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legal solutions in health reform fall 2009 51

Health Insurance Exchanges:Legal Issues

executive summaryPrepared by the ONeill Institute

IntroductionHealth insurance exchanges (HIE) are entities thatorganize the market or health insurance by con-necting small businesses and individuals into largerpools that spread the risk or insurance companies,while acilitating the availability, choice, and purchaseo private health insurance or the uninsured. Whilethere are legal issues that warrant consideration undera ederal, state, or private exchange ramework, thoseissues are not insurmountable barriers to implemen-tation. The section below outlines the legal issues andsolutions or a health insurance exchange i admin-istered through the ederal or state government orthrough a private entity.

Federal ExchangesCongress has the power to implement an HIE at theederal level, but must consider certain laws and regu-lations during both design and implementation asoutlined below:

Interstate Commerce: The ederal govern-ment has the authority to regulate matters thatsubstantially aect interstate commerce. Whilethe power to regulate interstate commerce isnot unbounded, the power certainly extends toinsurance regulation.

Tax and Spending:

The ederal government cantax and spend or the general welare o citizens,thus Congress could use tax incentives and itsspending power to incentivize participation ina ederal exchange or to develop a play or payramework with the states.McCarran Ferguson Act: Congress speci-cally delegated the regulation o insurance to

the states. Thereore, Congress must clearly andexplicitly communicate its intention to preemptstate regulation o insurance in any insuranceregulation it legislates.Anti-commandeering: The ederal governmentis prohibited rom appropriating state ocialsto implement ederal laws. Thereore, a ederalHIE must not require implementation by stateemployees.Due Process and Equal Protection: Whenselecting insurers or inclusion in the exchange,the ederal government must act rationallywhen making legislative classications and dis-tinctions. This analysis will also apply to stateexchanges.

Takings Clause: Severe regulation o insurancehas in a ew instances been ound by the courtsto constitute a taking. This must be consideredwhen determining the limitations that will beplaced on insurance providers to encourageparticipation in the HIE. This analysis will alsoapply to state exchanges.Administrative Procedures Act: A ederal HIEmust comply with the standards and proceduresrelating to the reedom o inormation, recordsprivacy, and adjudication applicable to all ederalagencies.

Other Considerations:

A comprehensive reviewo the tax code, as well as employee benet andpublic health laws should be conducted once theederal HIE has been designed.


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State ExchangesThere are no insurmountable legal barriers to imple-mentation o HIEs at the state level. Certain Constitu-tional issues that apply equally to state exchanges havebeen analyzed under the ederal exchange rameworkand stated above.

State Administrative Procedures Acts: Most,

i not all, states have adopted legislation thatoutlines procedures or rulemaking, records pri-vacy, adjudication, tort claims and governmentcontracting. A state HIE must comply with exist-ing state law, but these laws must be analyzed ona state by state basis.Employee Retirement Income Security Act(ERISA): Federal law preempts any state lawthat relates to an employee benet health plan.A state HIE would only be preempted i partici-pation by employers is mandatory or i the staterequires action on the part o an employer.Health Insurance Portability and Account-ability Act (HIPAA): Existing ederal legisla-tion contains non-discrimination, guaranteedaccess and pre-existing condition requirementsthat may need to be met by a state exchangei it oers insurance to employment-relatedgroups.

Private ExchangesImplementation o a private HIE is not prevented byexisting state or ederal law.

Private Health Care Voluntary Purchasing

Alliance Model Act: A number o states haveadopted laws or regulations authorizing the

creation o private exchanges. Review o exist-ing laws would be required to ensure they ade-quately support a multi-insurer ramework.Antitrust Laws: Current ederal antitrustlaws prohibit unreasonable restraints o trade.States, however, are exempt rom antitrust lawand could extend this exemption to privateexchanges. Private exchanges can also be struc-

tured to avoid antitrust violations.Multiple Employer Welfare ArrangementRegulation (MEWAs): Membership and orga-nizational rules will determine whether the stateor ederal government, or both, regulates privateHIEs.HIPAA: The consumer saeguards providedby existing ederal legislation likely would notapply to HIEs unless a contractual relationshipwas established that identied the exchange as abusiness associate o insurers. Under this agree-ment, HIEs would be limited in their ability todisclose personal health data to employers.

ConclusionHealth insurance purchasing exchanges have been pro-posed as a possible means o making insurance moreaccessible, increasing competition among health plans,and promoting choice o insurer. President Obamascampaign proposal and various congressional lead-ers have proposed establishing insurance exchangesthrough ederal legislation. Although exchangesimplicate many design and policy issues regardless owhether they are implemented at a ederal, state, orprivate entity level, there are no absolute legal bars to

the establishment o health insurance exchanges.


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IntroductionThis Legal Solutions in Health Reorm paper iden-ties and analyzes the legal issues raised by healthinsurance exchanges. Like all Legal Solutions papers,it does not purport to provide a concrete proposal as tohow health insurance exchanges should be organizedor even whether they should play a role in health carereorm. Rather, it attempts simply to describe the legalissues that health insurance exchanges raise, and topropose alternative solutions to legal problems whereuseul. More specically, it analyzes and oers alterna-tive solutions to the legal problems raised by proposalsto establish insurance exchanges by the ederal gov-ernment, by state governments, and by private enti-ties or associations. Because the ocus o this project

and paper is on legal issues, discussion o policy anddesign issues is attenuated. Nevertheless, some atten-tion to policy issues is unavoidable because law is therealization o policy.

Health insurance exchanges are entities that orga-nize the market or health insurance, much like stockexchanges do or securities or armers markets orproduce. They are intended to acilitate the avail-ability, choice, and purchase o private health insur-ance plans or individuals and the employees o smallgroups. They are usually government or non-protinstitutions, but can be operated by the state or ed-

eral government or by private business associations oreven by businesses.1Health insurance exchanges have been widely dis-

cussed as a solution to problems in the market or pri-vate health insurance. They gure prominently in thereorm campaign plan proposed by President Obama,

while a health insurance exchange, the Connector,is at the heart o the much-discussed Massachusettshealth reorm program.2 The bipartisan Wyden-Bennett health insurance plan also relies on healthinsurance exchanges to organize the health insurancemarket. Another bipartisan bill, the Small BusinessHealth Options Program Act o 2008 (S. 2795), hasbeen introduced specically to establish a nationwidehealth insurance purchasing pool.3

At a minimum, exchanges centralize individualhealth plan enrollment and premium payments. Theyalso provide inormation about insurance plans tothose who purchase insurance through them, thuspermitting individuals to compare the products o anumber o insurers and to choose the best product

or their needs. Exchanges can be used to acilitateemployer payment or insurance premiums, includ-ing direct payments by individuals and paymentscollected by employers rom employees through tax-advantaged Section 125 caeteria arrangements ornon- tax-advantaged payroll deductions.4 They couldalso be used to acilitate the use o tax credits to pur-chase insurance. Some authors would limit exchangesto these unctions, and indeed dene exchanges inthese terms.5

Other advocates would, however, give exchangesadditional, more regulatory, responsibilities. Exchanges

can, or example, dene the benets that participat-ing plans must cover or speciy the rating practicesthat they must ollow with respect to exchange pur-chasers. The Obama campaign health plan would,or example, establish a national exchange to, act asa watchdog group and help reorm the private insur-ance market by creating rules and standards or par-ticipating insurance plans to ensure airness and tomake individual coverage more aordable and acces-

Timothy Stoltzfus Jost, J.D., is the Robert L. Willett FamilyProessor at Washington and Lee University School o Law.

Health Insurance Exchanges:Legal IssuesTimothy Stoltzus Jost


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sible.6 The Obama exchange proposal would requirethat all the plans oered are at least as generous asthe new public plan and have the same standards orquality and eciency.7 It would also evaluate plansand make the dierences among the plans, includingcost o services, transparent.8 The State Health HelpAgencies included in the proposed Wyden-BennettHealthy Americans Act would be required to develop

standardized language or HAPI [Healthy AmericanPrivate Insurance] plan terms and conditions andrequire participating health insurance issuers to usesuch language in plan inormation documents, as wellas to ensure that plans ollow the rating rules providedby the Act.9 The Massachusetts Connector, the mostprominent currently existing example o an insuranceexchange, also has extensive regulatory responsibili-ties, as described below. An exchange with regulatoryresponsibilities would look very much like the healthalliances proposed by the Clinton Health Security Actor like various proposed purchasing cooperatives orlike those created by the states during the 1990s.

