By: Paul N. Van de Water and Richard P. Nathan

Published: January, 2011

SUMMARY: Federal health reform legislation encourages states to establish health insurance exchanges that will promote effective competition for health insurance and offer a wide selection of coverage options to individuals and small businesses. The law gives states four options for structuring the governance of an exchange: a state government agency (either existing or newly created), a nonprofit entity established by the state, or a multi-state exchange. It also provides states the flexibility to establish one or more sub-state exchanges serving geographically distinct areas within a state. If a state does not wish to establish an exchange, the federal government will operate an exchange in the state.

States offer a range of models for health insurance exchanges, and there is no one correct approach. The Utah Health Exchange was established within an existing state agency. The Commonwealth Health Insurance Connector Authority in Massachusetts is an independent public authority inside state government. New Mexico is considering establishing a nonprofit public corporation.

Whatever form of governance a state chooses, it will have to address most of the same issues, including the exchange’s political independence and accountability, preventing conflicts of interest, the extent to which the exchange will be subject to various general laws affecting its operations (such as hiring and procurement), the exchange’s sources of funding, financial reporting requirements, and more. Establishing a nonprofit entity, multi-state exchange, or sub-state exchanges would raise additional issues. A state must also consider what forms of governance are permissible under its own constitution.

Because a health exchange will face many unanticipated challenges, states should consider giving the exchange substantial flexibility and discretion in setting policies. The statute establishing a state’s exchange can leave many issues to be worked out later by the exchange as more information becomes available and the exchange gains experience.

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