On June 14, 2013, the Department of Health and Human Services (“HHS”) released a notice of proposed rulemaking entitled “Program Integrity: Exchange, SHOP, Premium Stabilization Programs, and Market Standards.” The proposed rule addresses many outstanding issues that must be resolved before the exchanges become operational in 2014.  One of the issues addressed is the implementation of SHOP insurance exchanges.

In a reversal of policy, the proposed rule would permit states to operate only a Small Business Health Options Program (“SHOP”), while the federal government would operate the individual health insurance exchange.  HHS had previously interpreted the Affordable Care Act to mean that a state establishing and operating a SHOP also must establish and operate an individual health insurance exchange. In the recently released proposed rule, HHS has reversed course to permit states to operate only a SHOP.  The proposed rule, however, does not permit the opposite situation. If a state operates an individual exchange, the state must operate a SHOP exchange.

Initially, the benefit of the proposed rule will be somewhat limited. For 2014, the first year that the SHOP exchanges will operate, states only may take advantage of the new rule if they received conditional approval to operate exchanges by January 2013. States with conditional approval to operate both a SHOP exchange and an individual exchange may elect to allow the federal government to run the individual exchange.