In this paper, I will use the term exchange broadlyto cover a range o entities, public and private, that (1)acilitate the purchase o private insurance plans byindividuals and employees, and (2) make available tothese individuals and employees a choice o a rangeo insurance plans. I include exchanges that perormadditional regulatory unctions.10

The best known contemporary model o a healthinsurance exchange is the Massachusetts Connector,a model that is being considered by a number o otherstates.11 The Massachusetts Connector is a quasi-publicauthority governed by a ten-member board, with three

members appointed by the governor, three membersappointed by the attorney general, and our memberswho serve by virtue o their government positions.12The Connectors responsibilities include the ollow-ing: (1) acilitating the purchase o insurance by indi-viduals and small groups (o 50 or ewer members) byproviding a centralized exchange or the purchase oapproved health insurance products and by collectingpremium payments rom individuals and employersand remitting these to insurers; (2) dening the crite-ria that insurance products must meet to oer mini-mum creditable coverage or purposes o the states

legal mandate that individuals purchase such cover-age; (3) administering the new Commonwealth CareHealth Insurance Program or lower-income Mas-sachusetts residents; (4) certiying i uninsured resi-dents are unable to nd insurance they can aord orpurposes o being excused rom the individual man-date; (5) establishing regulations or the 125 caete-ria arrangements that employers must establish underthe Massachusetts reorm; and (6) oering insurance

at reduced rates or uninsured young adults betweenthe ages o 18 and 26.13

Although some market advocates have hailed insur-ance exchanges (including the Connector) as a privatemarket solution to the problems o health care cost,access, and quality, the Connector is in act a quasi-government agency and many o its unctions areregulatory. Moreover, the Connector has ewer regula-

tory responsibilities than might have been necessaryto ensure a unctioning insurance exchange in otherstates because the health insurance market in Mas-sachusetts was already heavily regulated beore theConnector was established. Even beore the recentreorms, the insurance market in Massachusetts wassubject to guaranteed issue requirements, modiedcommunity rating with no medical underwriting, alengthy list o mandates, and a history o regulatorsreusing to approve high cost-sharing, low-beneitproducts (or which, in any event, there seemed to belittle consumer demand).14

The Massachusetts Division o Insurance, ratherthan the Connector, continues to enorce these require-ments. The Massachusetts reorm also instituted anindividual mandate, which plays a key role in control-ling adverse selection against the Connector.

The extent to which exchanges act as regulatorsis only one o the ways in which exchanges can vary.Another very important variable is whether they areestablished at the ederal, state, or local level. TheObama campaign proposal contemplates a nationalexchange as does the Small Business Health OptionsProgram Act o 2008 (S. 2795), while the Wyden-Bennett proposal and state initiatives like the Massa-

chusetts Connector locate exchanges at the state level.Additionally, private exchanges have been establishedby employers or by business coalitions.15 Althoughprivate exchanges lack regulatory authority, they havetheir own purported advantages more fexibility inhiring and ring and the capacity to react more rap-idly to changing conditions, or example.

With the election o President Obama, who cam-paigned on a platorm o health reorm, and strongDemocratic majorities in both the House and Sen-ate with leaders committed to health care nancingreorm, there is the real possibility o health reorm

legislation at the ederal level. I we were assured thatCongress would adopt legislation creating a nationalinsurance exchange, this paper could be very short.The only legal limit on the ability o Congress to adoptlegislation is the Constitution, and as will be discussedshortly, the Constitution imposes minimal constraintson the ability o Congress to act in this area. Congresswould ace serious policy and design problems in cre-


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Timothy Stoltzus Jost

ating a national insurance exchange program, butthose issues are not the ocus o this paper.

It is important to remember, however, that we havebeen to the precipice o health insurance reorm beore,and Congress has not jumped.16 It is possible that thecurrent economic crisis or other pressing policy pri-orities will delay or even derail health care nancingreorm. Were that to happen, the states would have to

take the initiative, as some o them are doing now. Con-gress could remove some o the legal impediments thatnow limit state reorms. Steps it could take to acilitatethe creation o insurance exchanges by the states aredescribed below. But Congress might not even do that,leaving the states to navigate around existing law. Thestates, moreover, are acing their own scal crises, andmany may take no action on their own i Congress ailsto act. This could leave the private sector to take theinitiative, and to nd its way through the constraintso both ederal and state law.

This paper will proceed to explore the legal issuespresented by the range o possible utures o healthcare nancing reorm. It will rst explore the limitsthat the law (primarily the Constitution) imposes onederal attempts to establish purchasing exchanges.Second, it will examine the constraints that ederal lawimposes on states that choose to establish insuranceexchanges, considering both what Congress could doto remove these impediments and how the states candeal with them i Congress ails to act. Third, it dis-cusses the legal constraints that the law imposes on pri-vate insurance exchanges. Although these constraintsare imposed both by ederal and state law, this paperwill ocus on the issues raised by ederal law, noting

that state law is varied and any concrete proposal or aprivate exchange would need to be analyzed in detailunder the laws o the particular state in which it wasto be operated. Finally, the paper will summarize thesolutions it has suggested to the legal problems that ithas identied.

I. Federal Insurance ExchangesOne possible approach, ound in the Obama campaignplan, would be to establish a purchasing exchange atthe ederal level. Ensuring that health insurance isuniormly available across the country would be valu-

able in itsel, and a national exchange could eectivelyaddress the problems o adverse and avorable selec-tion issues that are the central conundrums o healthinsurance reorm by creating massive risk pools. Buta single national exchange could also pose seriousadministrative problems, particularly since there islittle expertise in regulating insurance at the nationallevel. It is quite possible, thereore, there would notbe one central exchange under a national reorm pro-

gram, but rather numerous exchanges established atthe state or regional level. This is the solution that hasbeen reached in regionalizing other ederal programs.Examples o regional entities that have adminis-tered ederal programs include Medicare contractors,Medicare Peer Review Organizations, and the HealthSystems Agencies that were established under theNational Health Resources and Development Act in

the 1970s. Congress might even attempt to require thestates themselves to establish purchasing exchanges.O course, a single national exchange is not an impos-sibility. The Federal Employees Health Benets pro-gram and the Medicare Advantage program are bothadministered at the national level.

Were a national plan to be established, it wouldace dicult design issues. Such issues would includethe ollowing: (1) determining the regions exchangeswould cover, speciically whether they would berestricted by state lines or cover regions or multi-state metropolitan areas unctioning like a singlemarket; (2) the administrative relationship betweenexchanges and the central government, and whetherthe exchanges would be administered by private con-tractors (as in Medicare) or ederal/state entities; and(3) the level o uniormity that would be required inthe system, specically whether premiums, coverage,and eligibility requirements would be the same acrossthe country.17 I ocus here, however, on legal ratherthan design problems.

A. Federalism IssuesFirst, implementation o a ederal insurance exchangewould require resolution o ederalism issues. The rst

o these is the question o whether the ederal gov-ernment has the constitutional authority to regulatehealth insurance contracts, i.e., whether the sale oinsurance contracts constitutes interstate commerce.The Supreme Court decided in 1944 that the ederalgovernment may constitutionally regulate insurance,18and although there have been intervening decisionsindicating that the ederal governments interstatecommerce authority is not unbounded, that powercertainly extends to insurance regulation.

Congress would also need to consider the McCa-rran-Ferguson Act. In response to the Courts rec-

ognition in the 1940s that Congress had the powerto regulate insurance contracts, Congress adopted astatute providing that regulation and taxation bythe several States o the business o insurance is inthe public interest, and that silence on the part o theCongress shall not be construed to impose any barrierto the regulation or taxation o such business by theseveral States.19 This means that Congress should notbe considered to have preempted or superseded state


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law in the area o health insurance unless it does soexpressly. This does not limit the power o Congress tocreate ederal insurance exchanges; it merely meansthat Congress would have to do so explicitly.

Congress might attempt to implement a ederalexchange program through the states, thus takingadvantage o the insurance regulation institutions andexperience o the states. In doing so, it would need to

be mindul o the limitations the Constitution placeson the power o the ederal government to control thestates. The Constitution has been interpreted to pre-clude Congress rom passing laws that commandeerthe authority o the states or ederal regulatory pur-poses.20 That is, Congress cannot require the states toparticipate in a ederal insurance exchange programby simple at. This limitation, however, would notnecessarily block Congress rom establishing insur-ance exchanges. Congress could invite state participa-tion in a ederal program, and provide a ederal all-back program to administer exchanges in states thatreused to establish complying exchanges.21 Alterna-tively it could exercise its constitutional authority tospend money or the public welare (the spendingpower), either by oering tax subsidies or insuranceonly in states that complied with ederal requirements(as it has done with respect to tax subsidies or healthsavings accounts) or by oering explicit payments tostates that establish exchanges conorming to ederalrequirements.22

B. General Constitutional Constraints(Which Apply Also to State Insurance Exchanges)In addition to ederalism issues, there are a variety o

general constitutional issues that would aect gov-ernment exchanges. These issues would also applyto state and ederally established exchanges, but arediscussed only in this section to avoid duplication.One o the unctions that an insurance exchange mustulll is deciding which insurers can sell their prod-ucts through the exchange. Five possibilities here arereadily apparent. First, an exchange could allow anyinsurer to sell its products through the exchange thatwanted to do so. Second, the exchange could permitall insurers to participate that agreed to comply withcertain standards to sell their products, eectively an

any willing provider approach. Third, the exchangecould negotiate with insurers and only allow those toparticipate that concluded satisactory negotiations tooer their products through the exchange. Fourth, theexchange could decide to limit the number o insurersallowed to oer their products through the exchange,and then devise a process or deciding which insurerswould make the cut-o, and which would not. Finally,the state could not only bar some insurers rom the

exchange, but limit all insurance purchases (perhapsin the individual and small group market) to insurersparticipating in the exchange, eectively prohibitingany residents o the state rom purchasing insurancerom non-participating insurers.

