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Thursday, November 15, 2012

For the wonks on Obamacare.

I have been getting a lot of e mails and questions about Obamacare and what the governor wants to / is forced to do / what the state can and cant do.

Here is a webnar on Obamacare in Tennessee put out by the KATO institute and the Goldwater institute on why we should not implement. .

And below is a letter sent to me responding to some general questions arguing we have to.




310 Great Circle Road


Frequently Asked Questions (FAQs) about

Insurance Exchanges in Tennessee

1. Could Tennessee “opt out” to avoid the implementation of an exchange? If not, what are the options?

No. Federal law requires that all states participate in an insurance exchange by

January 1, 2014. The only question for states to decide is who will run the exchange.

The Supreme Court’s decision earlier this year upheld most of the Patient Protection and

Affordable Care Act (PPACA), including the requirement for states to participate in an

exchange. The question now is which level of government (state or federal) will run the

exchange, not whether there will be one.1 Thus, Tennessee must decide (a) allow the

federal government to run the exchange; (b) enter an agreement with the federal

government to operate a “Partnership” exchange; or (c) stand up a state-based exchange.

2. What is the deadline for a decision about a state-based exchange? Also, did HHS

recently extend this?

Governors face a deadline of November 16, 2012 to submit to the U.S. Department of

Health and Human Services (HHS) a “Declaration Letter” regarding their intention about the

operation of state-based exchange. While the November 16 date is not in statute, HHS has

reiterated since the election that it will be holding states to this deadline. However, HHS did

push back the deadline for states to actually submit the technical “Blueprint” for a statebased

exchange to December 14, 2012 or an application for a “Partnership” exchange to

February 15, 2013.

3. If the Governor submits a Declaration Letter on November 16, 2012, can Tennessee

withdraw at a later date? What are the consequences of doing so?

Yes. Tennessee could always change direction and decide not to operate an exchange. If

we were to submit a Declaration Letter and later back out, we would not have any liability to

repay any federal grant funds that we accepted. The Governor’s letter can also make the

1 1 Under PPACA § 1321(c), the federal government will operate the insurance exchange in Tennessee if the state

does not do so.

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November 14, 2012

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declaration contingent upon legislative approval and resolution of our outstanding questions with the federal government. However, if the Governor does not submit a Declaration Letter by November 16, 2012, then Tennessee loses the option of running a state-based exchange in 2014.

4. Is HHS’ deadline of November 16th truly enforceable?

Arguably, no – but this may not have practical relevance. Even though the November 16, 2012 deadline may have been arbitrarily chosen, we would probably need to begin to release procurements soon anyway if we hoped to meet statutory deadlines and prevent the implementation of a federally-run exchange in Tennessee.

5. Do we have enough information from the federal government to make a decision?

No, states do not have enough information at this point to make a clear decision. However, it’s worth pointing out that the only way a state’s options are further restricted after November 16 is if it declares its intent to let the federal government run the exchange. If a state signals that it wants to preserve the option of the state itself running the exchange and is willing to make plans accordingly, it could arguably await forthcoming federal regulations and related guidance before making a final call.

6. How much will the State have to pay to implement a state-based exchange?

The State will likely have to pay some portion of the costs for determining eligibility for Medicaid and the Children’s Health Insurance Program or “CHIP” (i.e., TennCare and CoverKids in Tennessee) under either a federal or state-based exchange. However, the federal government will award “establishment” grants under PPACA § 1311(a) to cover the other costs of developing, implementing, and operating an exchange through December 31, 2014.

7. Could Tennessee move forward with an insurance exchange in 2015 or thereafter if the state does not operate one in 2014?

Yes. However, the State would probably have to pay the full costs to create and implement an exchange after 2014.

8. Regardless of who pays, how much will it cost to design and implement an exchange?

We estimate that it could cost about $70-90 million to design and implement an exchange. The actual costs could be higher because of the shortage of qualified contractors and the resulting increase in their bids (due to competition among states and federal purchasers).

9. How much will it cost to operate an exchange each year?

We estimate that the costs will be between $20-$40 million. However, costs will vary proportionally with enrollment, which is inherently uncertain.

