March 2013

VOL. 21   ISSUE 1

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Employers that have not yet done so will soon have to start making decisions about whether to take advantage of the health insurance Exchanges1 that are being developed under the Affordable Care Act.2 Although the public Exchanges that are being created by the government have received most of the attention so far, private Exchanges have also been set up as alternatives to both public Exchanges and current forms of employer-sponsored health coverage. Many private Exchanges are aggressively marketing their services as they compete for business. Before employers sign on, however, they need to do their homework and learn about the various options.

This article focuses on what employers must know in order to make informed decisions about private Exchanges, how they differ from public Exchanges and how to determine if a private Exchange is the right fit for their employees.

What Is the Difference between Public and Private Exchanges?

Public and private Exchanges share several common features. Any health insurance Exchange is an online marketplace through which employees and retirees can purchase health insurance and evaluate the differences among plan designs and/or carriers. An Exchange is generally a web-based portal, similar to a retail website, except that it sells health insurance coverage instead of consumer goods. It also includes member support tools to help users understand how the Exchange operates and make informed decisions.

The private Exchange model typically uses a defined contribution (DC) approach to health care. Employers provide a set dollar amount toward health coverage, and the employees use that money toward the purchase of health insurance from the insurance carriers on the Exchange their employer has selected. Private Exchanges are operated by private-sector companies or non-profit organizations, and are not subject to the Affordable Care Act. Private Exchanges are typically fully insured with fixed premium payments paid on a per-employee basis. Private Exchanges negotiate premium rates with participating insurers and employers select Exchange options based on the needs of their employees. Generally, there are two types of private Exchanges:

A few private Exchanges have been in existence for a number of years, focusing mostly on the retiree/Medicare market where individual plans are the dominant mode of coverage and thus more easily adaptable to Exchange-based models. Although most were started by technology-oriented startup companies, a number of these Exchanges have since been sold to brokerages, benefits outsourcing operations and other organizations that want to enter to this potentially lucrative market. They are generally considered group purchasers of health coverage and operate in the large group market.

In contrast, the Affordable Care Act created a set of highly regulated public health insurance Exchanges, which must be operational as of January 2014 with an open enrollment period beginning in late 2013. There are two types of public Exchanges — individual Exchanges and Small Business Health Options Program (SHOP) Exchanges. Participants purchasing coverage through individual public Exchanges will be eligible for a federal premium assistance tax credit (a “subsidy”) toward coverage if their household income is less than four times the federal poverty level (FPL)3 and they do not have affordable coverage available to them (e.g., through their employer, Medicaid or Medicare). Unlike the individual Exchanges, the federal subsidy is not available in the SHOP Exchanges, but employers can use cafeteria plans to allow employees to pay their portion of the premium on a pre-tax basis.

Private Exchanges cannot take advantage of the federal subsidies. Consequently, employees purchasing coverage on a private Exchange will not receive the premium assistance subsidies for low-income employees. This difference between the private and public Exchanges can be extremely significant for individuals in lower-paid jobs. Similar to the SHOP Exchange, employers using a private Exchange can take advantage of cafeteria plan rules and allow employees to pay for their share of the premium on a pre-tax basis.

Advocates of private Exchanges believe they contain certain advantages:

Sibson Consulting believes that to realize any of these advantages, plan sponsors must fully understand the details of the Exchange design. They need to consider a number of factors before pursuing this path or choosing a partner.

Is a Private Exchange Right for You?

Each private Exchange is different. Consequently, employers must ask questions about features and be skeptical about promises. Joining a private Exchange is bound to change both a company’s relationship with its employees and how it administers health care benefits. To determine the potential effect on the enterprise, employers should answer the following questions:

Conclusion

For decades, employers primarily collaborated with insurance carriers to provide health benefits to their employees. Public and private health insurance Exchanges will soon provide a new avenue for health coverage that employers may want to explore.

It is important to understand that not all private Exchanges are the same, and they are different from the public Exchanges. In order to make informed decisions, employers need to fully understand what private Exchanges are and how they operate, all while continuing to set annual health care budgets.

 

About the authors:

Nancy Duta is a health consultant with Sibson Consulting. She specializes in strategy, plan design, cost management options and communications for all types of health coverage. She also has experience in vendor management, health care plan negotiation, renewal and claims analysis, competitive bidding and implementation and project management. She can be reached at 212.251.5955 or nduta@sibson.com.

Christopher Calvert is a senior vice president and the Health Practice leader for Sibson Consulting. He is heading the firm’s exploration of the health insurance Exchange marketplace. He can be reached at 212.251.5310 or ccalvert@sibson.com.


 

1 The Department of Health and Human Services has announced it will use “health insurance marketplaces” instead of “health insurance Exchanges.”
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2 The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152.
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3 In 2013, the FPL (except in Alaska and Hawaii) is $11,490 for a single individual and $23,550 for a family of four.
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4 The employer shared responsibility penalty of Section 4980H of the Internal Revenue Code (IRC) will be imposed on “large” employers with at least 50 full-time equivalent employees under certain conditions. The amount of the employer penalty will be based on whether the employer offers health coverage to employees. A large employer will be treated as having offered coverage to its full-time employees and their dependents for a calendar month if, for that month, it offers coverage to 95 percent of its full-time employees (as long as dependent coverage was also offered). Failure to offer coverage to 95 percent of all full-time employees will result in the 4980H(a) penalty being imposed. There are two branches of the employer shared responsibility penalty known as the “4980H(a)” and “4980H(b)” penalties. For more information, see Sibson Consulting’s Capital Checkup,IRS Proposes Rule on Employer Penalty Under the Affordable Care Act.”
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5 Starting in 2018, employers that continue to offer health coverage will be charged a 40 percent excise tax on the value of group health plans in excess of certain thresholds, now set at $10,200 for employee-only coverage and $27,500 for family coverage, with extra thresholds for certain high-risk professions and retirees.
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6 The Employment Value Proposition includes what an organization offers its employees in terms of benefits, experience and opportunity in Exchange for an employee’s effort and commitment. Sibson’s model consists of five components: affiliation, work content, career, compensation and benefits.
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7 See FAQs about Affordable Care Act Implementation Part XI, January 24, 2013.
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8 For more information, see “Is Your Organization a Healthy Enterprise?” in the July 2009 Issue of Perspectives (updated in January 2011).
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9 Adverse selection is the disproportionate purchase of health insurance by the least healthy individuals
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