One o the primary advantages o an exchange is thatit permits choice o insurers, particularly or employ-ees o small businesses. Allowing broad participation

o insurers, thereore, would seem desirable. On theother hand, another ideal that grounds health insur-ance exchanges is that o organizing or structuringcompetition among insurers. Indeed, there is someevidence that too many choices can be conusing toconsumers.23 Thus, it might make sense or exchangesto limit the number o insurers and participating plansand to structure competition among those insurers.Indeed, insurers might be prohibited rom selling pol-icies to individuals or small groups except through theexchange. Insurance exchanges might also be requiredto regulate the rating practices or benet packages oinsurers who sell policies through them, thus limitingparticipating insurers to those that accept limitationson these practices.

I insurance exchanges are government-run or spon-sored, their exclusionary or regulatory interventionsmay raise constitutional issues.24 The Due ProcessClause o the Constitution requires the governmentto act rationally when it engages in social and eco-nomic regulation, while the Equal Protection Clauserequires the government to make rational legislativeclassications and distinctions. The U.S. Constitutionand most states constitutions prohibit the taking oprivate property or public use without just compen-

sation. Finally, state governments are under an addi-tional constraint o the Contracts Clause o the U.S.Constitution prohibiting states rom adopting lawsthat impair the obligation o contracts.25

Government regulation o economic conduct isacceptable under the Due Process and Equal Protec-tion clauses as long as it bears a rational relationshipto a legitimate government interest.26 Similarly, theContracts Clause challenges will not succeed unlessa challenged regulation substantially impairs a con-tractual relationship, does not promote a signicantand legitimate public interest, and is based on unrea-

sonable conditions unrelated to the public purpose.27

Finally, a regulatory law can be challenged under thetakings clause, which bars the government rom tak-ing private property or public use without just com-pensation, i the law goes too ar in the severity o itsimpact and in rustrating distinct investment-backedexpectations.28

Insurance has long been a heavily regulated indus-try, and constitutional challenges to requirements


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imposed by an exchange through regulation or nego-tiation are unlikely to succeed unless the requirementsare wholly irrational.29 Courts have repeatedly rejectedconstitutional challenges to state insurance mandates,including statutes requiring insurers to provide mater-nity coverage30 and coverage or mental disorders.31 Inthe one reported constitutional case actually involvingan insurance purchasing exchange, a ederal court in

Kentucky rejected Due Process and Commerce Clausechallenges brought by an insurer against a statutoryrequirement that insurers oer only standard plansapproved by a health policy board.32 State statutes thatspecically restrict participation in markets by insur-ers have also been upheld.33 In analogous areas, courtshave upheld the constitutionality o certicate o needprograms, which prohibit private health care provid-ers rom entering markets or expanding their marketparticipation without permission rom the state,34 aswell as ederal Medicare amendments that prohibitphysicians rom selling their services to Medicare ben-eciaries outside o the Medicare program unless thephysician let the Medicare program or two years.35

Probably the category o constitutional challengesmost likely to succeed against reorm laws establishingexchanges are those brought under the Takings Clause.To this point, all such challenges have been broughtagainst state rather than ederal insurance regulation,although the Takings Clause applies equally to bothederal and state governments. In a number o cases inrecent years particularly, severe state laws regulatinginsurance have been successully challenged under theTakings Clauses o the U.S. or o state constitutions,prominently among them laws rolling back or reez-

ing rates, requiring insurers to und residual marketsusing prots rom other states or lines o business, orrestricting insurers rom exiting markets.36

The success o these challenges, however, seemsto be speciic to particular jurisdictions. For eachinstance in which a challenge has succeeded againsta particular kind o law, similar laws in other jurisdic-tions have survived similar constitutional challenges.For example, in a case involving New Yorks attempt tocreate a risk pooling mechanism, a court observed thatan insurer has no constitutionally protected interestin maintaining a healthier than average risk pool.37

As insurers ace increasingly comprehensive regula-tion analogous to that traditionally aced by publicutilities, a body o ederal or state constitutional lawmay evolve providing insurers the right to make a justand reasonable return on their investment like thatcurrently claimed by public utilities.38 It remains true,however, that government retains considerable discre-tion in regulating a wide range o insurer behavior.

Congress must take care that any insurance exchangeprogram it initiates and operates is non-discrimina-tory and does not engage in conscatory regulation. Itis unlikely that the Constitution will, however, provea signicant barrier to the development o reasonableinsurance exchanges.

C. Other Legal Issues Raised by Federal Insurance

ExchangesAn insurance exchange established by ederal law willpresumably be an agency subject to the Administra-tive Procedures Act, including provisions relating tothe reedom o inormation, records privacy, openmeetings, rulemaking, adjudication, and judicialreview.39 Certain aspects o the program might also besubject to the Federal Acquisitions Regulations pro-mulgated pursuant to 41 U.S.C. 405, which governederal purchases o products and services. These pro-visions would need to be considered in designing theexchange.

I Congress were to create ederal purchasingexchanges, then it would also need to amend a num-ber o ederal laws to clariy the relationship betweenederal and state regulatory power. The most obvi-ous o these would be the Employee Income Retire-ment Security Act o 1974, which is discussed below.Once the design o a ederal insurance exchangebecame clear, a comprehensive review o the ederaltax, employee benet, and public health laws wouldbe necessary to ensure that they properly refected thebalance o ederal and state regulatory power contem-plated by the purchasing exchange program.

II. State Insurance ExchangesA. Constitutional LawThe constitutional law issues that aect state insur-ance exchanges were discussed in the previous sectionand will not be repeated here.

B. Governance IssuesI an exchange is established as a state agency, it willbe subject to state administrative law. About two-thirds o the states have adopted some version o theModel State Administrative Procedures Act (APA).The Model State APA prescribes procedures or rule

making, adjudication, and judicial review. Each statealso has an open meetings and reedom o inormationstatute.40 State-run insurance exchanges will presum-ably be subject to these laws unless they are speci-cally exempted by statute.41 They will also presum-ably be subject, like other state agencies, to state lawsaddressing civil service, government contracting, andgovernment tort claims. These laws vary rom state tostate, and cannot be discussed in detail here.


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Another issue that will have to be addressed is howa state insurance exchange interaces with other stateagencies. This is primarily a design issue, but willrequire the drating o new laws or the amendment oexisting laws or implementation. The MassachusettsConnector was established as an independent author-ity, but the Massachusetts Division o Insurance con-tinues to regulate health insurance plans generally,

while the Department o Finance is responsible orenorcement o the individual mandate. The NationalAssociation o Insurance Commissioners (NAIC) hasadopted both a Single Health Care Voluntary Purchas-ing Alliance Model Act (78-1) and a Regional HealthCare Voluntary Purchasing Alliance Model Act (80-1), which presents the states with dierent options orcreating exchanges at the state or regional level. Thesestatutes would place regional alliances under the statecommissioner o insurance, but establish a separatestate agency or the single state exchange authority.The Single State Exchange Model Act states in a drat-ing note,

This Act establishes the purchasing alliance as astate agency. However, states may wish to establishthe purchasing alliance as a state-chartered non-prot organization. States may also consider estab-lishment under an existing state agency such as theoce o commissioner.42

States will also have to coordinate between the pur-chasing alliance and other state agencies, including:(1) the agency responsible or the Medicaid and StateChildrens Health Insurance Program, i Medicaid or

SCHIP recipients are covered through the purchas-ing pool; (2) the entity that purchases care or stateemployees or retirees, i state employees or retireesare covered through the purchasing pool; (3) thestate health insurance assistance program; and (4)any separate agency that regulates managed care, iapplicable.

C. Issues Raised by Federal LawI health insurance reorm proceeds primarily at thestate rather than the ederal level, the states will needto come to terms with ederal laws that limit their

options. To date, as noted above, insurance regulationhas primarily been the responsibility o the states. Con-gress has, however, adopted a number o laws partiallypreempting state authority over health insurance, par-ticularly in the area o employee benets. I the ederalgovernment assumes responsibility or health carenancing or its regulation, these laws will presumablybe repealed or comprehensively amended to transerthe responsibility o insurance regulation rom the

states to the ederal government. I Congress decidesrather to leave health reorm to the states, Congresscould repeal or amend these laws to aord the statesthe reedom to enact their own reorm programs. ICongress does nothing, the states will have to adapt tothese laws as they exist. This section explores the lattertwo possibilities.

