Financial Executive: April 2013

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Feature Article

Benefits

Questions to Ask Before Joining a Private Health Exchange

The newly forming health insurance marketplaces offer employers the choice: public or private exchange. How do these differ and what issues need consideration to make the decision?
By Christopher Calvert and Stewart Lawrence


Now is the time to begin exploring the financial and other pros and cons of the various types of health insurance exchanges (termed “health insurance marketplaces” by the U.S. Department of Health and Human Services) that are now, or will soon be, available.

Though public exchanges — which are being created by the federal and state governments under the Affordable Care Act (ACA) for 2014 — are receiving most of the attention, private exchanges have been set up as alternatives to both public exchanges and current forms of employer-sponsored health coverage. These private exchanges are aggressively competing for business and marketing their services to employers. But, before employers sign on, they need to do their due diligence and learn about the various options. (See the sidebar, “Public Versus Private Exchanges” ).

With all the new information, organizations need to answer several questions in order to make informed decisions about private exchanges: how do they differ from public exchanges and how does a company determine if a private exchange is the right fit for its organization? Also, what are the direct financial issues and the related human resources/benefits issues that employers need to consider?
Key Questions about Private Exchanges
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 11 questions:

What Role Does the Employer Want to Play in Health Care Delivery?
Employers need to consider whether they will be offering health care coverage in light of the ACA provisions. The driver of this decision tends to be financial, partly because employers must look closely at the implications of the ACA’s employer shared responsibility penalty and excise tax.

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.

In addition, 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).

What is the Employer’s Long-term Strategy and its Employment Value Proposition?
The Employment Value Proposition (EVP) includes what an organization offers its employees in terms of benefits, experience and opportunity in exchange for an employee’s effort and commitment. Sibson Consulting’s model consists of five components: affiliation, work content, career, compensation and benefits.

It is important to know if health care benefits play a major role in employee attraction, retention and engagement. Many employers compete for the best employees by focusing on benefits. If an organization joins a private exchange, each employee would pay a different premium, partly because each employee would choose a plan that best fits his or her needs.

How employers address this issue would depend on their EVP and the extent to which they want to make their employees financially “whole” by increasing their compensation and/or benefits. Employers also need to consider whether joining a private exchange may damage employees’ perception that their health care coverage is employer-sponsored. Moreover, it may be difficult to gauge how employees feel about the new arrangement.

Is the Private Exchange Considered Individual or Group Market Coverage?
Federal rules govern the tax status of employer-sponsored insurance coverage. If private exchanges are considered group health coverage, then employers will likely be able to continue to use Health Reimbursement Accounts (HRAs) as a purchasing vehicle for the coverage. However, if private exchanges are using the individual market, HRAs cannot be used to purchase the coverage on a tax-preferred basis.

What is the Competition Doing?
Employers should try to discover whether their peers are continuing the status quo, terminating group health plan coverage or joining an exchange. Ideally, they should find out what type of coverage the competition is offering.

What Role Does the Employer Want to Play in Improving the Health and Wellness of its Employees?
According to research, employers that focus on optimizing the health and positive behavior of their employees can experience benefits that go beyond reducing their health insurance costs.

For example, employers could move from paying for treatment-focused services to investing in keeping employees healthy. Employers should not lose sight of their wellness philosophy and initiatives.
It is important to continue to maximize workforce productivity and employee health, even if the organization’s mode of providing health coverage is through an exchange.

What is the Exchange’s Underwriting Model and Does Adverse Selection Play a Role?
A private exchange that has three or four large employer members today and doubles in size next year may change its rates if the new members alter its demographics. Depending on the underwriting model of the exchange, costs could swing wildly from year to year.

In addition, because health insurers can offer the same group plans both inside and outside of the exchange, older/less healthy employees may purchase their insurance through the exchange if that is the more affordable option. This could result in adverse selection, eventually leading to higher premiums. Adverse selection is the disproportionate purchase of health insurance by the least healthy individuals.

How Involved Would the Employer Be in Vendor Administration?
Although joining an exchange may reduce vendor administration, it will not eliminate it. A key question is how much consistency and uniformity employers want for their workforce. The way employers communicate with their insurance carriers may also change.

Employers need to think about whether they would be working directly with the exchange or vendor platform and if daily communication would be with the exchange or the insurance carriers. Employers should also review how much, if any, interaction there would be with an account service team. In addition, they need to consider whether they want to be involved with selecting insurance carriers and plan design or leave all selection up to the employees.

Will Joining a Private Exchange Improve the Employer’s Access to High-quality Health Plans?
With a private exchange, employers can choose from a menu of insurance carriers, which will help companies that are geographically diverse. Employers should compare their current plan offerings with those in the exchange to determine if the benefits they currently offer are similar to those being offered through the exchange and whether the networks are similar or different.

They should also look at the premium rates and investigate whether the quality of care would be reduced within an exchange. The exchange model may give employees more freedom and choice of coverage options, but employees could enroll in a less-rich plan and be subject to more out-of-pocket costs in time of illness than intended. The immediate next step would be to carefully evaluate the exchange options to make an informed decision.

Has the Employer Assessed its Internal Capabilities?
Joining an exchange will generate administrative and technological challenges. Employers need to research how they would be affected by the exchange’s billing and payroll systems. They also should look at the quality of the exchange’s call center and Web capabilities for employees and employers, the exchange’s staff and the reporting tools available to employers.

Who ‘Owns’ the Private Exchange?
Companies that used to be advisers on health care issues are now becoming issuers in the exchange market. Employers need to consider the source of any advice they receive.

How Would the Employer’s Human Resources Function Change?
Many employees need assistance when choosing a health care plan and look to human resources (HR) for help. Because most employees will probably continue to do so, employers need to determine how HR will communicate and deal with the carriers, how claim disputes and other issues will be handled and who owns the relationship.

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 than the public exchanges. 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.

Christopher Calvert (ccalvert@sibson.com) is a senior vice president and the health practice leader for Sibson Consulting and heads the firm’s exploration of the health insurance exchange marketplace. Stewart Lawrence (slawrence@segalco.com) is a senior vice president and leader of Segal’s national retirement practice.