Defining ‘Typical’: A Critical Step In Determining The Health Law’s Essential Benefits Package

As implementation of the Affordable Care Act unfolds amid the uncertainty of court challenges and an evolving federal regulatory framework, one of the most important questions remaining is, “How will the essential benefits package be determined?” The answer will have a significant impact on the cost of coverage, both inside and outside exchanges.

Under the health law, the secretary of Health and Human Services must define “essential benefits” in a way that includes 10 broad categories of services and is equal in scope to benefits provided under a typical employer plan. The problem is that what’s “typical” varies both within and across states, and even varies by employer and plan type. Further, “typical” may not even include some of the services required by the ACA. As a result, if the secretary establishes an inflexible, nationally uniform definition of essential benefits, states and consumers could lose in several ways.

First, if the essential benefits definition excludes existing minimum benefits, some states may choose to lower coverage requirements rather than pay the premium and cost-sharing subsidies for those benefits required by the law. If this happens, consumers lose. If it does not, states lose.

Second, if the essential benefits definition exceeds existing minimum benefits, premiums could go up, employers could drop coverage and states could face new costs due to increased Medicaid enrollment. Both consumers and states lose.

To minimize the possibility of these outcomes, I propose the determination of what constitutes a “typical employer plan” be made at the state-level, where the exchanges actually operate. Also, I propose that the secretary let each exchange, within the broad coverage requirements spelled out in key provisions (Section 1302) of the health law, determine the definitional details of what constitutes an essential benefits package. Together, these recommendations would let those closest to the consequences balance the many cost and coverage trade-offs that go into determining an essential benefits package and allow the package to more accurately reflect a “typical” employer plan within the boundaries of each exchange.

Realizing, however, that the secretary may not find this approach acceptable, I have also proposed a second, though less preferred, three-tier alternative to determining essential benefits. Under this approach, each state would be required to include Tier 1 services in its essential benefits package, but would have the option of determining whether also to include benefits from Tier 2, Tier 3, or both tiers. Federal premium and cost sharing subsidies would cover Tier 1 and Tier 2 benefits, but not Tier 3 benefits.

Although the tiers could be structured in various ways, I suggest Tier 1 include only the minimum number of services the secretary designates necessary to satisfy the health law’s 10 comprehensive coverage categories. Wherever possible, these services should reflect strong evidence of effectiveness and value. Tier 2 would include other services a state previously had deemed important enough to include in minimum coverage requirements, and other services designated by the Secretary. Tier 3 would include other services designated by the state.

This alternative does not provide as much flexibility as my preferred approach. But, like the preferred framework, it helps minimize the negative, disruptive effects of imposing a nationally uniform definition of essential benefits on state-based exchanges. It acknowledges political and market differences across states, while remaining true to the ACA’s intent.

I am grateful exchange rules recently proposed by the U.S. Department of Health and Human Services affirm the agency’s willingness to consider alternative implementation strategies. I hope the two alternatives I have proposed will be given similar consideration. I encourage states, employers, insurers, providers and consumer advocates to actively support the alternatives above or to make other proposals that will preserve state-level flexibility and minimize the undesirable consequences of a one-size-fits-all definition of essential benefits.

Rep. James Dunnigan, the owner of an insurance agency, is a Republican member of the Utah State House of Representatives where his committee assignments include the chairmanship of both the Health System Reform Task Force and the Business & Labor Committee. Earlier this year, he testified before the Institute of Medicine’s Committee on Defining and Revising an Essential Health Benefits Package for Qualified Health Plans.