1. employee retirement income security actof 1974 preemption

In general, preemption is a legal principle that barsstate regulation o a subject i ederal law expresslyprecludes state regulation, i the state regulationwould confict with ederal law, or i the ederal gov-ernment comprehensively regulates an area o activ-ity, thus excluding state regulation. For example, theEmployee Retirement Income Security Act (ERISA)regulates the administration o employer-sponsoredbenet plans including health benets. One o theissues that state-established exchanges ace is the pos-sibility o ERISA preemption that is that the ederalERISA statute will bar states rom establishing andoperating insurance exchanges in the manner theywould preer. The general law o ERISA preemption isully addressed in another Legal Solutions in HealthReorm paper authored by Peter Jacobson. Theimportance o ERISA, however, justies some consid-eration here. ERISA is also discussed urther in thenext section with respect to the question o whetherits multiple employer welare arrangements (MEWA)provisions aect private plans.

Section 514 o ERISA explicitly preempts any statelaw that relates to an employee benets plan.43 The

Supreme Court has interpreted this provision to meanthat any state law is preempted that has a connectionwith or reerence to a benets plan.44 Although ERISAalso provides that state laws that regulate insuranceare saved rom preemption, it urther stipulates thatstates may not regulate sel-insured insurance plans.Finally, section 502 o ERISA has been construed bythe Supreme Court to preclude any state judicial rem-edies against ERISA plans.45

In the insurance exchange context, ERISA preemp-tion is likely to be an issue only with respect to statelaws that seek some way to compel an employer to

establish an employee benet plan or to compel anemployee benet plan to participate in an exchange. Itshould not aect state insurance exchanges in whichparticipation is strictly voluntary and which do notrequire action to be taken by either an employer or anemployee benets plan. ERISA would also not aectprivate exchanges that do not have legal authority torequire employers or benet plans to participate.46ERISA explicitly saves rom preemption state laws


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regulating insurance,47 and thus ERISA would notlimit a states ability to require insurers to sell theirproducts through an insurance exchange or to regu-late the products insurers sell through exchanges. Thisis consistent with the long-standing policy o Con-gress, articulated in the McCarran-Ferguson Act, toleave the regulation o insurance to the states. ERISAshould also not preclude a state rom requiring indi-

viduals to purchase insurance through an insuranceexchange.48

ERISA, however, does impose signicant limitationson the states. ERISA almost certainly prohibits statesrom requiring any employer oering health benetsto provide those benets through an exchange. Sucha law would be seen as a law relating to an ERISAbeneits plan, preempted by ederal law.49 ERISAmight also preclude states rom imposing a require-ment directly on employers who do not currentlyprovide health insurance benets to begin providinghealth insurance through an exchange or to pay anassessment to the state. Federal courts are now spliton the question o preemption o state pay or playlaws and the enorceability o such laws may turn ontheir precise provisions.50 Finally, it would be unwiseor a state insurance exchange statute to explicitlymention ERISA plans lest it all aoul o the reerenceto prohibition. In one case, or example, the SupremeCourt held that a state law prohibiting garnishmento ERISA benets to be preempted because o theexplicit reerence to ERISA plans in the law.51

One unsettled issue is whether ERISA would pro-hibit states that establish insurance exchanges romrequiring employers who do not otherwise oer health

insurance to orward payments, taken out o theiremployees wages on a payroll deduction basis, to theexchanges, through a section 125 Caeteria arrange-ment.52 A section 125 Caeteria arrangement allowsan employer to withhold a sum o money specied bythe employee on a pre-tax basis rom an employeeswages, and allows the employee to use that money topurchase certain specic benets.53 States consideringhealth insurance reorm in general and health insur-ance exchanges in particular have ound the section125 option o particular interest. Specically, the sec-tion 125 option allows employees to obtain ederal

tax subsidies or their own expenditures so that theycan purchase insurance through an exchange, assum-ing that ERISA does not allow the states to requireemployers to oer their employees health insurancepurchased through an exchange. The Massachusettslaw, as noted above, requires employers with morethan 11 workers (under the threat o a penalty i otherconditions are met) to establish section 125 arrange-ments or their employees, through which unds may

be channeled to the Connector to purchase healthinsurance.

As discussed below, it is arguable that a section125 arrangement is a group health plan under theInternal Revenue Code. It could be argued by exten-sion that it is also an ERISA plan, and thus thatERISA prohibits states rom requiring employers toestablish section 125 Caeteria arrangements through

which employee contributions can be channeled toinsurance exchanges. There are, however, convinc-ing arguments that section 125 arrangements are notERISA plans. First, ERISA denes an employee ben-ets plan as a plan established or maintained by anemployer.54 In several instances, courts have oundthat an ERISA plan did not exist when employerssimply assisted employees in paying individual healthor disability insurance premiums rom the employeesown unds without urther involvement in the insur-ance relationship.55

Second, the Labor Department regulations estab-lish a sae harbor that excludes rom the ERISA plandenition group or group-type insurance arrange-ments i ve conditions are met: (1) the employer doesnot contribute its own unds; (2) employee participa-tion is voluntary; (3) the employer does not endorsethe arrangement; (4) the employer does nothing morethan to allow an insurer to publicize the arrangementto employees and to collect premiums through payrolldeductions; and (5) the employer receives no consid-eration beyond reasonable compensation or adminis-trative services.56

There are dozens o cases litigating the applicationo this sae harbor to particular arrangements, usually

in the context o an insurer seeking the protection oERISA preemption against a state law claim broughtby an aggrieved member. This litigation generallyocuses on the third sae-harbor criterion the prohi-bition against endorsement by an employer. The casestend to hold that i an objectively reasonable employeewould conclude that an employer has not simply madea plan available, but has also exercised control overthe plan or made it appear to be part o the employersown benet package, the arrangement will be consid-ered an ERISA plan. I an employer becomes activelyinvolved in the promotion or administration o a plan

unded through a section 125 arrangement, courts arelikely to nd the plan to be an ERISA plan on employerendorsement grounds.57

I, on the other hand, an employer simply col-lects premiums rom employees on a payroll deduc-tion basis and orwards them to insurers, then courtsshould nd that no ERISA plan exists.58 I a section 125Caeteria arrangement exists solely by operation o astate law requirement, and the employer has taken no


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action to endorse the purchase o insurance throughthe arrangement other than to comply with state law,it is dicult to see why the arrangement would nott within the ERISA sae harbor.59 The argument thatan employer has not endorsed a plan would be par-ticularly strong i a state directed employee unds col-lected under a section 125 arrangement to a purchas-ing exchange rather than to a particular insurance

plan, as the employee and not the employer would bechoosing the employees insurance plan through theexchange.60

Third and nally, the only Department o Laboradvisory opinion examining the question o ERISAand section 125 arrangements concluded that a sec-tion 125 arrangement was not the equivalent o theprovision o a benet enumerated under the ERISAdenition o an ERISA plan.61 Thus, a state require-ment that employers allow their employees to pay orhealth benets through a state insurance purchasingexchange by way o a section 125 arrangement wouldnot seem to be preempted by ERISA.

Congress could, o course, amend section 125 othe Tax Code and ERISA to clariy that the states canrequire employers to establish section 125 arrange-ments to allow employees to purchase individualhealth insurance policies, including policies purchasedthrough a state-sponsored health insurance exchange.The Department o Labor could probably accomplishthe same end through an administrative regulation orruling, given the uncertainty in this area. Alternatively,Congress could simply extend the tax subsidies cur-rently oered in employment-related health insuranceto individual insurance, which would obviate the need

or section 125 arrangements. In the absence o anyamendments in the ederal law, however, it appearsthat the states are permitted to require employers toestablish section 125 plans or the purchase o insur-ance through health insurance exchanges, as Massa-chusetts has done.

2. the health insurance portability and

accountability act

The application o another ederal law, the insuranceportability provisions o the Health Insurance Porta-bility and Accountability Act (HIPAA), raises other

legal issues that would aect the implementation oan insurance exchange at the state level. The specicissue is whether an arrangement where an employerpays insurance premiums or its employees throughan insurance exchange creates a group health planunder HIPAA.

HIPAA prohibits group health plans and healthinsurance issuers rom discriminating on the basis ohealth status in determining eligibility or premiums

or members o group health plans. HIPAA imposedthese requirements through amendments to ERISA,the Public Health Service Act, and the Internal Rev-enue Code (the Tax Code), all o which are quite simi-lar.62 These provisions eectively require guaranteedissue and community rating to individuals withingroup health plans without regard to health status. IHIPAA applies to purchases o insurance or employ-

ees through an insurance exchange, insurers would notbe able to underwrite individual employees who pur-chase insurance through the exchange separately, butwould need to oer insurance to all otherwise eligibleemployees o any single employer and oer them thesame rate. Other provisions o HIPAA require guar-anteed issue and renewal or group plans and limitthe use o preexisting conditions clauses within groupplans.63 These provisions would also apply i employeeso a single employer who purchase insurance throughan exchange were treated as a single group. The appli-cation o HIPAA to state health insurance exchangeswould not preclude the creation o exchanges, but itwould have clear implications or their design. Insteado simply acilitating the purchase o individual insur-ance policies through a coordinated market, exchangeswould rather be coordinating the sale o policies toemployment-related groups (in addition to individu-als who were not employed).

