Health insurance buying power: Public marketplaces vs. private exchanges
The Marketplace concept is the backbone of PPACA, to the point of requiring each state to operate one, in some manner, as of January 1, 2014. In fact, on October 1, 2013, every employer was required to furnish employees with a Model Notice that announced the existence of the public Marketplace along with more information about where to find one. A “Marketplace” is an online health insurance clearinghouse from which individuals can select a health insurance plan among several insurance carriers and varying plan designs. The Marketplace is a concept that we will all likely become more familiar with in the months and years to come, some of us sooner rather than later.
A public Marketplace is a very convenient forum that addresses several PPACA goals: to mete out the health insurance premium subsidies to those who qualify, to standardize health plan offerings, to engage consumers in the selection process, to inspire price competition among the insurance carriers, and to offer a solution for individuals who simply do not have access to employer-sponsored coverage.
To make matters a little more complicated, there are both public and private versions of a health insurance clearinghouse. “Public marketplaces” are mandated under PPACA and offered to individuals, who may qualify for premium subsidies so long as their household income is lower than 400% of the Federal Poverty Level, and they have no access to affordable coverage through an employer plan. Public marketplaces also exist for the small business segment, known as Small Business Health Options Program (SHOP). SHOP marketplaces do not provide premium subsidies , but allow premiums to be paid on a pre-tax basis. The state of Massachusetts operates a fairly sophisticated public marketplace by the name of The Health Connector, which was borne of Mitt Romney’s Massachusetts Healthcare Reform law back in 2006.
“Private exchanges”, by contrast, are generally run by healthcare consultants or other entities and are offered to groups of very large employers for the benefit of their employees. Though federal premium subsidies are not available through a private exchange, an employer can contribute to the purchase of healthcare through a private exchange, most typically a flat dollar amount for each employee.
|Public Marketplace||Private Exchange|
|Federal premium subsidies available||No federal aid available|
|Available for individuals and small businesses||Available for employees of a certain employer|
|Post-tax premiums (for individuals)||Pre-tax premium payment allowed|
|Offer a variety of carriers and plans||Single carrier or multiple carrier models|
|Individual policies, not protected under ERISA||Group coverage protected under ERISA|
PPACA may not have invented the idea, but the resurgence of the health insurance clearinghouse concept is an exciting development for employers today. Indeed, there have been positive news reports about retail giants such as Walgreens and Sears embracing the concept for tens of thousands of employees. There are many advantages for a large employer, for example:
- Allows an employer to earmark a specific budget for health insurance: Set a defined contribution amount per employee per year. Fluctuations only relevant to headcount.
- Enables employees to shop for the level of coverage that is right for them. One size does not always fit all!
- Considered bona fide employer-sponsored group coverage. Employee protected by all rights under ERISA, COBRA, HIPAA, etc.
- Promotes consumerism and cost awareness, two missing elements in group coverage over the past decade.
- Streamlines plan administration and takes many tasks off the employer’s plate, although some involvement is still necessary.
- Reduces the effects of adverse risk on the plan, the insurance carrier generally assumes risk for all claims.
Despite the fact that private exchanges offer so many solutions for certain employers, there is an undeniable layer of bureaucracy that exists in this approach. In addition, it’s hardly an exact science. Employers need to be aware of some of the pitfalls of offering coverage through a private exchange, not the least of which is that it may take some time for a well-crafted model to emerge. Some drawbacks of offering coverage through a private exchange include:
- Is limited in availability to very large employers such as national retail chains and the like. While models may emerge for middle market groups, there is yet to be any evidence of that happening.
Would generally require the employer to fully insure the medical plans, which may be perceived as a drawback if the employer is coming from a self-insured setting.
- Sending employees off to a third-party may distance the employer from the offering of health insurance; employees may see less value.
- Will require a type of unknown administrative support from the employer that may involve IT expertise, etc.
- Employers will have a little role in the annual rating of the premiums on the plan, especially if the private exchange is shared with other employers.
- Employer education would become even more important; employees will need guidance on how to select a plan for them, especially if the offerings are robust.
The correct approach depends on the employer’s size, culture, budget and employee benefit goals. It is important that employers take some time to quantify that now before more choices start emerging. Is this approach a way for employers to effectively outsource health insurance or will it result in de-valuing one of the core offerings employers have always been able to use to attract and retain employees?
About the Author
Sara LaVallee is a Senior Vice President at WGA’s Employee Benefits Practice, where she focuses on full-scale service to large groups. Her role involves the handling of all lines of coverage in an account management and retention capacity. She is also a key member of the Health Reform Advisory team at WGA.