The Evolution Of A Two-Tier Health Insurance Exchange System

By Rosemarie Day, Pamela Nadash and Angelique Hrycko
Health Affairs Blog, August 13, 2014

Health reform has been a catalyst for change. It has fostered the creation of public health insurance exchanges and accelerated existing trends in health insurance coverage for employees. Many employers are reevaluating their coverage offerings, some employers are no longer providing insurance coverage, and, among those who continue to offer it, high deductible plans with restricted networks are becoming the norm.

In addition, employers are increasingly outsourcing health insurance benefits management by moving employees to private health insurance exchanges – often in combination with a shift toward a defined contribution approach. Estimates vary, but surveys show that anywhere from 9 to 45 percent of employers plan to implement private exchanges in the future.

Accenture has predicted that by 2018, private exchange enrollment will outpace public exchange enrollment.

Consulting firms and benefits consultancies are positioning themselves to grab this market, and are generating interest by publicizing upbeat projections of conversions to private exchanges. This publicity means that attention is focused on these firms and the large employers they target.

However, another, less visible movement is taking place among small to mid-size employers, whose employees may not be so well served by private exchanges. Not only do small employers lack the negotiating power of large employers, but exchange operators for this market may be unable to offer the same level of service; nor does it seem likely that the public small business exchanges will offer sufficient competition.

Benefits consultancies, such as Aon Hewitt, Towers Watson, and Mercer, have been actively recruiting employers to switch to this model, and — with notable success — have acquired large well-known companies like Walgreens. Other major employers are currently negotiating arrangements, planning to phase in private exchanges over time, focusing on different groups of employees.

Two Tiers: Small vs. Large Employers

However, these established consulting firms and benefits consultancies are, by and large, initially focusing on large employers, which represent only one segment of the American workforce. Small employers (with 2-50 employees working at least 30 hours a week) make up nearly 96 percent of all U.S. businesses and employ nearly 34 million workers – and the health insurance picture here isn’t pretty.

People working at firms with fewer than 50 employees are disproportionately uninsured, constituting 25 percent of American workers, but 40 percent of the uninsured. The smaller the firm, the less likely they are to cover their workers.

Moreover, the health insurance that they do provide has tended to be less robust than that offered by large employers – the phenomenon that the term “underinsurance” was created to describe. This is largely because small businesses pay, on average, 18 percent more for health insurance than large employers do, due to higher administrative costs.

The Affordable Care Act (ACA) attempts to address this problem by establishing the Small Business Health Options Program, or SHOP exchanges.

SHOP vs. Private Exchanges

However, like the public exchanges for the individual market, SHOP exchanges have had their problems. For the 32 states participating in the federal SHOP exchange, the picture is gloomy: the administration delayed implementation and dropped the requirement that insurers participating in the public exchange also participate in the federal SHOP exchange, reducing choice for employees, and making life more complicated for the federal SHOP exchange – they will now need to negotiate with each carrier individually to encourage participation.

In addition, the “employee choice” option was delayed for the federal SHOP exchanges until 2015, and most recently, 18 of these exchanges sent a request to CMS to opt-out of employee choice for another year, pushing this delay to 2016.

The picture for the 17 states and DC running their own SHOP exchanges is somewhat better, but not great. Currently, only 3,000 out of roughly 120,000 small businesses in Colorado participate in its SHOP exchange, while enrollment in other states has been low: in Connecticut, only 330 lives are insured, along with only 4,900 lives in California.

Are There Any Downsides to These Private Sector Efforts?

Given the slow start-up of the SHOP exchanges, the private exchanges may provide a valuable service, and, because they have the chance to corner the market before the SHOP exchanges are fully up and running, they may provide public exchanges with stiff competition.

Yet, with private exchanges, employers are likely to get what they pay for. Consequently, large employers will likely have the interest and capacity to demand quality from the sophisticated organizations competing for their private exchange business. These entities are likely to do a good job, using well-designed websites and decision support tools that promote product transparency.

Less sophisticated organizations, dealing with employers who have less negotiating power and insurance expertise, may not.

Private exchanges may well end up segmenting based on the markets they are catering to: more bare-bones, with fewer options and decision support tools for the small employer sector, and more generous, better options with more sophisticated decision support tools for large employers.

Moreover, if private exchanges corner the market, SHOP exchanges may never get off the ground.

http://healthaffairs.org/blog/2014/08/13/the-evolution-of-a-two-tier-hea…

It’s complicated. As insurance coverage expands, inside and outside of the ACA marketplace (insurance exchanges), it looks like some of the current inequities and injustices will be expanded as well.

Briefly, here is what we are looking at:

  • The public ACA exchanges are now covering individuals, but primarily with plans that have lower actuarial value (pay a smaller percentage of health care costs) and with narrow networks (greatly limiting choice of physicians and hospitals). These undesirable features slow the growth of insurance premiums though, even with government subsidies, they are still too high for many who are then allowed to opt out on a hardship basis.
  • Federal and state SHOP exchanges (Small Business Health Options Program) are being established to provide a health insurance market for small businesses now, and eventually for large employers as well. For reasons explained in the article, these government SHOP exchanges are off to a very slow start and may become inconsequential as employers turn to private insurance exchanges instead.
  • Employers have been seeking relief from the burdens of their employee health benefit programs. They are turning to private insurance exchanges which employees accept as a means of providing them with greater choices of health insurance plans. However, employers are using this opportunity to increase deductibles and other cost sharing, reduce provider choice through narrower networks, and switch from defined benefit to defined contribution – placing more of the burden on employees. It may take a while before employees realize what happened.
  • Large employers will still have leverage to negotiate more favorable features with the competing private exchanges.
  • Small employers will not have leverage and will be stuck with higher administrative costs and bare minimum, lower actuarial value plans. They likely will end up using private exchanges by default because of the implementation difficulties that the government SHOP exchanges are experiencing.
  • As this article explains, it appears that we will perpetuate and expand the two-tiered nature of lousy plans for small employers and slightly better but mediocre plans for large employers.

Where is health care justice in all of this? Not to be found. We need an equitable single payer national health program. The sooner the better.