For now, private healthcare exchanges are a blip on the employer-provided healthcare screen, but, within the next few years, that could change dramatically. And employers should pay attention.
By Tom Starner
Private healthcare exchanges may not be dominating the employee benefits scene right now, but some believe they will eventually have a serious impact on U.S. healthcare.
In a 2013 report, Accenture Research, for example, predicted that private health insurance exchanges will "rapidly upend insurance purchasing" for many of the 170 million people who receive benefits through their employer. According to that report, private exchange participation will approach public exchange enrollment levels (the Congressional Budget Office says 30 million by 2017) and surpass them soon thereafter. That means that, by 2017, about 18 percent of Americans will purchase insurance through exchanges, radically transforming the health insurance landscape.
With that as context, Vanessa Scott, a partner at Atlanta-based law firm of Sutherland Asbill & Brennan, recently authored a Tax Notes alert that discusses some of the employment law issues revolving around private exchanges. She also answered a few key questions for HRE on the subject.
Q: Can you differentiate private exchanges from public exchanges from an employment-law perspective?
A: To some extent, vendors designed private exchanges to model the benefits offered through the Affordable Care Act's public exchanges. Public exchanges provide a purchasing platform for small businesses and individuals who cannot otherwise obtain or afford health insurance coverage. Similar to private exchanges, public exchanges offer guaranteed coverage and allow individuals to review, compare and purchase health insurance coverage products directly from private issuers in each state. However, federal and state governments operate public exchanges, while third parties, such as consultancies, offer private exchanges. Public exchanges are open to anyone willing to purchase coverage, while private exchange participation is limited to a single employer's eligible employees, spouses and dependents.
Private exchanges also look to an employer's claims experience for underwriting, while public exchanges require no medical underwriting and will not rely on economies of scale to control costs in the manner of a private exchange adopted by an employer. Unlike private exchanges, public exchanges are limited to medical, dental and vision offerings from government-approved carriers.
Q: Can you explain any specific private health-insurance-exchange benefits for employers?
A: For one thing, they provide access to a broader array of coverage options for employees. Currently, studies show 32 percent of employers with 5,000 or more employees offer only one medical plan option. For employers with 500 to 4,999 employees, that number rises to 52 percent.
In contrast, most private exchanges offer a wider variety of health coverage options than an employer-sponsored plan, increasing the likelihood that participants will have options closely tailored to their individual coverage needs. Coverage choice also leads to more efficient employee healthcare spending. Younger employees can be provided with less expensive plan options on a platform that can also include several options for older employees and employers with families -- at various price points.
Next is increased cost predictability. Employers sponsoring traditional self-insured plans often find it difficult to accurately predict healthcare cost trend increases due to external variables beyond the employer's control, including participant claims, company growth or retraction and unpredictable swings in provider costs. A private exchange can offer an employer the ability to mitigate cost increases by shifting risk to the exchange sponsor and, by extension, participating issuers. By setting a "fixed" per-employee subsidy for health benefits, the employer can budget its year-to-year healthcare costs more accurately.
Finally, there are reduced administrative burdens. Seventy percent of employers report being "very" or "somewhat" concerned about the amount of internal resources spent on benefits administration. Private exchanges can reduce or eliminate the administrative burden associated with sponsoring a traditional plan by allowing the employer to cede certain ACA and Employee Retirement Income Security Act compliance duties to the exchange sponsor, including eligibility determinations and compliance with the requirements surrounding the employer-shared responsibility requirements.
The exchange sponsor can step into the shoes of the plan sponsor by taking on roles such as plan maintenance, benefit design, and COBRA processing and administration. Most private exchanges also offer technologically sophisticated decision tools that assist employees with coverage choices and enrollment, two of the most labor-intensive roles for benefits staff. In addition, the consumer education resources offered by exchanges can help employees become more conscientious, efficient consumers of health coverage by offering transparency tools and access to provider cost comparisons often unavailable under a traditional self-insured arrangement.
Q: Can you talk about the uncertainty of the tax consequences of linking a health reimbursement account to a private exchange?
A: The Department of Labor and the Internal Revenue Service have issued guidance suggesting that an HRA must be "integrated" with a comprehensive employer-sponsored group health plan in order to meet the ACA's coverage mandates and, furthermore, could not be used to fund premium costs for individual coverage on an exchange, public or private. Under this guidance, an HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by a primary group health plan coverage provided by an employer and otherwise meeting the requirements of the ACA.
Because this guidance does not address the meaning of the term "integrated," in the private exchange context, some private exchange sponsors have opted to re-examine or adjust business models that relied on stand-alone HRAs as an employer funding vehicle. So far, it's somewhat unclear which HRA structures can be used to fund premium costs for group health plans within a private exchange. Private exchange structures that have adopted an "integrated" HRA model continue to pose questions regarding the application of the HRA rollover rules to these accounts, the use of premium-only HRAs and the treatment of unused employer subsidies upon termination.
Q: Do you expect regulators to remove or at least reduce legal uncertainties related to private exchanges?
A: Right now, it does not appear that the regulators see a need to address the legal uncertainties around exchanges. The market standard for private exchanges is evolving, and therefore it would be difficult for the agencies to step in and provide guidance at this point. If private exchanges get very popular, particularly among large employers, I expect we would see more regulatory action around these plans.