April 2012

Legal Issues and the State-Based Exchange – Enhancing Your State's Readiness

3 min


On March 12, 2012, the Department of Health and Human Services (“HHS”) issued final regulations relating to the establishment and operation of a State-based health insurance Exchange, including standards for the Small Business Health Options Program (“SHOP Exchange”).

While the final regulations did not include rules on how the Federally-facilitated Exchange would operate or what a Federal-State “partnership” would entail, the final regulations confirm the flexibility that states generally have when it comes to structuring and operating a State-based Exchange. This flexibility is welcomed by most if not all states. However, such flexibility presents certain political as well as practical challenges. In the case of practical challenges, the new Exchange rules carry with them a number of legal issues that every State Exchange will have to address.

Exchange Structure

Most states are leaning toward housing their Exchange in an independent, non-profit organization or a quasi-public/private entity. Regardless of its structure, the Exchange will operate like a business entity. In this case, the Exchange Board will need to engage in risk planning and risk management. In addition, although the state “establishing” legislation may afford the Exchange sovereign immunity, there will likely be legal challenges against the Exchange.

Exchange Functions

With respect to operating an Exchange, there are a number of Exchange functions that also raise legal issues. These legal issues range from the protection of personally identifiable information and HIPAA compliance to memoranda of understanding between state agencies regarding Exchange functions and fiduciary issues that are certain to be associated with “premium aggregation” in the SHOP Exchange (and the “individual market” Exchange if it operates as a premium aggregator).

Exchange Funding

While states have significant latitude in funding the Exchange, if a state opts to raise financing for the Exchange through, among other things, advertising, the Exchange Board may have to navigate certain areas of the law. In addition, if user fees are imposed on participating insurance carriers, legal and enforcement challenges are likely, and other financial management issues are sure to arise.

How Can Venable Help?

Venable’s Public Policy and Healthcare Transactions Group includes attorneys Christopher Condeluci and U.S. Congressman Bart Stupak, who drafted portions of the Patient Protection and Affordable Care Act in Congress. Venable’s team also includes former Maryland Insurance Commissioner Ralph Tyler, as well as Katherine Whelan, a former Senior Policy Advisor to a state governor. Our firm also houses experienced attorneys in corporate formation and governance (both for-profit and non-profit), privacy law and HIPAA, and litigators with experience representing states. Venable is well-positioned to provide legal counsel to a state and/or a State’s Exchange Board on any and all legal issues associated with the Exchange.