Flexible federal health insurance exchange regulations could give states the freedom to move quickly to set up ambitious programs – or get them stuck in political quicksand.

Drew Altman, president of the Henry J. Kaiser Family Foundation, Menlo Park, Calif. – a major health policy think tank – delivers that assessment in a new commentary on draft healthPPACA compass insurance exchange regulations recently proposed by the U.S. Department of Health and Human Services.

If the Patient Protection and Affordable Care Act of 2010 (PPACA) takes effect as written and works as supporters hope, the exchanges will help individuals and small groups buy health coverage using a new system of subsidies starting in 2014.

A state will be able to let several exchanges operate within its borders, set up one exchange, join a multi-state exchange consortium, or put the federal government in charge of providing exchange services for its residents. A state and its exchanges also can set health insurer participation rules.

HHS officials emphasized in comments on the draft that they want reflect the flexible spirit of the exchange provision by encouraging state officials to develop exchanges that suit local needs and local preferences.

“This means, for example, that states will have a high degree of discretion in deciding whether to take a more free market or more regulatory approach in moderating the growth in health insurance premiums,” Altman writes. “Under any scenario, plans offered in exchanges will be run by private insurers. But, a state can choose to create a more powerful, highly-regulated exchange, one that is part of state government and has the authority to negotiate premiums and selectively-contract with insurers. Or, a state could build a less-constrained marketplace, operated by a non-profit exchange that acts as an Amazon.com-like clearinghouse for any insurer that meets minimum requirements.”

The flexible rules could lead to wide variations in how completely and how well states implement the exchange provision, Altman says.

“States almost always say they want greater flexibility, and more often than not they do (even more, they want more federal money),” Altman says. “But if you have been a state official, as I have, you know that inside a state attitudes about federal rules are often more nuanced and complex.”

In Washington, the governor typically represents the “public face” of a state on issues such as health insurance regulation, but, within a state, governors, legislators, insurance commissioners and other officials might have different views, Altman says.

In states where key officials generally agree on major issues, flexibility might be preferred by all, but, in states in which officials disagree, PPACA supporters might prefer to be able to blame rigid federal regulations when negotiating with other officials, Altman says.

Today, 29 states seem to have a constituency for more prescriptive rules, Altman says.

“We do know that virtually all of [the] consumer-oriented provisions in the law are popular with the public,” Altman says. “The more you strengthen the regulatory aspects of the law the more vulnerable you may be to interest group criticism, but the more tangible benefits and protections you will have to sell to a public looking at [PPACA] and trying to answer the question, ‘how will this help me.’”

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