OCPA Memorandum

Oklahoma Council of Public Affairs, Inc.An Independent Think Tank Promoting Free Enterprise and Limited Government Since 1993

1401 N. Lincoln Boulevard � Oklahoma City, OK 73104 � (405) 602-1667 � FAX: (405) 602-1238

www.ocpathink.org � ocpa@ocpathink.org

TrusteesBlake Arnold � Oklahoma CityLee J. Baxter � LawtonSteve W. Beebe � DuncanG.T. Blankenship � Oklahoma CityJohn A. Brock � TulsaDavid R. Brown, M.D. � Oklahoma CityAaron Burleson � AltusPaul A. Cox � Oklahoma CityJay T. Edwards � Oklahoma CityWilliam Flanagan � ClaremoreJosephine Freede � Oklahoma CityKent Frizzell � ClaremoreAnn Felton Gililand � Oklahoma CityJohn T. Hanes � Oklahoma CityRalph Harvey � Oklahoma CityJohn A. Henry, III � Oklahoma CityHenry F. Kane � BartlesvilleRobert Kane � TulsaGene Love � LawtonTom H. McCasland, III � DuncanDavid McLaughlin � EnidLew Meibergen � EnidRonald L. Mercer � Oklahoma CityLloyd Noble, II � TulsaRobert E. Patterson � TulsaBill Price � Oklahoma CityPatrick Rooney � Oklahoma CityMelissa Sandefer � NormanRichard L. Sias � Oklahoma CityJohn F. Snodgrass � ArdmoreCharles M. Sublett � TulsaRobert Sullivan � TulsaLew Ward � EnidWilliam E. Warnock, Jr. � TulsaGary W. Wilson, M.D. � EdmondDaryl Woodard � TulsaDaniel J. Zaloudek � Tulsa

Adjunct ScholarsWill Clark, Ph.D.University of Oklahoma

David Deming, Ph.D.University of Oklahoma

Bobby L. Foote, Ph.D.University of Oklahoma (Ret.)

Kyle Harper, Ph.D.University of Oklahoma

E. Scott Henley, Ph.D., J.D.Oklahoma City University

Russell W. Jones, Ph.D.University of Central Oklahoma

Andrew W. Lester, J.D.Oklahoma City University (Adjunct)

David L. May, Ph.D.Oklahoma City University

Ronald L. Moomaw, Ph.D.Oklahoma State University (Ret.)

Ann Nalley, Ph.D.Cameron University

Bruce Newman, Ph.D.Western Oklahoma State College

Stafford North, Ph.D.Oklahoma Christian University

Everette Piper, Ph.D.Oklahoma Wesleyan University

Michael Scaperlanda, J.D.University of Oklahoma

Quentin Taylor, Ph.D.Rogers State University

FellowsJ. Rufus Fears, Ph.D.Dr. David and Ann Brown Distinguished Fellowfor Freedom Enhancement

J. Scott Moody, M.A.Research Fellow

Andrew C. Spiropoulos, J.D.Milton Friedman Distinguished Fellow

Wendy P. Warcholik, Ph.D.Research Fellow

StaffMichael Carnuccio � President

Brett A. Magbee � VP for Operations

Brandon Dutcher � VP for Policy

Margaret Ann Morris � VP for Development

Jason Sutton, J.D. � Policy Impact Director

Dacia Harris � Interactive Media Director

Jonathan Small, CPA � Fiscal Policy Director

Jennie Kleese � Development Events Manager

Bob Provine � Controller

Clara Wright � Hospitality Coordinator

Can Oklahoma Create a “Free Market” HealthInsurance Exchange Using the $54 MillionEarly Innovator Grant?By Jason Sutton, J.D. and Jonathan Small, CPA

Introduction

On February 25, Oklahoma leaders announced1 our state would accept a $54.6

million “Early Innovator” grant from the U.S. Department of Health and Human

Services (HHS). The “Early Innovator” grants were authorized under the Patient

Protection and Affordable Care Act2 (hereafter “Affordable Care Act”) to begin

developing the information technology (IT) infrastructure for the “health benefits

exchanges” as required under the Act.

That decision has sparked much discussion and confusion regarding health

insurance exchanges and the use of the federal grant to implement an exchange in

Oklahoma.

To their credit, Oklahoma’s leaders have, to date, been clear that their intention is

to take the federal funds and create a health insurance exchange that empowers

consumer choice through real competition—in essence, an exchange unlike those

required under the Affordable Care Act.

