Regulating a health insurance exchange: implications for individuals with mental illness

Under the newly enacted health reform law, millions of lower- and middle-income Americans will purchase individual or family health insurance through state-based markets for private health insurance called insurance "exchanges," which consolidate and regulate the market for individual and small-group health insurance. The authors consider options for structuring choice and pricing of health insurance in an exchange from the perspective of efficiently and fairly serving persons with mental illness. Exchanges are intended to foster choice and competition. However, certain features-open enrollment, individual choice, and imperfect risk adjusters-create incentives for "adverse selection," especially in providing coverage for persons with mental illness, who have higher overall health care costs. The authors review the experience of persons with mental illness in insurance markets similar to the exchanges, such as the Massachusetts Connector and the Federal Employees Health Benefit Program, and note that competition among health plans for enrollees who are "good risks" can undermine coverage and efficiency. They review the possible approaches for contending with selection-related incentives, such as carving out all or part of mental health benefits, providing reinsurance for some mental health care costs, or their preferred option, running the exchange in the same way that an employer runs its employee benefits and addressing selection and cost control issues by choice of contractor. The authors also consider approaches an exchange could use to promote effective consumer choice, such as passive and active roles for the exchange authority. Regulation will be necessary to establish a foundation for success of the exchanges.