Flexibility. Choices. Competition. That's what the federal government wants to see when states set up health insurance exchanges in about three years.

To that end, the U.S. Department of Health and Human Services (HHS) on Monday proposed rules that will offer states more flexibility and encourage a competitive marketplace. In this marketplace individuals and small businesses can buy affordable private health insurance and have similar choices as the members of Congress, according to a HHS release.

HHS on Monday said beginning 2014, exchanges will make it easy for individuals and small businesses to compare health plans, get answers to questions, find out if they are eligible for tax credits for private insurance or health programs like the Children's Health Insurance Program, or CHIP, and enroll in a health plan that meets their needs.

HHS' proposed new rules offer guidance and options on how states can structure their exchange in two key areas. The first is that it sets standards for establishing exchanges, setting up a Small Business Health Options Program, or SHOP, performing the basic functions of an exchange, and certifying health plans for participation in the exchange. The second is that it ensures premium stability for plans and enrollees in the exchange, especially in the early years as new people come in to shop for health insurance.

With the proposed rules states will also have the flexibility to design exchanges that best fit their insurance markets, and are consistent with the steps they've already taken to move forward with exchanges, HHS said.

Forty-nine states, the District of Columbia and four territories accepted grants to help plan and operate exchanges, HHS said. Additionally, more than half of all states are taking added action beyond receiving a planning grant such as passing legislation or taking administrative action to begin building exchanges.

Kaiser Health news reported that although there is a deadline of Jan. 1, 2013 for states to show they will have an exchange up and running by 2014, the proposal offers some wiggle room: States showing progress will be granted conditional approval.

Health Secretary Kathleen Sebelius in a statement said exchanges offer Americans competition, choice, and clout.

Insurance companies will compete for business on a transparent, level playing field, driving down costs; and Exchanges will give individuals and small businesses the same purchasing power as big businesses and a choice of plans to fit their needs, Sebelius said in a statement.

The administration examined models of exchanges, held numerous meetings with stakeholders and consulted closely with state leaders, consumer advocates, employers and insurers in order to drafty the proposals. HHS is currently accepting public comment on the proposed rules over the next 75 days in order to learn from states, consumers, and other stakeholders how the rules can be improved.

HHS will then modify these proposals based on public feedback.

States are leading the way in implementing health reform, and [Monday's] announcement builds on that momentum by giving states flexibility to design the exchange that works for them, said Center for Consumer Information and Insurance Oversight Director Steve Larsen in a statement. This regulation allows us to meet states where they are.

States can choose to develop an exchange in partnership with the federal government or develop these systems themselves.