However, a serious question remains: Does the “Early Innovator” grant permit

Oklahoma to use this $54 million to create the type of “patient centered,” “free-

market, conservative” insurance exchange state leaders are pursuing?

The short answer to that question: highly unlikely. The $54 million “Early

Innovator” grant is specific in its requirement that the state may only use the grant

funds to create an exchange that complies with the requirements of the Affordable

Care Act.

First, it would be constructive to clarify some of the confusion regarding “health

insurance exchanges” and to explain what state leaders have said they intend to do

with the federal grant funds.

What are health insurance exchanges?

The requirement under the Affordable Care Act that states establish a “health

benefits exchange”—or health insurance exchange—seemingly has been the most

confusing aspect of the entire health reform law.

It is important to note that health insurance exchanges pre-date the Affordable

Care Act. Exchanges were developed nearly a decade ago by the Heritage

Foundation, a conservative public policy think tank. The Heritage Foundation

envisioned insurance exchanges as a centralized online “marketplace”—essentially

a website—that was lightly regulated, where transactions costs were reduced, where

all types of health products could be bought and sold, where all insurers could

participate and compete, and where competition would promote real choices for

consumers.

As Robert Moffit, Ph.D., of the Heritage Foundation wrote in 2006:3

April 7, 2011

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“A properly designed health insurance exchange would function as a single market for allkinds of health insurance plans, including traditional insurance plans, health maintenanceorganizations, health savings accounts, and other new coverage options that might emergein response to consumer demand. In principle, it would function like a stock exchange, whichis a single market for all varieties of stocks and reduces the costs of buying, selling, andtrading stocks. For the same reasons, other types of market transactions are also centralized,such as farmers’ markets, single locations where shoppers can purchase a variety of freshfruits and vegetables, and Carmax, where consumers can choose from among all kinds ofmakes and models of automobiles.”

For reasons unimportant here, the idea never gained much traction, with only one state, Utah, enacting

such an exchange. However, following the enactment of the Affordable Care Act in March 2010, Americans

received their first real exposure to the term “insurance exchanges.”

Affordable Care Act exchanges are not Heritage Foundation exchanges. Affordable Care Act exchanges

are perversions of the “free market” exchange model promoted by the Heritage Foundation.

As Ed Haislmaier of the Heritage Foundation recently noted:4

“What Congress did in the [Affordable Care Act], however, was to merely keep the word‘exchange,’ while designating the purpose as something very different. Rather than servingas a mechanism for expanding health insurance choice, variety, and competition, and forspurring plans and providers to innovate and offer customers better value, [Affordable CareAct] exchanges will impose new regulations, administer new subsidies, standardizecoverage, and restrict consumer choice and insurer competition more than it is already. Thus,in the [Affordable Care Act] Congress has perverted the exchange concept into abureaucratic tool for federal subsidization, standardization, and micromanagement of healthinsurance coverage by the Department of Health and Human Services.”

Affordable Care Act exchanges differ from the free market approach promoted by the Heritage

Foundation in several significant ways.

Affordable Care Act exchanges:

• Are Heavily Regulated

o In addition to the likely unconstitutional mandate for individuals to purchase health

coverage, the Act places onerous burdens on insurers, insurance plans, individuals

and businesses. Notably, the Act regulates the health insurance exchanges by

restricting certain insurers from participating, by preventing insurers from

underwriting risk, by forcing insurers to rate consumers similarly regardless of risk,

by mandating the amount of coverage each plan offered in the exchange must

provide and by restricting health providers from freely contracting with insurers on

reimbursement rates and networks.

• Limit Choice

o The Act limits choice for consumers by requiring that EVERY plan available in the

exchange provide minimum levels of coverage. Plans would be grouped together into

only four categories (“Bronze,” “Silver,” “Gold,” and “Platinum”) based on actuarial

value. In addition, certain individuals would be eligible to purchase a “catastrophic”

coverage plan that doesn’t require the minimum levels of coverage other plans must

provide.

• Restrict Competition

o The Act restricts competition not only by requiring that all plans meet certain

minimum standards, but also by prohibiting any insurer from participating in the

exchange that doesn’t offer at least one plan in both the “silver” and “gold”

categories and that agrees to charge the same premium for plans sold inside the

exchange and outside of the exchange.