The ERISA provision o HIPAA, 29 USC 1182,adopts the ERISA denition o group health plandiscussed above, under which the key question iswhether the plan is established or maintained bythe employer.64 I an employer pays part o the costo the premium or in some other way endorses a plan

purchased through an exchange, then HIPAA wouldapply and the above requirements would apply to theplan purchased through the exchange. This is trueeven though the employer pays or separate individ-ual policies or each employee, a so-called list bill-ing arrangement.65 I an employer, however, neithercontributes to the cost o insurance or employees norendorses a plan, it would then seem that policiespurchased on a payroll deduction basis (or example,through a section 125 arrangement) would not be sub-ject to the HIPAA non-discrimination, small groupcoverage, or pre-existing conditions rules under the

ERISA statute, but would simply be individual insur-ance policies.66The HIPAA requirements, however, are also ound

in the Tax Code, which incorporates the Tax Code de-nition o group health plan. The Tax Code denes theterm group health plan somewhat dierently thandoes ERISA. It denes a group health plan as a plan(including a sel-insured plan) o, or contributed to by,an employer (including a sel-employed person) or


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employee organization to provide health care (directlyor otherwise) to the employees (emphasis added).67This deinition raises issues i a state attempts torequire employers to und health insurance pur-chases by requiring employers to establish section 125arrangements.

Section 125 regulations recently proposed by theDepartment o the Treasury explicitly permit payment

o individual health insurance premiums rom a sec-tion 125 arrangement, either directly to the insurer oron an indemnity basis to the employee, suggesting thatthe individual policies do not become group policiessimply because the employer collects and remits pre-mium payments.68 Section 125, however, only exemptsrom taxation expenditures or qualied benets, i.e.,benets otherwise exempt rom taxation under othersections o the Tax Code.69 The relevant provision othe Tax Code exempting health benets is section 106,which excludes employer-provided coverage.

Arguably, thereore, insurance provided through asection 125 arrangement is a group health plan underHIPAA because it is employer-provided. It can alsobe argued that a section 125 arrangement is a grouphealth plan because it is unded by an employer con-tribution, because the statute provides that unds in asection 125 arrangement are not part o an employeesgross income, and thus might be considered undscontributed by an employer. The IRS has inormallytaken the position that the use o section 125 arrange-ments to purchase individual policies makes themgroup policies or purposes o the Tax Code, and thusor the HIPAA provisions o the Tax Code.70 In thisview, insurance policies purchased by employees o a

single employer through an insurance exchange withthe unds provided under a section 125 arrangementwould have to comply with the HIPAA non-discrim-ination, guaranteed access and renewability, and pre-existing conditions requirements o HIPAA.

The entire issue o the application o HIPAA isavoided, o course, i a state itsel requires commu-nity rating, guaranteed issue and renewal, and limitspre-existing conditions clauses rom insurers oer-ing insurance through an insurance exchange. Fed-eral requirements under HIPAA would, in that case,be superfuous. Congress could also amend HIPAA

to clariy either that HIPAA does or does not apply toinsurance policies purchased through exchanges withsection 125 unds. The Internal Revenue Service couldalso possibly clariy this issue through a regulationor some other orm o guidance. Alternatively, Con-gress could simply extend the requirements o HIPAAto all health insurance policies. I Congress does notchange the law, however, and a state allows insurers tounderwrite and rate individuals covered through the

exchange individually, it would seem that the insurerswould not be able to do so within ERISA group healthplans and within groups o individuals whose premi-ums are paid by a single employer through a section125 arrangement.

D. State Regulation o Underwriting, Premiums,and Benets

States that regulate non-group insurance or insuredERISA plans are permitted to regulate insuranceunderwriting, premium rates, and benets. Most statesdo so to a greater or lesser extent.71 States, or example,require insurers to guarantee coverage and renewalto small groups (implementing HIPAA), while somestates go urther, requiring insurers to oer commu-nity rates to small groups or individuals or limit thedispersion o rates through rating bands. States alsorequire insurance plans to cover specic benets, pro-viders, and eligible individuals. The extent to whichstates regulate underwriting, premium rates, and ben-et coverage is a matter o public policy rather thanlaw. The policy arguments or and against underwrit-ing, rating, and benet coverage mandates are wellknown (and passionately asserted), and will not berepeated here.72 Since these orms o regulation mustbe implemented by state law, however, they will beaddressed briefy here.

States that create public or authorize quasi-publicpurchasing exchanges can apply underwriting, rat-ing regulation, and coverage mandates either gener-ally to the entire insurance market or only within thepurchasing exchange. A state is ree to make its ownpolicy choices in determining which approach to take,

as long as it does not attempt to apply such laws tosel-insured ERISA plans or permit the violation oHIPAA requirements with respect to group plans.

I a state attempts to apply underwriting and rat-ing requirements within an insurance exchange thatare not applied generally in the relevant market,or attempts to impose benet mandates within anexchange that are not imposed generally, it exposesthe exchange to adverse selection, which might makethe arrangement untenable.73 I insurers are allowedto underwrite in the market generally, but not withinthe insurance exchange, the exchange may in eect

become a high-risk pool. I insurers are required tocommunity rate within the insurance exchange but nototherwise, they may not participate in the exchange. Istates require insurers to oer more generous benetswithin the exchange than they can outside o it, therates or exchange products may become compara-tively unattractive.

Community rating is not the only available strategyto make insurance purchased through an insurance


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exchange aordable to persons with poor risk pro-les. An insurance exchange could also, or example,collect premiums (and tax credits or other orms opublic insurance vouchers) and then pay out premi-ums on a risk-adjusted basis, as Medicare does withMedicare Advantage and the Part D drug beneitplan premiums. Alternatively, insurers selling theirproducts through the risk pool could be required to

participate in a risk reinsurance pool, so that planswould not be disadvantaged by taking higher riskinsureds. Third, a public reinsurance program couldbe provided to backstop insurers who cover the high-est risks.74 Fourth, the simple imposition o an indi-vidual mandate could create a large enough risk poolthat insurers would be comortable taking on greaterrisk exposure. Finally, simply providing substantialstate subsidies or individuals who purchase insurancethrough an exchange (but not otherwise) would go artoward reducing adverse selection against exchangeinsurers. Each o these solutions, however, may createadditional responsibilities or exchanges.

III. Private ExchangesI exchanges are created neither by the ederal norstate government, but rather privately by businesscoalitions or groups o employers, they ace a dier-ent set o legal issues.75 These entities must complywith state laws regulating insurance. The NAIC hasa Private Health Care Voluntary Purchasing AllianceModel Act,76 and a number o states have adoptedlaws or regulations authorizing the creation o insur-ance exchanges.77 State insurance laws regulating asso-ciation health plans should also be reviewed to deter-

mine i they aect particular arrangements, althoughexchanges should be distinguishable rom AssociationHealth Plans (AHPs) because exchanges oer a choiceo a number o insurers while AHPs usually provideinsurance themselves either through sel-insurance orby contract.78 Some states prohibit list billing, whichcould close o one approach to unding employeehealth care through purchasing exchanges.79

Exchanges would, moreover, have to comply withtheir contractual obligations and could ace claimsunder business torts. Both regulatory and commonlaw vary rom state to state, and a 50-state survey o all

state insurance regulations that might aect an insur-ance exchange would be less productive than ocusedanalysis o an actual proposal in its own state environ-ment. There are three ederal laws that would aectprivately operated purchasing exchanges, however:the antitrust laws, ERISA provisions regulating mul-tiple employer welare associations (MEWAs), and theHIPAA privacy regulations. These will be briefy con-sidered here.

A. Antitrust LawSection one o the Sherman Antitrust Act prohib-its every contract, combinationor conspiracy inrestraint o trade, while section two prohibits monop-olization.80 Although the ederal antitrust laws aremost commonly enorced against sellers o productsand services, they also prohibit unreasonable restraintso trade imposed by buyers. Monopsony, or the domi-

nation o a market by a buyer, can distort markets justlike monopoly, and can potentially reduce the quantityand quality o available products.

The explicit purpose o an insurance exchange is torestrain trade since it organizes the purchase o insur-ance by individuals and groups. Insurance exchangescan potentially achieve near monopsonistic marketpower in the private insurance market.

At the same time, antitrust law has long permittedpurchasers to engage in joint ventures, including pur-chasing cooperatives that enhance eciency and donot create undue purchaser market power. It is a airquestion, thereore, whether the ederal antitrust lawswould limit insurance exchanges.

To begin, ederal antitrust laws do not restrict theauthority o the states to establish government-runinsurance exchanges. The Massachusetts Connector,or example, is not subject to an antitrust challenge.Antitrust law has developed the State Action Doctrineto accommodate the interests o ederalism and alsopermit states to engage in regulatory supervision ocommerce in their states. The State Action Doctrineexempts state entities rom ederal antitrust law itheir conduct is compelled or clearly authorized bystate law. I the state law pertains to conduct by pri-

vate actors, then that conduct must be compelled orauthorized and must be actively supervised by thestate.81 Situations arise, however, in which the stateexplicitly or impliedly authorizes or encourages actorsto engage in conduct that violates ederal antitrustlaw, but the level o state supervision may all short othat required under Supreme Court precedent. Thus,the State Action Doctrine would not apply, leaving theconduct exposed to antitrust enorcement.

