BHCG Monitor: Focus on Health Care Benefits

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BHCG Monitor: Focus on Health Care Benefits - Health Insurance Exchanges


The Basics of Health Insurance Exchanges — Public and Private

With the passage of the Patient Protection and Affordable Care Act (ACA) in 2010, health insurance exchanges fully entered the lexicon of health care and insurance in the United States. The exchanges delineated in the ACA will be public exchanges operating in every state. Private exchanges – promoting a shift to a defined contribution model for providing health care benefits – pre-date the ACA and have been in existence for at least the last half dozen years. This article seeks to serve as a primer regarding the status and development of both public and private health insurance exchanges.

Public Exchanges

In theory, the establishment of public health insurance exchanges – probably more accurately described as marketplaces – in the ACA should have been a fairly straightforward concept. Each state would create a competitive marketplace for health insurance, akin to buying an airline ticket online, something consumers now do routinely. Consumers could look at apples-to-apples comparisons between health plan offerings and select the plan right for them. However, as with everything else associated with the ACA, politics are playing a major role in the establishment of the exchanges in each state.

A State by State Decision

As envisioned by the ACA, each state will have an exchange up and running by October 1, 2013 for policies to go into effect on January 1, 2014. Initially the exchanges will only be available to individuals who buy their own policies and to employees of employers with 50 or fewer workers. Although most Americans will continue to get insurance through their employers and not through the exchanges, members of Congress will be getting their health insurance through exchanges beginning in 2014.

States’ decisions on how to address the mandate in the ACA that an exchange must be established in each state, have fallen into three groups: a state-run exchange, state-federal partnership exchange or a federally-run exchange. Although, these decisions could still change, as of February 15, according to the Kaiser Family Foundation, 17 states and the District of Columbia are planning to run their own exchanges. Those states include: California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Massachusetts, Maryland, Minnesota, Nevada, New Mexico, New York, Oregon, Rhode Island, Utah, Vermont and Washington.
Seven states are planning to develop their exchange in partnership with the federal government including: Arkansas, Delaware, Illinois, Iowa, Michigan, New Hampshire, and West Virginia. It is possible some of these states may ultimately decide to create their own exchanges. The remainder of the states, for a variety of reasons – some political – have chosen to have the federal government build the exchanges in their states.

What the Exchanges will Offer

All plans in each state’s exchange will have to cover a standard set of "essential health benefits." Those details, still being worked out by the Obama administration and the states, will include hospitalization, doctor visits, prescriptions, emergency room treatment, maternal and newborn care, prevention and other care. Plans in every exchange will be divided into four different types, based on the level of benefits: bronze, silver, gold and platinum. The bronze plan is designed to cover 60 percent of expected health care costs, while a platinum plan will cover 90 percent of expected costs. The gold and silver plans will pay expected costs between the 60 and 90 percent levels.

The premiums costs will vary by type of plan and state, but insurers will not be able to charge more based on gender or health status. They will be able to charge older people no more than three times what they charge younger ones.

The ACA is designed to assist individuals and families with the cost of the premiums based on a sliding scale for incomes up to four times the federal poverty level, which equates to about $44,700 for an individual and $92,200 for a family of four.

Insurance companies that write health insurance in a state are not required to participate in the exchange. While most analysts predict widespread insurer participation, each insurer will need to make an economic decision about participation. Stephen Hemsley, CEO of UnitedHealth Group, Inc. told analysts recently that the insurer's involvement in online exchanges will depend on whether it's financially viable for the company. "We will only participate in exchanges that we assess to be fair, commercially sustainable and provide a reasonable return on the capital they will require," he said.

Much work needs to be done by both the states and the federal government and many details need to be sorted out to have the exchanges up and running by October 1 for enrollment to begin. It remains to be seen whether this aggressive timeframe can be met.

To stay abreast of the latest information related to the development of public exchanges in each, the Kaiser Family Foundation web site maintains very current information. Here is a link to the relevant pages on their site: Kaiser Health Reform Gateway.

Private Exchanges

Several years before public health insurance exchanges were written into the ACA, a number of private entities began work on private exchanges. With the passage of the ACA, interest in private exchanges, in combination with a defined contribution approach, has gained momentum.

What is a Private Exchange?

Private exchanges are a marketplace of health insurance products supplied by participating insurers. These exchanges are typically operated by insurers or brokers/consultants and provide access to a broad array of benefits – both traditional and voluntary – from multiple insurance providers, along with education and support tools to help employees make choices to fit their needs.

Private exchanges target different markets. Some exchanges sell to those purchasing insurance in the individual health insurance market. Other exchanges sell to the group health insurance market – either fully insured or self-funded markets. Some exchanges may sell in both spaces.