As Moffit further explains:5

“Under the Heritage design, individuals could choose the health plan they want withoutlosing the tax benefits of employer-sponsored coverage. The exchange we propose would be

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open to all state residents and—very importantly—be free of federal regulation. Under the[Affordable Care Act], however, the congressionally designed exchanges are a tool imposedon the states enabling the federal government to standardize and micromanage healthinsurance coverage, while administering a vast and unaffordable new entitlement program.This is a vehicle for federal control of state markets, a usurpation of state authority and thesuppression of meaningful patient choice. Heritage finds this crushing of state innovationand experimentation repugnant.” (Emphasis added)

Clearly, then, an exchange that complies with the requirements of the Affordable Care Act cannot

seriously be considered a “free market” exchange.

Which type of Exchange do Oklahoma leaders intend to implement?

Oklahoma’s leaders have been unambiguous in their stated intentions to create a “free market”

exchange similar to those promoted by the Heritage Foundation.

In the February 25 news release6 announcing Oklahoma would accept the grant, Senate President Pro-

Tempore Brian Bingman said:

“Real solutions to our health care needs are best found through market-based principles ofchoice and competition. The health insurance exchange empowers Oklahomans with thosefree-market tools…”(Emphasis added)

In a March 22 letter7 to legislators, Gov. Mary Fallin stated:

“One of the most important ways we can fight that federal takeover is to implement anOklahoma-based, free-market health insurance exchange so that Washington does not forceits own model on the state…Unlike the federal exchange Washington may try to force on us,the exchange we are trying to build offers a positive, free-market alternative to the biggovernment, tax-and-spend plan that is the [Affordable Care Act].” (Emphasis added)

It is clear that Oklahoma’s leaders have no intention of implementing the type of rigid, heavily regulated

health insurance exchanges mandated under the Affordable Care Act.

Can Oklahoma implement a “patient centered, free market” exchange by using the Early Innovator

Grant?

It is exceedingly unlikely. While Oklahoma leaders have clearly stated their intention to create a

“patient-centered, pro-market exchange…[that uses]…free market principles to contain health insurance

costs,” such an exchange is simply not permitted under either the Affordable Care Act or the $54 million

“Early Innovator” grant our state recently accepted.

The “Early Innovator” grants were authorized by the Affordable Care Act to provide states funding to

begin developing the IT infrastructure necessary to support the exchanges required by the Act.

Section 1311(a) of the Affordable Care Act authorizes the Secretary of the U.S. Department of Health

and Human Services (HHS) to make grants available to states for the establishment of “American Health

Benefits Exchanges.” Section 1311(a)(3) limits the “use of funds” made available to “activities (including

planning activities) related to establishing an American Health Benefits Exchange, as described” in the

Affordable Care Act.

In an October 2010 grant announcement,8 HHS Secretary Kathleen Sebelius did in fact make funds

available to the states in the form of “Early Innovator” grants for the purpose of implementing the type of

exchanges obligated by the Affordable Care Act.

That grant announcement is implicit in its requirement that states that accept the money are to

implement exchanges that comply with the Affordable Care Act.

On page four, the document states:9

“I. Funding Opportunity Description. A. Purpose. This Funding OpportunityAnnouncement (FOA) will provide competitive incentives for States to design and implementthe Information Technology (IT) infrastructure needed to operate Health InsuranceExchanges–new competitive insurance market places that will help Americans and smallbusinesses purchase affordable private health insurance starting in 2014.”

On page five, the document further states:10

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“C. Background. On March 23, 2010, the President signed into law the Patient Protectionand Affordable Care Act. On March 20, 2010, the Health Care and Education ReconciliationAct of 2010 was signed into law. The two laws are collectively referred to as the AffordableCare Act…Among its provisions, the law provides for funding to assist States in implementingparts of the Affordable Care Act.”

“Section 1311 of the Affordable Care Act provides funding assistance to the States for theplanning and establishment of Health Insurance Exchanges…The Affordable Care Actprovides that each State may elect to establish an Exchange that would: 1) facilitate thepurchase of qualified health plans (QHPs); 2) provide for the establishment of Small BusinessHealth Options Program (SHOP Exchange) designed to assist qualified employers infacilitating the enrollment of their employees in QHPs offered in the SHOP Exchange; and 3)meet other requirements specified in the Act.”

Based on the language included in the grant announcement, there can be no doubt that the purpose of

the “Early Innovator” grant is for the state to implement an exchange that complies with the requirements

of the Affordable Care Act.

Furthermore, not only does the Affordable Care Act grant HHS broad authority to audit the state’s use of

the grant funds at any time, but HHS will also actively monitor Oklahoma’s progress to ensure certain

targets are met before the state can draw down the additional grant funds necessary to continue

implementation of the exchange.