I an insurance exchange is created solely by privateaction, or example, by a coalition o private employ-ers, there is by denition a combination o actors,

leaving only the question o whether this combina-tion is a restraint o trade. This is a complex question,the answer to which depends heavily on the actualsituation o a particular exchange. The issues raisedby antitrust law or insurance exchanges were ana-lyzed thoroughly by Clark Havighurst a decade ago,82and a decade earlier by H. Robert Harper and JohnJ. Miles,83 and their analysis will not be repeated indetail here.


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A ew salient points can, however, be made. First, asalready noted, private purchasing coalitions are prob-lematic under the ederal antitrust laws. Courts apply-ing the antitrust laws may be somewhat less troubledby buyer than by seller cartels, but restraints o tradeimposed by buyers can still be antitrust violations.Second, naked price restraints imposed by a combina-tion o buyers and lacking any eciency justications

can be per se violations o the antitrust laws that is,illegal regardless o any other justication that may beoered. In most instances, however, courts will evalu-ate purchasing coalitions under the rule o reason that is, review their legality in the context o theirparticular market and consider their pro and anticompetitive eects. Applying the rule o reason, courtswill be concerned with pro-competitive justicationsor joint purchasing arrangements. Given the marketailures present in health care, it may be quite possi-ble to justiy joint purchasing as eciency enhancingin many situations.84 In particular, purchasing poolsare pro-competitive insoar as they oer individualsand small employers the chance to achieve risk pool-ing and economies o scale not otherwise available.Third, i an exchange does nothing more than orga-nize a market or insurance without negotiating prices or example, by providing inormation, structuringchoices, and discouraging adverse selection it isunlikely to be ound in violation o the antitrust laws.Indeed, such activities may increase rather than sup-press competition.85

A coalition without excessive market power is prob-ably sae in any event. Dening the relevant prod-uct and geographic markets aected by insurance

exchanges itsel is a complicated endeavor. Antitrustcases have in various contexts identied insurancemarkets on the sell side, the markets in which insur-ers sell their products, as including individual andsmall groups, and excluding larger employers and sel-insured plans. The buy side market, in which insurerscompete with other purchasers in purchasing services,such as physician services, may include other purchas-ers such as Medicare and Medicaid, and not be limitedto private insurers only. A market must be dened orthe market share to be determined. I the market isdened narrowly enough, insurance exchanges aect-

ing private plans may be ound to have large marketshares, but i the market is dened broadly, their sharemay not be troublesomely large.

The Department o Justice, Federal Trade Com-mission Statement on Antitrust Enorcement Policyin Health Care on Joint Purchasing Arrangementscreates a sae harbor or health care providers whosepurchases account or less than 35 percent o the totalsales o the purchased product or services in the rele-

vant market,86 a market-percentage that would prob-ably apply to insurance purchasing as well. However,a coalition that oers its members access to a widevariety o insurance plans and products is unlikely tobe ound to be in restraint o trade even i its share islarger.

Currently existing private insurance exchanges havetended to control only a small share o the market,

and thus not to pose antitrust problems. I this wereto change, Congress could amend the antitrust laws toexempt health insurance exchanges that allow the par-ticipation o multiple insurers rom antitrust scrutiny.

Alternatively, the Department o Justice and FederalTrade Commission could promulgate a new enorce-ment guideline delineating more clearly the circum-stances under which they would consider a privatehealth insurance exchange to be in compliance withthe antitrust laws.

B. Multiple Employer Welare ArrangementRegulationA private insurance exchange that oers health insur-ance to employees is a multiple employer welarearrangement (MEWA) under ERISA, and thus subjectto regulation under state and ederal law. The extent towhich a private exchange is subject to state or ederalregulation depends, however, on the type o MEWA itwould regulate. 29 U.S.C. 1002(40) denes a MEWAas:

an employee welare benet plan, or any otherarrangement (other than an employee welarebenet plan), which is established or maintained

or the purpose o oering or providing any ben-et described earlier in the statute, includinghealth insurance, to the employees o two or moreemployers (including one or more sel-employedindividuals), or to their beneciaries.87

An employee welare benet plan, as noted in theabove discussion o ERISA, is any plan, und, orprogram whichisestablished or maintained byan employer or by an employee organization, or byboth,or the purpose o providing or its participantsor their beneciaries, through the purchase o insur-

ance or otherwise, []medical, surgical, or hospital careor benets.88 Finally, an employer is any person act-ing directly as an employer, or indirectly in the inter-est o an employer, in relation to an employee benetplan; and includes a group or association o employersacting or an employer in such capacity (emphasisadded). 89

Under these denitions, i a group o employersgets together to orm an insurance exchange, it would


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almost certainly be a MEWA, but could be eitherone o the ollowing: (1) a MEWA which is also anemployee welare benet plan under ERISA estab-lished or maintained by an employer,(which can bea group or association o employers) or (2) a MEWAwhich is any other arrangementestablished or main-tained or the purpose o oering or providing healthinsurance to employees o two or more employers or

to sel-employed individuals.90

Under the Depart-ment o Labors interpretation o ERISA, a group orassociation o employers can only be an employeri it is determined to be a bona de group o employ-ers, taking into consideration a number o actors,including how members are solicited, who can partici-pate and who in act participates, the purpose o theorganization, any pre-existing relationships amongthe members, and most importantly, whether theemployee-members o the group exercise control overthe program.91 An exchange ormed by an associationo employers who do not qualiy as a bona de groupor by a private entity other than a bona de employergroup could be an other arrangement MEWA, butwould not be an employee welare benet plan.92

MEWAs that are also ERISA plans are ully regu-lated by ERISA, including its disclosure, duciaryobligation, HIPAA, and benet mandate provisions.Thus an insurance exchange that was considered to bean ERISA plan-MEWA could be sued in ederal courtby its members or breach o duciary obligation or ora denial o claims and could not discriminate in pre-miums or eligibility based on health status. A MEWAthat is not an employee welare benet plan is not itselregulated by ERISA, but every participating employer

is considered to each have independently established asingle-employer plan subject to ERISA.93 The admin-istrators o a non-ERISA plan MEWA are nonethelessstill likely to be held to be duciaries insoar as theyhave discretionary duties in administering the termso the constituent employers ERISA plans.94 Federallaw also requires MEWAs to le with the Departmento Labor.95

Under the 1983 Erlenborn Amendment, states areempowered to regulate ERISA plans that are alsoMEWAs. This amendment to ERISA allows states toregulate both insured and sel-insured MEWAs that

are ERISA plans, eectively exempting them romthe preemptive power o ERISA provisions that pro-hibit the states rom regulating sel-insured plans.96By denition, insurance exchanges would be insuredrather than sel-insured MEWAs, since exchangesexist to organize a market in which several insurersoer plans to exchange participants rather than oerinsurance themselves. Under this section o ERISA,states are limited in their authority to regulate insured

MEWAs.97 States may only impose standards, requir-ing the maintenance o specied levels o reserves andspecied levels o contributions, which any such plan,or any trust established under such a plan, must meetin order to be considered under such law able to paybenets in ull when due on an insured MEWA. 98This would rarely be relevant to insurance exchanges,since they do not normally bear risk. States may also

presumably regulate any insurer that sells insurancethrough an exchange because regulation o insurerswould be saved rom preemption under the generalERISA savings clause, which saves state insuranceregulation rom preemption.99 But the state regula-tion would probably have to apply to all insurers in themarket, which could be the small group or individualmarket, not just to insurers participating in a particu-lar exchange.

Finally, states may regulate private insuranceexchanges that might be classied as MEWAs, butare not ERISA plans, under the states inherent policepower, since state regulation o MEWAs that are notERISA plans do not relate to ERISA plans.100 Statesmay be limited in their ability to provide judicial rem-edies or beneciaries against insurers who provideinsurance through such MEWAs, however, becausebeneciaries are members o their own employers sin-gle-employer ERISA plan, and only secondarily mem-bers o the MEWA. Thus, actions against the insurersmay be considered to be actions against those plansand would be preempted by ERISAs remedial provi-sions.101 State law claims brought by employers againsta MEWA, on the other hand, are not preempted byERISA.102

Private insurance exchanges are likely to be classi-ed as MEWAs, and thereore, in general be subjectto state regulation. The power o the states to regulateinsurance exchanges operated by bona de employerassociations, and thus considered to be ERISA plans,is very limited and does not reach the most impor-tant issues that states may want to regulate. Privateinsurance exchanges that are MEWAs, but not ERISAplans, are subject to state regulation, but are prob-ably also subject to the ERISA requirements that bindplan administrators to the extent that the exchangemanagers act as administrators o the ERISA plans

o the MEWAs member employers.103

To date, manystates have not yet exercised their authority to regu-late MEWAs, and ew states have regulated MEWAseectively.104

I Congress adopts comprehensive health insurancereorm, but leaves a role or private health insuranceexchanges, it could take over responsibility or regu-lating them or clariy the authority o the states toregulate. I Congress takes no action, states would still


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be ree to exercise their authority to regulate MEWAsthat are not operated by bona de employer associa-tions. They may also want to test careully the statuso MEWAs that claim to be ERISA plans since they arelargely exempt rom state regulation.