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November 14, 2012

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10. Which will cost less for Tennesseans: a state or federal exchange?

A state exchange would probably cost less. If Tennessee were to operate an exchange, then we would leverage existing resources in order to keep the actual costs at the lower end of this range. Tennessee typically also incurs substantially lower labor and contracting costs than the federal government. For these reasons and based on our historical experience, we believe that a state-based exchange would be less expensive than the federal exchange.

11. Who pays the costs for either a federal or state exchange after 2014?

The PPACA requires all insurance exchanges to be financially self-sufficient by January 1, 2015.2 Thus, any insurance exchange will need to charge fees to users and/or the insurance industry in order to cover its costs.

12. Who verifies eligibility in an insurance exchange?

In a state-based exchange, Tennessee would establish the policies and procedures as to what level of documentation from an applicant constitutes adequate proof of eligibility. We would supplement this process with any eligibility data that the federal government may make available through the new “data hub.” In a federal exchange, the federal government would set the standards as to what constitutes proof of eligibility and would make determinations under those policies. Based on our experience to date, the state standards are more rigorous than those under consideration by the Obama Administration.

13. Who controls Medicaid eligibility in each of the options?

Under any of the options, Tennessee would determine the income limits for the Medicaid/TennCare program. Under a state-based exchange, Tennessee would also control the policies and procedures as to what level of documentation from an applicant constitutes adequate proof of eligibility. In contrast, the federal government would control these “program integrity” rules in a federal exchange.

The choice of a federal versus state exchange may have substantial state budget implications. For example, if the Obama Administration were to use less rigorous program integrity controls than the state, then a federal exchange would enroll in TennCare and CoverKids many individuals who would otherwise be unable to demonstrate their eligibility under our current state processes. Because the state pays part of the costs of providing services to these individuals, federal mismanagement could result in millions of dollars in new obligations on our state budget. To put this into perspective, the State must pay an average of $15 million in state dollars for 10,000 additional TennCare enrollees (which reflects an increase in enrollment of only 0.8% over current levels).

14. Who determines tax credit eligibility in an exchange?

A state-based exchange has the option of determining eligibility for the tax credits under the final rules issued by the Internal Revenue Service (IRS). A state-based exchange could

2 PPACA § 1311(d)(5).

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also delegate this function to the federal government. In a federal exchange, the federal government would conduct all such determinations.

For reference, the PPACA authorizes new premium assistance tax credits for residents whose incomes are between 100% and 400% of the federal poverty level (i.e., about $44,700 for a single individual and $92,200 for a family of four in 2012) and who do not have access to affordable coverage.3

15. What are the implications of Tennessee’s Health Care Freedom Act to the decision as to whether to operate a state-based exchange?

While the Health Care Freedom Act at TCA § 56-7-1016(d) states that “No public official, employee, or agent of this state or any of its political subdivisions shall act to impose, collect, enforce, or effectuate any penalty in this state that violates the public policy set forth in this section,” federal law assigns to the IRS the exclusive role in imposing, collecting, and enforcing such penalties. See 26 USC §§ 5000A and 4980H as added by PPACA §§ 1501(a) and 1513(a), respectively. Thus, the Health Care Freedom Act does not prohibit a state-based exchange in this context.

16. Can Tennessee shield employers and residents from penalties by not operating a state-based exchange?

The argument that employers and residents would face no tax penalties under a federal exchange is based on a July 2012 paper by Jonathan Adler and Michael Cannon.4 Adler and Cannon argue that the plain language of the PPACA does not allow federal exchanges to determine eligibility for premium assistance tax credits – and, in the absence of these tax credits, employers and residents in jurisdictions with a federally-operated exchange would generally not be liable for penalties under the PPACA.5 On this basis, they argue the IRS’ final rules on the tax credits,6 which allow federal exchanges to determine eligibility for the tax credits, are illegal.

While Adler and Cannon have sparked an interesting debate, these issues may not be resolved for several years. Under the Anti-Injunction Act,7 an employer in a jurisdiction with a federally-facilitated exchange may be able to bring suit and make the argument advanced by Adler and Cannon only after the IRS actually imposes such penalties. Since the IRS will not assess such penalties until 2015 (for the 2014 tax year), federal courts are unlikely to hear such cases for some time – and the appellate review of any federal district court and tax court decisions could take several additional years.