The “Notice of Grant Award” –the document announcing Oklahoma’s award of the $54.6 million Early

Innovator grant–specifies that funds will only be released incrementally as certain benchmarks are

reviewed and approved.11

“Special Terms & Conditions. 2. Restriction of Funds. Grantee will not have access to thecontractual line item funds until the conditions under Parts A and B have been met.”

“B. Grantee must also meet specific Program Requirements, to include undergoingstandard industry Systems Development Life Cycle (SDLC) reviews. The Early InnovatorExchange IT SDLC reviews are as follows (with tentative dates to occur):

1. Architecture Review 3/16/20112. Project Baseline Review 4/18/20113. Detailed Design Review 9/14/20114. Operational Readiness Review 10/10/2011"

Particularly important are the “Detailed Design Review” and the “Operational Readiness

Review.” As shown above, the “Early Innovator” grant requires the state to build an exchange that

complies with the Affordable Care Act, which is heavily regulated, restricts competition by limiting

which insurers can participate in the exchange, reduces choice by mandating that all plans sold in

the exchange meet expensive, minimum levels of coverage and prohibits insurers from freely

contracting with medical providers.

For Oklahoma to draw down the funds and continue implementation it must show during the

“Detailed Design Review” and the “Operation Readiness Review” how it intends to keep out of our

exchange all insurers and plans that do not meet the requirements of the Affordable Care Act. If the

exchange we are building passes that test, it cannot be a “free market,” “patient centered” health

insurance exchange. Instead, it would undoubtedly be an Affordable Care Act exchange.

Based on the express requirements of the grant, it is clear that a state cannot take the grant funds

and build a “free market” exchange that complies with the Act.

Conclusion

Oklahoma’s leaders face a conundrum, but one with a workable solution.

To establish an exchange that truly leverages market forces to create competition, increase

choice for consumers and constrain costs, Oklahoma’s leaders need to finance the exchange with

funds not tied to the Affordable Care Act.

Because the language of the “Early Innovator” grant requires states that receive the grant to

implement exchanges that comply with the Affordable Care Act–and because the states will not

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even receive the funds until they prove compliance—it is very unlikely Oklahoma could implement a

“free market” exchange with the funds from the grant.

It is important to note that no such constraints would exist should the state pursue the creation of

a “free market” exchange with the use of state-appropriated funds or a public-private partnership

financing structure.

Furthermore, the use of state-appropriated or private funds would also likely satisfy the most

ardent critics of using federal funds authorized by the Affordable Care Act to implement an

insurance exchange in Oklahoma—most notably the Heritage Foundation, U.S. Senator Tom

Coburn, M.D., and the Oklahoma Council of Public Affairs.

In a March 25 blog post, Heritage’s Robert Moffit wrote:12

“Right now, states across the country are trying to figure out what to do in response to [theAffordable Care Act] and its health insurance exchange architecture. In Oklahoma, thequestion has gone even further as the state government debates whether or not to acceptfederal funding, appropriated in the [Affordable Care Act], to create a state informationtechnology system for a health care exchange.

In addition, and at issue in Oklahoma, is whether states should accept federal funding topursue state-based reforms. It would be prudent for states to think twice before accepting anyfederal funding from [Affordable Care Act]. As history documents, once states accept fundingfrom the federal government, they are forever at the mercy of the federal bureaucracy…As EdHaislmaier said, ‘The best strategy for the state lawmakers is to adopt their own reforms –separate from, and independent of, [the Affordable Care Act’s] exchange design.’Acceptance by states of federal funds appropriated by [the Affordable Care Act], to be usedby the state for the purpose of implementing [the Affordable Care Act], would be inconsistentwith current congressional efforts to repeal and defund [the Affordable Care Act].” (Emphasisadded)

A March 28 statement received by OCPA from Sen. Coburn’s staff clarified the Senator’s position:

“Official position of Dr. Coburn on the plan to implement a state health exchange in

Oklahoma:

Dr. Coburn supports state-based efforts to create free-market, voluntary health insuranceexchanges that encourage transparency, consumer choice, and individual control. Statesshould be able to use state dollars to pursue innovative strategies to better equip consumerswith information about their health coverage choices. In this model, consumers can compareplans via the Internet or a toll free number, so they can choose a plan tailored to theirindividual needs. In this way, state-based exchanges can help facilitate the purchase ofprivate health insurance based on price and quality.

The kind of market-based solution Dr. Coburn supports looks a lot like Utah’s market-based health exchange. It does NOT resemble Massachusetts’ heavily-regulated, state-levelbureaucracy, or the federally-mandated exchanges required by [the Affordable Care Act] –both of which are built around an individual mandate and price controls on private healthinsurance that increase the cost of health insurance for consumers. The main problem withhealth insurance is that it costs too much – but the changes in Massachusetts have beenproven to simply increase the cost of coverage, while failing to improve access.