C. HIPAA Data Privacy RequirementsPrivate insurance exchanges would, nally, be subject

to HIPAA regulations on privacy.105

The HIPAA PrivacyRule is discussed at length in another Legal Solutionsin Health Reorm authored by Deven McGraw, so itwill only be addressed briefy here. The privacy ruleapplies to any individually identiable health inorma-tion in the hands o covered entities. Covered entitiesinclude only health care providers, health plans, andhealth care clearinghouses.106 Health plans includemost public and private insurers, including those thatwould participate in insurance exchanges, but wouldseem not to include an exchange itsel.107

Health plans may disclose inormation withoutconsent or the ollowing reasons: (1) treatment; (2)health care operations, which includes underwriting,premium rating, and other activities relating to theoperation; (3) renewal or replacement o a contract ohealth insurance or health benets; and (4) payment,which includes activities undertaken by a health planto obtain premiums.108 Health plans may also dis-close de-identied data,109 which is not covered byHIPAA, and may disclose personal health data, whichis covered, to business associates with appropriatecontractual assurances to saeguard data.110 It wouldseem that health plans could disclose health inor-mation regarding their members to health insurance

exchanges under one or more o these provisions, sub-ject however, to a urther caveat. Health plans, andthereore insurance exchanges as their agents, mayonly disclose to plan sponsors (i.e., employers) de-identied summary health inormation and inor-mation as to whether an individual is participatingin the sponsors group health plan.111 This would limitinormation fow rom exchanges to employers whopurchase insurance through them.

Although HIPAA constraints on the inorma-tion that health plans can share with exchanges andexchanges with employers are important, data fow in

the other direction rom employers or employees toexchanges and then to health plans or underwriting orsetting premiums is likely to be even more important.Inormation acquired by a health insurance exchangein this way would in all likelihood only be protectedby HIPAA i the exchange were a business associate oa health plan that allow[ed] a business associate tocreate or receive protected health inormation on itsbehal.112 It would be important, thereore, or health

insurance exchanges to enter into contracts withhealth plans that identiy the exchange as a businessassociate o the health plans with assurances that theexchange would protect any personal health inorma-tion it received to be sent on to covered plans. I this isnot done, individuals and employers may be reluctantto disclose inormation to exchanges.

Congress should amend HIPAA to clariy that health

insurance exchanges are bound by the HIPAA privacyrule, perhaps by including them within the denitiono health plan ound in HIPAAs language.113 Even iCongress ails to amend HIPAA specically or insur-ance exchange, private health insurance exchangescould enter into business associate contracts withhealth care plans whose products they sell and couldcomply with HIPAA requirements, including limita-tions on the sharing o identiable health data withemployers.

IV. Summary of Potential SolutionsA. Implementation o a Federal Purchasing ExchangeCongress could constitutionally establish an exchangeprogram operated solely by the ederal government,which could be operated either at the national or theregional level. Congress, however, cannot simply com-mand the states to implement a ederally establishedand dened health exchange program. It could, how-ever, use its power to spend money to oer the statesnancial incentives to encourage them to participatein an insurance exchange program. Alternatively, Con-gress could invite the states to establish exchanges,but also administer a ederally operated all-back pro-gram or states that decline participation, as it does

now with respect to HIPAA provisions. Whateverapproach it takes, Congress should make certain thatany statute it adopts explicitly notes that the programis being established as one that regulates the businesso insurance to orestall challenges under the McCa-rran-Ferguson Act. I Congress establishes a nationalpurchasing exchange program, it must be aware oother applicable ederal administrative law require-ments, and either amend relevant laws accordingly orensure that ederal exchanges comply with them.

The Due Process, Equal Protection, and TakingsClauses o the Constitution limit the power o Con-

gress to regulate insurers, although the Constitutionprohibits only extreme discriminatory or conscatoryactions, and would not preclude most orms o regu-lation. Government exchanges that allow all insurersthat accept exchange rules to participate in exchangesare unlikely to ace successul constitutional litigation.I government exchanges exclude insurers rom par-ticipating, they should do so according to clearly estab-lished guidelines and or clearly articulated purposes.


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B. State ExchangesI Congress ails to take action to establish a nationalhealth insurance exchange, the states could take theinitiative to establish exchanges on their own. Statesinitiating purchasing exchanges would be bound bythe same constitutional constraints acing the ed-eral government, in addition to the peculiarities ostate constitutions, which, in some instances, impose

greater restraints on economic regulation.State exchanges will also need to comply with state

administrative law and other laws governing stateagencies, such as state civil service or purchasingrequirements. States establishing insurance exchangeswill need to clariy relationships between the exchangeand other state agencies with jurisdiction over insur-ance issues. Specically, an exchange could be parto the states Department o Insurance or could be aseparate entity.

As it is currently written, ERISA precludes statesrom requiring employee benet plans to purchaseinsurance through exchanges. States may require indi-viduals to do so, however, and may regulate insurersthat sell their products through exchanges. States mayalso require employers who do not oer health insur-ance to allow their employees to purchase insurancethrough exchanges with pre-tax dollars using sec-tion 125 arrangements. To avoid ERISA challenges,employers will have to be careul to ensure that theyare not perceived as endorsing such arrangementsand should not oer discounts only to employees whopurchase insurance through the exchange.

I states allow employee groups to participate inan insurance exchange as groups (i.e., i the employer

contributes to or administers the arrangement), thenHIPAA will require that participating insurers pro-vide insurance on a guaranteed oer and renewabilitybasis. HIPAA also prohibits discrimination in eligi-bility or premiums based on health status, and lim-its pre-existing conditions clauses or participatingemployee groups. HIPAA would probably impose thesame requirements or all employees o a particularemployer i the employees were to purchase insur-ance through section 125 arrangements, even withoutemployer contributions. I a state requires commu-nity rating, guaranteed issue and renewal, and limits

preexisting conditions clauses within the exchange,and thus, eectively applies HIPAA protections to allexchange participants, then the state may avoid theissue o whether employees who participate in theplan under a section 125 arrangement are indepen-dently protected by HIPAA.

Congress could amend ERISA and HIPAA to clariytheir requirements or insurance exchanges. It is pos-sible that the Internal Revenue Service could, even in

the absence o congressional action, clariy whether ornot the use o a section 125 arrangement automaticallycreates a group plan or HIPAA purposes.

States could consider applying uniorm regulationo underwriting, premiums, and benets both insideand outside o insurance exchanges to avoid exposingexchanges to adverse selection or limiting the abilityo exchanges to compete with insurers selling outside

the exchange. Alternatively, states could only allow thepurchase o insurance through the exchange in spe-cic markets such as individual and/or small group.

C. Private Insurance ExchangesI neither Congress nor the states proceed with estab-lishing insurance exchanges, exchanges could still becreated by private entities or associations. Congresscould create a special antitrust exemption or pri-vate insurance exchanges. The Department o Justiceand Federal Trade Commission could also clariy thestatus o exchanges through issuing an enorcementguideline. States may shield private exchanges romantitrust liability i the state explicitly authorizes andactively supervises the exchanges. I the state does notdo so, private exchanges should be prepared to limitthemselves to 35% o the market and/or be able tooer procompetitive justications or the restraintsthey impose on the market.

Private exchanges should be aware that their mem-bership and organizational rules will determinewhether they are regulated primarily by the state orederal government. Under the ederal law governingMEWAs, bona de employer association exchangeswill be primarily regulated by ERISA, while other

exchanges by the states. Congress could, o course,expand the power o the states to comprehensivelyregulate all MEWAs or could extend ederal authorityover them.

Since HIPAA could implicate private exchanges andthe exchange o protected health inormation, Con-gress could amend HIPAAs privacy rules to specicallyclariy that they cover health insurance exchanges.I Congress ails to amend HIPAA, exchanges couldenter into business associate agreements with insurersto the extent that they will need to access health dataon insureds. To avoid legal challenges and to protect

privacy, exchanges should not disclose personal healthdata to employers except to the extent permitted byHIPAA.

ConclusionHealth insurance purchasing exchanges have beenproposed as a possible means o making insurancemore accessible, increasing competition amonghealth plans, and promoting choice o insurer. Presi-


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dent Obama and congressional leaders have proposedestablishing insurance exchanges through ederallegislation. There are no serious constitutional barsto Congresss establishing an insurance exchange,although the Constitution might limit the means thatCongress could use i it chose to implement an insur-ance exchange program through the states. Alterna-tively, Congress could amend a number o laws such as

ERISA, HIPAA, and the antitrust laws to ease the cre-ation o state or private purchasing exchanges. Evenin the absence o any congressional action, however,the creation o purchasing exchanges by the states orby private entities and associations are not likely to beprecluded by legal considerations. State and privatepurchasing exchanges do raise a number o importantlegal issues, however, that would need to be consid-ered by any state or private entity creating an insur-ance exchange program.

