Everything (And More) You Always Wanted to Know About Exchanges/Marketplaces
Before we talk about Exchanges and Marketplaces, it is helpful to look at where we have been and gain some perspective. The key question to ponder before you read any further – Why do employers provide group health insurance for their employees? Employers let their employees do everything else….employers pay their employees a salary, and employees go out and buys their own mortgage, car, TV, choose their own investments, etc….SO WHY DOES THE EMPLOYER CHOOSE THEIR HEALTH INSURANCE FOR THEM AND THEIR FAMILY?
Most of us are familiar with Healthcare.gov (Federal or State Government Insurance Marketplaces/Exchanges) that rolled out October 1, 2013 with many malfunctions and was built for Americans to purchase health insurance. Meanwhile, there have been lots of conjecture, lots of buzz, myths, along with news stories about the so called “private exchanges” making them a very hot and often misunderstood topic.
Most recently, when Walgreen Co. announced in September 2013 that it was moving its 160,000 active employees to Aon, a fully insured private exchange, large employers took notice. Petco and Sears along with others also implemented private exchanges. Wall Street responded as well, sending the stock price of Benefitfocus, which provides the technology platform for a private exchange, up 102 percent from $26 to $53 in one day. Later in 2013, Towers Watson acquired Liazon on November 22, 2013 for $215 million because they were a leader in developing and delivering private benefit exchanges.
Most private exchanges, however, have been in existence for a number of years and are hardly new, pre-dating the enactment of the Patient Protection and Affordable Care Act (hereinafter referred to as the “new health care reform law”) serving group retirees and the individual market for years. Due to the combination of the Affordable Care Act insurance coverage mandates, the allure of a defined contribution model to cap costs and large, well-known companies signaling the OK to make the move is shifting the benefits landscape.
What is the difference between a Public and Private Exchange?
There are significant differences between the public and private exchanges. While the highly publicized public exchanges are government entities (either federal or state-run including the Small Business Health Options called SHOP Exchange), the private exchanges are run by private companies. Public exchanges offer medical, dental and/or vision insurance while private exchanges offer medical, dental, vision and other insurance products like life, home, automobile, and pet.
Public exchange consumers are primarily individuals buying insurance on their own and small businesses with up to 100 employees (federal subsidies are available to individuals with household incomes up to 400 percent of the federal poverty level who are not eligible for employer coverage).
Private exchange consumers are active employees and retirees of the sponsoring organization, and their dependents.
What is a Private Exchange?
A private exchange is a technology-enabled marketplace – an online or cloud based solution – that does exactly what you currently do for your employees but on a technology platform used for buying and selling health insurance policies. At its core, a private exchange is a private business – typically operated by consultants, brokers, or insurers – that sells insurance products to health care consumers through an on-line product. What makes private exchanges unique is their ability to enable the health care consumer to shop from among a wide-variety of major medical health plans and supplemental insurance products (e.g., hospitalization, disease, disability, or dental coverage) through the use of creative, interactive technology. There are two distribution models:
• Single Carrier: Employer/facilitator selects one plan; enrollees access all available plans from the single carrier. As an example, an employer may only want to offer Blue Cross Blue Shield to its employees. BCBS may then offer several plan options.
• Multicarrier: Enrollees access all available plans from all carriers. The user interface is similar to online comparison-shopping websites like Travelocity, where consumers choose a plan based on side-by-side comparisons. This is more of the “wild west,” with insurance companies competing side by side for member enrollment.
Whether there will be multiple carriers on all private group exchanges is a mixed bag. From a medical standpoint, fully insured plans will likely only have one carrier option, though there’s some flexibility with self-funded plans to offer multiple carriers. On the smaller end of the employer spectrum, we suspect most exchanges will stick with one carrier for now.
Many in the industry, including brokers, are still trying to “sweat out” the definition of a private exchange. One thing I am certain of what a private exchange/marketplace is not. A single carrier can’t offer an online marketplace because that’s not a marketplace. When a carrier will coexist with their competitors, then I will acknowledge that is a marketplace, but if I am limited to one vendor then I would not call it a marketplace — it’s not a supermarket, I don’t have five brands of cereal available.
Types of Private Exchanges
There are two primary private exchange models:
• Individual Market Segment: Competes against public individual exchanges that offer significant subsidies. Growth opportunities are questionable.
• Group Market Segment: Greater flexibility and ability to offer ancillary products. No subsidies on the public group exchange to compete with. Appear poised to grow rapidly.
Tax Treatment of Employer and Employee Premium Contributions on Exchanges
A GROUP Private Exchange’s tax implications will work the same way they do today from the employee’s perspective and the Private
INDIVIDUAL Exchange’s tax implications will work very differently than the Group Private Exchange:
Private Exchanges Use a Defined Contribution Approach
The private exchange model deploys a defined contribution approach in which employers provide a fixed contribution with employees paying more or less for their share of the total premium depending
on the level of coverage they choose. This is very different than the defined benefit model most employers have used for years – pay a fixed percentage of the premiums.