Dr. Coburn supports states using state dollars to tackle the challenges of their ownpopulation. He does not think that any state involved in a lawsuit against [the AffordableCare Act] should use Administration grant dollars to set up an exchange – regardless ofwhether that exchange looks more like Utah’s model or [the Affordable Care Act’s] model. Heis glad that Oklahoma has filed a lawsuit against [the Affordable Care Act] and will continueto do everything he can at a federal level to overturn this unconstitutional $2.6 trillion lawthat fails to fix what is broken in our health care system.” (Emphasis added)

In a March 17 blog post, OCPA stated:13

“It is important to add, however, that OCPA has never advocated acceptance of federalfunds—especially federal funds that have to be printed or borrowed—to accomplish state

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goals that are not a ‘core’ function of state government.To be clear, OCPA believes the state should not use federal dollars to implement a health

insurance exchange. If state leaders conclude an insurance exchange is vital for reducingcosts of care and increasing access to care for consumers, the state should appropriate statedollars to build it.”

Oklahoma leaders have been clear that their intention is to pursue the creation of an exchange

that leverages market forces to induce completion, increase choices and lower prices for health

insurance consumers. Unfortunately, the best of intentions will likely be constrained by the inflexible

parameters of the “Early Innovator” grant.

Jason Sutton, J.D. is the Policy Impact Director for OCPA and previously served as SeniorCommunications Officer at the Oklahoma Insurance Department. Jonathan Small, CPA is the FiscalPolicy Director for OCPA and previously served as Director of Government Affairs at the OklahomaInsurance Department.

Endnotes

1 “Oklahoma Will Accept $54 M Grant to Support Oklahoma-based Health Insurance Exchange,” February 25, 2011, http://www.ok.gov/triton/modules/newsroom/newsroom_article.php?id=223&article_id=841.2 Patient Protection and Affordable Care Act, Public Law 111-148 (2010), http://www.gpo.gov/fdsys/pkg/PLAW-111publ148/content detail.html.

3 Robert Moffit, The Rationale for a Statewide Insurance Exchange, The Heritage Foundation, October 5, 2006, http://www.heritage.org/Research/Reports/2006/10/The-Rationale-for-a-Statewide-Health-Insurance-Exchange.4 Edmund Haislmaier, A State Lawmaker’s Guide to Health Insurance Exchanges, The Heritage Foundation, March 21, 2011, http://www.heritage.org/Research/Reports/2011/03/A-State-Lawmakers-Guide-to-Health-Insurance-Exchanges.5 Robert Moffit, Op-Ed, Obama’s Health Reform Isn’t Modeled After Heritage Foundation Ideas, Washington Post, April 19, 2010

6 “Oklahoma Will Accept $54 M Grant to Support Oklahoma-based Health Insurance Exchange,” February 25, 2011, http://www.ok.gov/triton/modules/newsroom/newsroom_article.php?id=223&article_id=841.7 Gov. Mary Fallin, Letter to Oklahoma Legislators, March 22, 2011, http://ftpcontent.worldnow.com/griffin/NEWSon6/PDF/1103/3-22-11GovernorFallinlettertolawmakers.pdf.8 Grant Opportunity, Cooperative Agreements to Support Innovative Exchange Information Technology Systems, U.S. Department of Health andHuman Services Office of Consumer Information and Insurance Oversight, October 19, 2010, Early Innovator Grant Federal Guidance, OklahomaHealth Care Authority website, http://www.okhca.org/OHX.9 Id. at page 4.10 Id. at page 5.11 Notice of Grant Award, Pages 1-2, U.S. Department of Health and Human Services Centers for Medicare & Medicaid Services Office ofAcquisitions and Grants Management, February 16, 2011, Oklahoma EI Grant Terms and Conditions, Oklahoma Healthcare Authority website,http://www.okhca.org/OHX.12 Robert Moffit, Accepting Federal Exchange Funding for Obamacare: A Dangerous Proposition for the States, March 25, 2011, The Foundry Blog,The Heritage Foundation, http://blog.heritage.org/2011/03/25/accepting-federal-exchange-funding-for-obamacare-a-dangerous-proposition-for-the-states/.13 Jason Sutton, Health Insurance Exchanges and Federal Funding, March 17, 2011, Interalia Blog, The Oklahoma Council of Public Affairs, http://www.ocpathink.org/articles/977.