Exchanges and employers: Wave of the future?

State health insurance exchanges soon could be a dominating fixture in the health care landscape of the United States. As a new marketplace for health care coverage, how will they operate and what will their effect be? HealthPass New York President and CEO Vincent C. Ashton sheds some light on these new players in the health care game.

Health insurance exchanges soon will be a dominating fixture in the nation's health care landscape. Experts predict that exchanges will expand health care coverage to scores of Americans, many of whom were previously without it. One study estimates that 2.9 million employers will participate in exchanges, 1 million of which previously did not offer their workers coverage.

The health care reform law calls for two exchanges in each state. One is referred to as the American Health Benefit Exchange and will serve individuals. The other one, known as the Small Business Health Options Program Exchange, will first serve only the small-group market. Large employers likely will be brought into the fold shortly thereafter. States have the option of capping their small-group market at firms with up to 50 employees until 2016, when they must expand it to firms with up to 100 employees. Beginning in 2017, states will have the option of opening up their SHOP exchange to firms of any size. A major deciding factor in this policy decision will be the SHOP exchange's initial experience. This puts pressure on states and employers to work collaboratively to ensure robust and thriving SHOP exchanges. A healthier small-group market—one that enjoys balanced risk and affordable premiums—helps to enhance the large-group market.

These new state-based marketplaces aim to bring individuals and employers a new method of shopping for and purchasing health care coverage. Individuals will be able to easily compare their options and access federal subsidies to make coverage more affordable. Employers will benefit in myriad ways, too. Tax credits will be available to certain small businesses that offer their employees exchange-based coverage. Workers will be empowered to choose the health care plan that fits their needs. An entire menu of coverage options that span multiple carriers, plan designs and provider networks will be available to them. Employers likely will be encouraged to modify how they contribute financially to health benefits. Flat-dollar defined contributions are growing in popularity. This approach has proven an effective method—in private-sector exchanges and public exchanges that were already established when the health care reform law passed—in enhancing cost-conscious behavior on the part of employees, and bringing a greater degree of certainty to health benefits budgets.

Employer relief from the administrative burden of managing health benefits—the indirect costs of providing health care coverage—is a core exchange feature, too. Exchanges will carry out many of the back-office services—from enrollment and eligibility determination to premium aggregation and member services—that large firms' human resource departments perform. Employers will be free to devote more time and other resources to achieving their business goals. This approach is a radical and welcome departure from the current model, one that has proven largely unsuccessful, especially for small businesses. Exchanges are not about just health care access; they serve economic development interests as well.

Under the health care reform law, exchanges are set to be installed by 2014. Some states, however, will have a federally facilitated exchange in their backyard. Political posturing and policy concerns have slowed exchange development. These slow-moving states likely will bump up against rapidly approaching statutory deadlines, forcing the federal government to step in and operate their exchange for them. As of the printing of this article, only 14 states have approved legislation or issued an executive order—after the passage of the reform law—creating an exchange. Many more are pursuing a variety of strategies aimed at achieving that outcome.

Regulatory uncertainty has been cited as one factor stalling exchange development. However, a recently released and long-awaited final regulation positions exchanges to substantially benefit employers. It requires exchanges to provide for rolling enrollment periods so employers can sign up whenever is most convenient for them, supply a robust set of back-office services to relieve employers of the burden of managing health benefits, and allow for employee choice across all options offered. Equipped with these measures, exchanges will be a force for good in the marketplace.

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Numerous factors are affecting the future of employer-sponsored health insurance. The economy struggles to recover, health care costs continue their upward spiral, and global competition is as stiff as ever. Employers, therefore, are reconsidering their long-term benefits strategy. A series of questions confronts them in this enterprise. Should we continue offering health benefits? If so, how do we structure an approach that is fair, sustainable and complementary to business goals?

The calculus of whether to stay in the game is not as straightforward as it may first seem. Dropping the health benefits offer—and instead sending employees to the AHBE—costs more than simply paying the employer mandate penalty, a fee imposed on large firms that do not offer their employees coverage. Costs associated with employee morale, tax implications, reductions in productivity, compensation replacement and other elements factor into this equation. A 360-degree approach must be taken when considering future health benefits.

In addition, group coverage is ordinarily more affordable than individual insurance, particularly in states that suffer from anemic, high-cost individual insurance markets. Recent research shows that even coupled with a premium subsidy, individual coverage still will be more expensive than group coverage for most workers, especially mid- and high-income earners. Sending employees to the open market likely also will mean replacing workers’ lost compensation—health benefits—with cash wages. This would require not only replacing the value of the benefits, but also grossing up the cash wages considerably to make up for the tax favorability that group coverage offers. The same factors that have made group coverage a viable option for decades still may hold.

Large employers care deeply about exchanges. One reason for this is that participating in an exchange is another possible health benefits strategy. Some will send active employees to exchanges, others will use them for pre-Medicare retirees, and still more will draw on exchanges for both sets of beneficiaries. If a state decides to open its exchange to large groups, these employees and firms will benefit from the same advantages that small businesses enjoy.

Large employers will be keeping their eyes on a few elements when deciding whether to enter an exchange. The major one will be the viability of an exchange. Some experts predict that some SHOP exchanges will fail after only a few years. Others will thrive and be long-term solutions for scores of employers. And some exchanges will be a good fit for some large employers, and a poor one for others.

A second consideration is the state of the economy and the labor market. Much can happen in five years, and the demand for health benefits could be vastly different in the future than it is today.

Lastly, legal challenges to the health reform law put in question the future of the nation’s health care landscape. Although we will have a better sense of that future when the Supreme Court rules on this issue in June of this year, it could thrust implementation dynamics into new and unforeseen directions.

Large employers also care about exchanges because the two can be purchasing partners. The health reform law presents an opportunity to align employers’ purchasing values and goals with those of the exchanges. Many exchanges will be configured as health care change agents affecting delivery system and quality improvement reforms, issues of great importance to employers. The combined voice of the employer community and the exchanges will make for a formidable force in the marketplace, catalyzing the implementation of innovative delivery mechanisms and payment reforms. This consistent and powerful signal to health plans and providers will surely help bring about much-needed change to the health care system.

All that said, it is far too early to know if exchanges will be viable options for large employers. Nevertheless, they present an opportunity worth considering and tracking.

A whirlwind of change is overtaking the nation’s health care and insurance systems. Health insurance exchanges could very well quickly emerge as a sensible and sustainable solution for many small, midsize and large employers. Although large-employer participation will arrive as one of the later points of health reform implementation, these firms should carefully track the development and evolution of state exchanges. Their partnership with and participation in exchanges could lead to the next wave of health care innovation.

Vincent C. Ashton is president and CEO of HealthPass New York, a nonprofit commercial health insurance exchange serving New York-based small businesses in the New York City metropolitan region. He can be reached at vashton@healthpass.com.