Many of you may recall the retirement plan revolution that took place in the early 90’s with defined benefits becoming legacy plans and employers shifting to defined contribution plans i.e. 401(k) plans with employers agreeing to match dollars the employees contribute only; otherwise, no employer contribution was available. Through this approach, an employer can cap or de-link their future medical insurance costs it will pay for health plan coverage for its employees making it easier to plan their budget forecasting. At the same time, exchanges typically offer employees more plan choices than their employers previously provided enabling employees to right size their coverage – choosing what coverages are right for their needs and budgets.
Because defined contribution will not slow down the cost of insurance, employers will be faced with potentially having to raise their contribution or pass the increases on to be shouldered entirely by their employees. This will not work without the employers shielding some of the increase from the employees. This method while more innovative will not get employer and employees off the health insurance escalator that is becoming steeper year by year.
Why are Insurers hesitant to participate in SHOP and Small Group Private Exchanges?1
While most health insurers are flocking to the large group private exchanges, many of these same carriers have been hesitant (to put it kindly) to participate in government subsidized exchanges, individual and small group. Why – if there are a large number of new customers where the government is paying a large percentage of the premiums – wouldn’t all major insurers want to participate?
Didn’t all the major cellular providers jump to participate in the government subsidized Lifeline program?i Like the Lifeline program, funded by the Universal Service Fundi fee added to the bill of
paying wireless customers, a risk corridor is being applied to carriers in and outside of the government exchangesiii to offset the possible adverse risk selection in government exchanges. However, unlike the Lifeline program, insurers have to provide “unlimited minutes” to all consumers at a predetermined cost. Not knowing if only those who will use unlimited minutes are going to sign up, insurers are justifiably concerned.
According to a white paper in 2011 by the NAIC on adverse selection and health insurance exchanges, there are several areas of concern for insurers participating in public exchanges, such as permitted variation between the plans offered in versus outside of the public exchanges and ability of an individual to choose a lower benefit plan when healthy but move to a higher level benefit plan when sickiv. Even though there are mechanisms to minimize the risk of adverse selection between the small group public subsidized market and the private market, one fear is that the public exchange market may become “the equivalent of a state high risk pool.”
However, many of these concerns do not apply to the small group private exchange market. Insureds/Employees in private group exchanges are not eligible for tax credits, so there is minimal risk of adverse selection from subsidized individuals selecting the richest plan because they have little “skin in the game.” Further, unlike, their government counterparts, private market small exchanges do not have to offer the richer Silver and Gold plans (70 percent and 80 percent actuarial value respectively) nor do they have to offer employee choice within a tier. Lastly, small group private exchanges, unlike their large group counterparts, can still impose certain participation and contribution requirements.
Large groups certainly have a reduced risk of adverse selection when compared to small group plans. However, with the full implementation of ACA, small group insurers must now consider all small groups to be member of a single risk pool.v The single risk pool requirement, along with the factors noted above, will spread the risk and minimize adverse selection in the small group market. So why aren’t insurers willing to join small group private exchanges? Aren’t small groups in a community rating environment a de facto large group? As such, why aren’t insurers willing to offer their small group plans, alongside with other insurers, to any willing private exchange?
Since the option to provide pre-tax dollars for individual insurance through an HRA, Section 125 plan or PRA has been closed, employers have little option but to consider employer-sponsored coverage. Further, because small employers are not subject to a penalty for failing to provide “affordable” coverage, employers can set the minimum contribution required by the carrier to the lowest cost Bronze plan, allowing employees whose income may qualify them for subsidies, based on the Silver plan, to obtain coverage through government exchanges, while providing employees pre-tax dollars for other qualified benefits. This is a win-win for small employers if managed correctly: tax-free income for employees for premiums for those that do not qualify for government subsidies and an opportunity for employers to set the contribution to allow employees that qualify to still obtain subsidies. Insurers will gain by keeping insureds while avoiding government exchanges.
Administration and compliance help are the missing link for small businesses moving to a defined contribution model. While many of these employers see the benefit of continuing coverage, they are desperately looking for a solution to provide coverage while minimizing their involvement and the increased administrative and compliance burdens. Hence the intrinsic value of a private exchange – a “place” for small employers to outsource not just “a defined contribution” but plan selection, notices, enrollments, administration and government compliance.
Will private exchanges step up to the plate to help small employers by offering multi-carrier exchanges where employees select the carrier and plan that works best for them? In spite of the single risk pool and commoditization of products in the small group market, the answer right now seems to be “not yet” – but shifts in employer demands may soon change their mind.
Private Exchanges are Gaining Steam
Several analysts have weighed in with prognostications of how the private exchanges will play out:
- 24 percent of employers will offer benefits on a private exchange in the next five years. (NBGH/Towers Watson)
- 70-80 percent of employers prefer private over public platform. (Booz Allen)
- 44 percent believe private exchanges will be preferred way of purchasing. (Aon)
- 1 in 4 consumers will receive employer health benefits through insurance exchanges within five years. (Accenture)
- The number of consumers expected to enroll in private exchanges will reach 40 million by 2018, surpassing the 31 million individuals likely to enroll in state-funded public exchanges. (Accenture)
- 95 percent of employers said they would continue to offer health care in
the next three to five years, 33 percent may use a private exchange to
provide the benefit up from 5 percent currently – a survey released earlier
this month by Aon Plc, the London-based insurance broker
Why Would Employers Consider a Private Exchange?
