fair, clear and understandable, allowing employers and individuals alike valuable insurance options. It is imperative that businesses be incorporated in the dissemination of information, and that employers receive clear, unbiased information as to what tax credits, fines and

5 options would be applicable. This is a very complex law that creates a significant amount of confusion among employers, and clear communication and options are necessary for implementation. Many businesses, especially small businesses, do not have the human resources capability to sort through complex regulations and information in multiple exchanges or to determine possible tax credits or fines. Manufacturers need clear information to assist these businesses. We appreciate that employers have been considered a relevant stakeholder and consulted on the structure and function of the exchange. Moreover we believe that consultation should not be limited to the set-up and design but should continue on going governance. Thus employers need to be included on the board specifically. Open Marketplace vs. Active Purchaser: The exchange could function as an active purchaser attempting to bargain with insurers over premiums or as an open marketplace, a clearinghouse or Travelocity, for health insurance that is open to all qualified insurers, facilitating the purchase of insurance and providing a range of options to purchasers. Many small businesses do not have the internal expertise to navigate a complex health care system. Clear and easy-to-understand information on their options and responsibilities will assist small businesses. While much discussion is focused on how individuals need access to information to understand their health insurance options, manufacturers will need access to the same information. Employers need a better understanding of issues such as the criteria to qualify for a tax credit, the fines they may be subject to and insurance products they can access. Clear information on all of these points will assist manufacturers participation in the exchanges. Limiting plan participation through select contracting will limit choices for purchasers and negatively affect enrollment. Further, this model of active purchasing may require additional staff resources, market research, and technical expertise. These resources would translate into a larger operational budget, and could result in higher fees or assessments on insurers to support that budget which insurers could pass on to consumers and small businesses in the form of higher premiums. Further it could result in a lack of focus on the core mission, facilitating the coordination between the exchange and purchasers (employers and consumers). Exchange Financing: Unlike a typical governmental unit, in which an expense budget is developed and managers of the unit must manage to a known target, exchanges will be confronted with a classic start-up issue: incurring significant expense while dealing with an uncertain revenue stream. This balance will be acute in the early stages and will require solid budgeting discipline and expense management. (Section 9(c)) The exchange should be fully funded and self-sustaining through a transparent, sustainable funding source after initial start-up monies are expended in To be equitable the exchange should not be funded through an assessment which shifts costs onto other insurance markets. In fact quite the opposite should be the case. A robust market outside the state-sponsored exchanges will bolster competition and lower

6 costs. Companies and individuals should be able to look to the exchanges and outside the exchanges for insurance options that are most suited to their particular needs and not be subject to extra taxes to underwrite the exchange. Interaction with the existing markets/overlap with DOBI: The legislation does not address how the insurance exchange, specifically the SHOP, will interact with the existing Individual Health Coverage and Small Employer Health Coverage marketplaces, which have existing boards and rules. The legislation should make the rules for any insurance markets outside the exchange fully consistent with the rules that apply inside the exchange to avoid adverse selection that harms either market. (Section 7(b,d,) The legislation should also ensure that the exchange board does not undertake activities that duplicate DOBI s regulatory role. For example, the legislation seems to require health insurers to provide justification of rate increases to the exchange. However, responsibility for oversight of rate increases already falls to the U.S. Department of Health and Human Services and the Department of Banking and Insurance. The legislation should be more narrowly tailored to match the charge given to the exchange board by PPACA, to assess which plan offerings show a pattern of excessive or unjustified premium increases, for purposes of excluding such plans from exchange participation, not to duplicate existing agencies oversight of rate increases. Rate Setting: One of the most critical issues for small employers will be the affordability of coverage in the exchange marketplace. However, this cannot be achieved through rate setting. Exchanges should refrain from engaging in overt regulatory methods such as rate setting, either of premium or of reimbursements, to providers. The exchange should allow a fair and competitive environment for consumers, insurers and providers, similar to the example being set by Utah. Providers and insurers should be able to freely negotiate to ensure competitive reimbursement rates. The oversight of health insurance plans, including the review of rates, is not the role of the exchange, but rather of the Department of Banking and Insurance. This point should be clarified. NJBIA appreciates that the perspective of small business is included in the discussion on this important topic.