3 By way of comparison, the median household income in Tennessee is roughly $43,300.

4 This article is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2106789.

5 If the federally-facilitated exchange provides access to the tax credits, then the IRS would assess penalties to employers with more than 50 employees if they meet the criteria outlined in 26 USC § 4980H as added by PPACA § 1513(a).

6 77 Fed. Reg. 30377 (May 23, 2012) (to be codified at 26 CFR § 1.36B–0 et seq.).

7 26 USC § 7421(a).

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While states may not be in a position to delay decisions pending the outcome of this debate, they could change course at any time pending the future resolution of these issues.

17. Why would Tennessee make a choice on an exchange if we didn’t make a choice on the benchmark plan for the Essential Health Benefits (EHB) package?

The Governor noted in his letter to HHS Secretary Kathleen Sebelius dated September 30, 2012 that HHS provided no real meaningful choice or state flexibility regarding the EHB. For this reason, the Governor elected not to choose among the constrained set of options permitted by HHS. The decision regarding the insurance exchange – albeit still a constrained one - arguably involves a different level of state discretion and operational flexibility and could have a bigger impact on our citizens and state budget.

18. How much more control would Tennessee have in a state-based exchange compared to a federal exchange? What guarantees do we have that HHS will respect this?

First, the HHS final rule on qualified health plans8 allows state-based exchanges a broad degree of discretion in defining the criteria for qualified health plans. Indeed, the ability to set these criteria would help states ensure that local or “domestic” insurers are able to compete on a level playing field with the multi-state plans.

Second, HHS has also indicated that they will allow states broad discretion to pursue a “One Family, One Card” or bridge option to allow all members of a family the option to use the same network of health care providers even if they are eligible for different programs. Additionally, HHS has signaled that they will allow states the flexibility to design and implement market-based wellness programs.

Washington, DC will almost certainly have some power over a state-based exchange, and the key question to Tennessee is whether the amount of state flexibility here is worth the investment of time and talent to implement a state-based exchange.

19. Will the federal government be able to set up exchanges if a large number of states refuse to implement state-based exchanges?

Given its large budget and the private-sector talent that it has retained, the federal government will likely provide some limited form of an exchange.9 Due to the

8 77 Fed. Reg. 18310 (March 27, 2012) (to be codified at 45 CFR § 155.1000 et seq.). Accord PPACA § 1311(e).

9 One related note: the population (not just the number) of states that refuse to set up exchanges may be an important factor in the ability of the federal government to stand up exchanges. The federal government may soon reach “critical mass” in this regard: the New York Times reported that as of August 4, 2012, “Governors of 13 states with nearly one-third of the United States population have sent letters to the Obama administration saying they intend to set up exchanges.” See http://www.nytimes.com/2012/08/05/us/us-officials-brace-for-huge-task-of-running-health-exchanges.html?pagewanted=all&_r=0.

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aggressive implementation timelines, though, the federal exchange will likely not be the most efficient or effective – which may have fiscal implications to the TennCare program as described above.

20. Under what circumstances would individuals have to pay back the value of the tax credits?

Under the final IRS rules, individuals may have to pay back the full value of any advance payments of the tax credits that the federal government makes to an insurer on the individual’s behalf. This “claw back” provision applies to families who may have an income equivalent to below 400% of the federal poverty level when they apply for the tax credits but whose year-end incomes are above 400% of the poverty level. This IRS rule applies equally to federal- and state-run exchanges.10


  1. I certainly hope that the great Volunteer state will have NOTHING to do with Obamacare in ANY form. The very fact that people are mandated to violate their firm religious beliefs by financially supporting abortion, sterilization, etc. is reason enough. It is an unprecedented government action in American history and it MUST be strongly rejected.

    Again, we want NO part of this evil, incompetently constructed, financially unsustainable and unpopular law that was corruptly slammed through Congress with NO bipartisan support.


  2. The legislature needs to pass a bill that charges the costs of setting up and running the exchange to those people using the exchange. Don't allow for any exemptions on who pays so that everyone using the service will pay their fair share.


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