There are four reasons employers would make the move to a private exchange, and the first and most prominent reason is to cap costs and take variability out of the budget process. Making a move to an exchange:
- Shifts from a defined benefits to a defined contribution model, which caps its health care costs at a desired threshold and improves control of future liabilities.
- Avoids excise tax on high-cost coverage (Cadillac tax), which starts in 2018. This is a nondeductible 40 percent excise tax on the portions of health coverage costs that exceed $10,200 per year for single coverage and $27,500 for family coverage. Mercer estimates that 40 percent of companies will pay this tax on at least one plan if they don’t change the current benefit design.
- Simplifies benefits distribution and administration, freeing up HR resources to focus on other mission-critical tasks.
- Provides potentially more benefit choices for employees and illustrates cost transparency. Employers can choose from a menu of insurance carriers, which would help service a geographically diverse employee base.
Questions Employers Must Ask Themselves About a Private Exchange
Before moving to a private exchange, employers need to assess the opportunity by asking these questions:
- What are our peers and competitors doing? Are there indications that our industry is leaning toward a defined contribution model?
- What criteria would we look for in an exchange? What’s important to the business and our employees?
- Are our current plan offerings and provider networks similar to what is offered on an exchange? Would there be a big gap we may need to address?
- Will we get plan selection data from the exchange in a timely fashion?
- How would moving employees into a private exchange affect company culture? Would we create recruitment and retention challenges?
- What kind of online decision making tools to aid employees with their decisions will be available?
- Will there be any benefit education meetings face-to-face or all online with no human interaction?
- What kind of support will employees get? Is there a way we can “test drive” the quality of the exchange’s web services and/or call center?
Private exchanges appear poised for further growth. The question is how quickly will employers migrate. It’s one of many questions in this changing, dynamic health care market.
Additional Employer Issues that Private Exchanges Create
- Plan participant communications. Private exchanges add a new layer of complexity for employees and retirees, in terms of benefit offerings and the selection process, while a shift to an exchange model will raise questions and concerns among affected participants. Communications need to be crystal-clear and employees must be able to articulate basic elements of the plan before roll-out.
- Who owns compliance? Employers need clarity around who owns the various documents required by Employee Retirement Income Security Act and the Affordable Care Act, including the Summary Plan Description and the Summary of Benefits and Coverage.
- Monitoring private exchange vendor performance. Employers will need to be fully educated on the defined contribution approach and have both an efficient RFP process for private exchange vendors and a robust supplier management system to monitor vendor performance.
- Data consistency from employer to private exchange to payer and back. All players in the benefits management data lifecycle – employers, private exchange vendors and payers alike – will need solutions to ensure consistent plan data, including cost-sharing information.
Private exchanges appear poised for further growth. International management consulting company, Oliver Wyman, predicts that 40 million Americans will receive health insurance through private exchanges by 2018. The question is how quickly will employers migrate. It’s one of many questions in this changing, dynamic health care market. Exchanges, whether public or private, are not a magic bullet for the ever-increasing health care costs. It is unrealistic to believe that this will be a linear model like the CBO predicts. From my viewpoint, The Affordable Care Act will continue to be a wild ride as we are left with an incredibly complicated set of rules, taxes, exceptions, and more twists and turns than the lines at Disney World. My quote below reveals the biggest issue that ACA did not address which will continue to cause skyrocketing health insurance increases for all Americans:
I have evaluated many of the “private exchanges” offered by many different vendors, and we have established a “private exchange” that will facilitate the defined contribution administration details and give employees the opportunity through you (or as individuals) to elect the plan design they feel best meets their unique needs and budgets. This may or not be attractive for your use, but in a word, we will be ready to support whatever direction we agree is best for you and your employees.
1 Communities: Regulatory & Compliance – Why Health Insurers are Leery of Playing in SHOP or Small Group Private Exchanges – The Institute for HealthCare Consumerism –
i The Lifeline program provides qualified low-income Americans with a prepaid wireless service plan. See
About the Author: Carl C. Schuessler, DHP, DIA, GBDS is the Managing Principal of BenefitStrategies, LLC. an Insurance and Employee Benefits Brokerage and Consulting firm. We specialize in Insurance, Risk Management and Employee Benefit Consulting. BenefitStrategies helps improve your cash flow, save money and retain top talent with well-structured employee benefit and financial planning solutions. With more than 20 years of experience in employee and executive benefits consulting and financial planning experience, he guides large firms, privately held companies and executives through the challenges of evaluating planning opportunities. We pride ourselves on our ability to be creative in designing innovative, optimum plans and helping companies and individuals make the most of their financial resources.
For more information:
Carl C. Schuessler, Jr., DHP, DIA, GBDS
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