Employers contract with the private exchange and their employees can choose insurance products from those supplied by participating insurers. While private exchanges can offer a variety of insurance products, this discussion will focus on health benefits.

Facilitating the Shift to a Defined Contribution Model

For decades employers that have offered health care coverage to their employees have generally stuck to a defined benefit model in which the company offers a standard set of health benefits and accepts the majority of the financial burden and risk of the cost of health care.

Due to ever increasing costs of paying for health care, some employers are considering a paradigm shift for their health benefits strategy. Like the transition many employers have made from pension plans to 401(k) accounts, some are switching from defined benefits toward a defined contribution model. Instead of offering defined health benefits, employers make cash contributions to savings accounts that employees use to purchase insurance products.

While private exchanges can operate with or without defined contributions, private exchanges can facilitate the migration to a defined contribution model while allowing employers to retain some involvement in their employees’ health care.

Models Emerging

Private exchanges are being promoted by private industry stakeholders such as insurers and brokers/consultants. Two private exchange models are emerging:

Single-carrier exchanges: These exchanges are promoted by a single insurer and target employers that wish to maintain some role in choosing both the insurance carrier and plan design. To date, entities such as WellPoint, BCBS of Michigan, BCBS of Minnesota, HCSC and Towers Watson are developing single carrier exchanges.

Multi-carrier exchanges: These exchanges are being promoted predominantly by third-party intermediaries such as brokers or benefits consultants. They will offer a broad range of payers and plan design options. Employers will likely take a more hands-off role in this model, with less input into benefit design options. Aon Hewitt, ADP, Mercer and Walgreens, among others, are offering or plan to offer this model of private exchange.

Can Private Exchanges Become a Viable Option?

If history serves as a predictor, it is conceivable that the success of private exchanges in addressing health benefits for retirees could be applied to current employees. In the 1990s the Financial Accounting Standards Board (FASB) enacted an accounting rule requiring employers to recognize future retiree health benefits liabilities. This rule forced many employers to find ways to cap their retiree health lia­bilities. Some dropped coverage for retirees, while others set a cap on how much they would contribute to retiree benefits each year. Over time, new third-party private exchanges emerged where retirees could shop for Medicare insurance products using a defined contribution model for funding. The administra­tion of benefits was simpler and more cost-effective for employers.

A recent Booz & Company research study of more than 500 employers found strong interest in private exchanges. Seventy to eighty per­cent indicated that they would prefer a private exchange to a public one. While interest is strong, there are several hurdles impeding their widespread adoption including:

  • Employers’ desire to offer competitive health benefits. Many employers consider health insurance a critical part of their employee benefits package offerings. Employers believe moving to a private exchange with a defined contribution model could hurt their ability to attract and retain talent.
  • An untested approach to offering health benefits. Employers are concerned that moving to an as yet unproven approach could lead to quality issues related to customer support and service.
  • Too many unknowns. With many issues involving health care reform still unresolved, employers are hesitant to make any substantial changes to their health plans, such as moving to a defined contribution model, until reform comes into clearer focus.

For detailed information about private exchanges and defined contribution health plans, please see: Employee Benefit Resource Institute.

Elements for Success

Regardless of whether it is a public or private exchange, many industry experts suggest there are several features exchanges must have to ultimately be successful:

  • Robust, unbiased decision support tools. Critical to the success of any exchange is providing decision support tools to help the consumer determine what health insurance plan is best for them. Decision support may come in different forms and different levels of sophistication. The availability of call centers and online live support represent fairly simple, but valuable assistance to consumers. More sophisticated tools include so called “recommendation technology.” The health care consumer is asked a series of questions related to:
    • Expected utilization of future care
    • Tolerance of risk
    • Past health care utilization, including claims information, if available

The technology then recommends a plan that best fits the consumer’s needs.

  • Comprehensive support services: The successful exchange will provide customer services and support from the time the consumer enters the exchange, through to the actual purchase of a health plan and/or supplemental insurance product(s) and enrollment.
  • A significant inventory of health plan offerings. Exchanges should offer a variety of products with a wide range of costs and options. Just as important, the exchange’s plan offerings should be flexible, consumer-oriented and simple to understand.


Exchanges, whether public or private, are not a magic bullet for ever increasing health care costs. But with the momentum provided by the enactment of the ACA, they will continue to attract attention, as will interest in defined contribution models. While the health care landscape is changing, what has not changed is employers’ need to control the cost of their health benefits.  It is likely employers will consider approaches such as exchanges to begin the transition of health benefits from an employer-driven model to a more consumer-driven model.

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BHCG Monitor: Focus on Health Care Benefits - April 2012