AcknowledgementThe author wishes to thank Patricia Butler, Thomas Greaney,

James Blumstein, Amy Monahan, Christie Hager, Gary Bacher,and the ONeill Institute Management Team who provided valu-able eedback on earlier drats.

Reerences1. The literature on exchanges is vast, but a useul sampling o

recent papers would include A. Lischko, Health InsuranceConnectors & Exchanges: A Primer or State Ocials , Acad-emy Health Stateside, September 2007, available at (last visited June 15, 2009); E. F.Haislmaier, State Health Reorm: How Pooling Arrangementscan Increase Small-Business Coverage,Heritage FoundationWebMemo 1563, July 23, 2007, available at (last visited

June 15, 2009); J. Solomon, Health Insurance ConnectorsShould Be Designed to Supplement Public Coverage, NotReplace It, Center on Budget and Policy Priorities, January29, 2007, available at (last visited June 15, 2009); M. Koman, Group Pur-chasing Arrangements: Issues or States, State Coverage Ini-tiatives Issue Brie4, no. 3 (April 2003): 1-6. One older articlealso worth reading is M. A. Hall, The Role o Insurance Pur-chasing Cooperatives in Health Care Reorm, Kansas Journalo Law & Public Policy 3 (1993-1994): 95. Empirical stud-ies o health insurance exchanges include, K. Bender and B.Fritchen, Government-Sponsored Health Insurance Purchas-ing Exchanges: Do They Reduce Costs or Expand Coverage orIndividuals and Small Employees, Oliver Wyman ActuarialConsulting, Inc., 2008, available at (last visited June 15, 2009); Insurance Markets: WhatHealth Insurance Pools Can and Cant Do,Caliornia HealthCare Foundation Issue Brie, 2005, available at (last visited June 15, 2009); E. K.Wicks, Health Insurance Purchasing Cooperatives, Com-monwealth Fund Issue Brie, November 2002, available at (last visited June 15, 2009); R. E. Curtiset al., Consumer-Choice Purchasing Pools: Past Tense, FuturePerect? Health Afairs 20, no. 1 (2001): 164-168; S. H. Long

and M. S. Marquis, Have Small-Group Purchasing AlliancesIncreased Coverage? Health Afairs 20, no. 1 (2001): 154-163; E. K. Wicks and M. A. Hall, Purchasing Cooperativesor Small Employers: Perormance and Prospects, MilbankQuarterly 78 (2000): 511.

2. Senator McCains plan did not include insurance exchangeproposals.

3. S. 2795, 110th Cong. 2008.4. These arrangements, authorized by section 125 o the Inter-

nal Revenue Code, allow employees to pay or various benetswith their own income on a pre-tax basis.

5. See R. E. Mot, State-Based Health Reorm: A Comparison oHealth Insurance Exchanges and the Federal Employees HealthBenet Program, Heritage Foundation WebMemo, June 20,2007, available at (last visited June 15, 2009).

6. Barak Obamas Plan or a Healthy America is no longer avail-able online.

7. Id.8. Id.9. S. 334, 110th Cong. 2008.10. Some commentators attempt to draw a clear distinction

between the purchasing cooperatives and health alliances thatwere widely discussed in the 1970s, 80s, and 90s and were atthe heart o the Clinton Health Security Act, and the contem-porary health insurance exchange. See Lischko, supra note 1,at 2; Mot, supra note 6. Because the terms purchasing coop-erative, health alliance, and health insurance exchange cover

or have covered a broad assortment o models among whichthere is considerable variety and overlap, I do not believe itis possible to draw a clear line between the modern insuranceexchange and its antecedents. (See Bender and Fritchen, supranote 2, at 12, or an analysis o exchanges written or the BlueCross/Blue Shield Association that strongly supports this con-clusion.) Insoar as there are dierences, they are the ollow-ing: (1) that health insurance exchanges, as some commenta-tors dene them, do not act as purchasing agents or regulatorsbut rather simply connect insurance purchasers with insurers,and (2) that some commentators in the past have includedas purchasing cooperatives entities that purchase servicesdirectly rom providers, while contemporary health insuranceexchanges generally contract only with insurers. Believing thatthe terms are in act largely interchangeable, I will use theterm insurance exchange throughout this paper instead o theterms purchasing cooperative (or pool) or health alliance.

11. These include, by one list, Caliornia, Connecticut, Georgia,Kansas, Maryland, Michigan, Minnesota, Missouri, Montana,New Jersey, Oregon, Texas, Virginia, Washington, and Wiscon-sin. See J. E. Schneider et al., Legal and Economic Analysiso Health Insurance Exchange Mechanisms, Health Econom-ics Consulting Group, 2007, available at (last visited June 15,2009).

12. See C. L. Hager, Massachusetts Health Reorm: A SocialCompact and a Bold Experiment, University o Kansas LawReview 20 (2007): 1313-1329. M. A. Chirba-Martin, Univer-sal Health Care in Massachusetts: Setting the Standard orNational Reorm, Fordham Urban Law Journal 35 (2000):409-449.

13. See Hager, supra note 13; E. A. Zelinsky, The New Massachu-setts Health Law: Preemption and Experimentation, William

and Mary Law Review 49 (2007): 229-287, at 235.14. See Hager, supra note 13, at 1316.15. See E. K. Wicks and M. A. Hall, Purchasing Cooperatives or

Small Employers: Perormance and Prospects, Milbank Quar-terly 78 (2000): 511.

16. See, e. g., J. Quadagno, One Nation Uninsured: Why the U.S.Has No National Health Insurance (New York: Oxord Univer-sity Press, 2005).

17. See H. T. Greely, Policy Issues in Health Alliances: O E-ciency, Monopsony, and Equity, Health Matrix 5 (1995):37-81.


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me as I was drating this paper and is now available at (last visited June 15, 2009). See alsoP. Butler, Employer Caeteria Plans: States Legal and PolicyIssues, Caliornia Healthcare Foundation, October 2008,available at (last visited June 15, 2009).

53. I.R.C. 125 (1996).54. 29 U.S.C. 1002(1) (2007).55. See New England Mut. Lie Ins. Co. v. Baig, 166 F.3d 1 (1st

Cir. 1999); OBrien v. Mutual o Omaha Ins. Co., 99 F.Supp.2d744 (E.D. La. 1999). Where employers are more involved in theinsurance relationships or individual insurance policies seemto be part o a larger employee plan, however, the arrange-ments will be held subject to ERISA. Burrill v. Leco Corpora-tion, 1998 WL 340781444 (W.D. Mich. 1998).

56. 29 C.F.R. 2510.3-1(j) (2007).57. See,e.g., Butero v. Royal Maccabees Lie Ins. Co. 174 F.3d 1207

(11th Cir. 1999); Hrabe v. Paul Revere Lie Ins. Co., 951 F.Supp.997, 1001 (M.D.Ala. 1996). There is also a line o ERISA casesthat have held that a scheme under which an employer pays orindividual insurance premiums on a payroll deduction basisis a group policy i the employee receives a discount that isotherwise not available or purchasing through the employer.See Tannenbaum v. Unum Lie, 2006 U.S.Dist. LEXIS 6623(E.D. Pa. Mar. 18, 2005); Kuehl v. Provident Lie & Accident,1999 U.Dist. LEXIS 22946 (September 30, 1999). One case

has even held that a disability plan was an ERISA plan becauseit was unded with pre-tax income, Brown v. Paul Revere LieIns. Co., 2002 WL 1019021 (E.D. Pa. 2002), although thatcourt seems to have inappropriately applied COBRA regula-tions in interpreting ERISA and the case is in any event dis-tinguishable rom our situation on several grounds. See Butler,supra note 51. Other courts have held, however, that the actthat employees receive a discount or purchasing through theiremployer does not in itsel make a plan an ERISA plan. See,e.g., Rubin v. Guardian Lie, 174 F.Supp. 2d 1111 (D.Or. 2001).I the only discount that is oered employees participating ina state insurance exchange is the benet o paying or insur-ance using pre-tax income available under 125, this alone isunlikely to turn the 125 arrangement into an ERISA plan.

58. See Schwartz v. Provident Lie and Accident, 280 F.Supp. 2d937 (D.Ariz. 2003); Murdock v. Unum Provident Co., 265F.Supp. 2d 539 (W.D. Pa. 2002); Merrick v. NorthwesternMutual Lie, F.Supp.2d, 2001 WL 34152095 (N.D.Iowa 2001);Byard v. Qualmed Plans or Health , Inc. 966 F.Supp. 354(E.D. Pa. 1997); Levett v. American Heritage Lie Ins. Co., 971F.Supp. 1399 (M.D. Ala. 1997).

59. Although there is no authority addressing this question, itwould seem that participation by an employee in a state-man-dated 125 arrangement would still be voluntary under theterms o the sae harbor because it would not be required bythe employer, which is the concern o the regulation.

60. See Butler, supra note 52.61

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