Tag Archives: private exchanges

Private Exchanges: Panacea or Problem?

Employers trying to continue offering affordable health and welfare benefits amid the expanding costs and regulations enacted under the Patient Protection & Affordable Care Act (ACA) often are encouraged by some consultants and brokers to consider offering  coverage options pursuant to a “private exchange.”

While these options sound attractive, not all work for all employers.

The consumer-driven healthcare and other private exchange lingo used to describe these arrangements often means different things to different people. Some “private exchanges” are little more than high-tech online cafeteria enrollment arrangements. (See, e.g., A ‘Cynical’ Look at Private Exchanges.)

Employers need to scrutinize proposals both for compliance and other legal risks, affordability and cost and other suitability. When considering a private exchange or other arrangement, it is important to understand clearly the proposal, its design, operation, participating vendors, the charges, what is excluded or costs extra and who is responsible for delivering what.

Agencies have issued a long stream of guidance cautioning employers against paying for or reimbursing premiums for individual policies or the cost of enrolling in coverage under a public health insurance exchange. (See, e.g., DOL Technical Release 2013-03IRS Notice 2013-54;Insurance Standards Bulletin, Application of Affordable Care Act Provisions to Certain Healthcare Arrangement; IRS May 13, 2014 FAQs available here. )Most recently, the new FAQS About Affordable Care Act Implementation (XXII) (FAQ XXII) published by the agencies on Nov. 6, 2014, reiterates agency guidance indicating that tax basis for purchasing individual coverage in lieu of group health plan coverage.  FAQ XXII, among other things, states:

  • Health reimbursement accounts (HRAS), health flexible spending arrangements (health FSAs) and certain other employer and union healthcare arrangements where the employer promises to reimburse health care costs: are considered group health plans subject to the Public Health Service Act (PHS Act) § 2711 annual limits, PHS Act § 2713 preventive care with no cost-sharing and other group market reform provisions of PHS Act §§ 2711-2719 and incorporated by reference into the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code) but
  • HRA or other premium reimbursement arrangements do not violate these market reform provisions when integrated with a group health plan that complies with such provisions. However, an employer healthcare arrangement cannot be integrated with individual market policies to satisfy the market reforms. Consequently, such an arrangement may be subject to penalties, including excise taxes under section 4980D of the Internal Revenue Code (Code).

FAQ XXII reinforces this prior guidance, stating, “Such employer healthcare arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.”

Another potential issue arises under the various tax and non-discrimination rules of the code and other federal laws.  For instance, Code sections 105, 125 and other Code provisions against discrimination in favor of highly compensated or key employees could arise based on the availability of options or enrollment participation.  Historically, many have assumed that these concerns could be managed by treating the premiums or value of discriminatory coverage as provided after-tax for highly compensated or key employees. However, IRS and Treasury leaders over the past year have made statements in various public meetings suggesting that the IRS does not view this as a solution. Of course, FAQ XXII also highlights the potential risks of underwriting or other practices of offering individual or other coverage in a manner that discriminates against disabled, elderly or other employees.

In addition to confirming that the arrangement itself doesn’t violate specific Code or other requirements, employers and others responsible for structuring these arrangements also should critically evaluate and document their analysis that the options offered are suitable. Like other employee benefit arrangements, ERISA generally requires that individual or group products offered by employers, unions or both be prudently selected and managed. Compensation arrangements for the brokers and consultants offering these arrangements also should be reviewed for prudence, as well as to ensure that the arrangements don’t violate ERISA’s prohibited transaction rules. Eligibility and other enrollment and related administrative systems and information sharing also should be critically evaluated under ERISA, as well as to manage exposures under the privacy and security rules of the Health Insurance & Portability Act (HIPAA) and other laws.

As a part of this analysis, employers and others contemplating involvement in these arrangements also will want to review the vendor contracts and operating systems of the vendors that will participate in the program for legal compliance, prudence for inclusion, prohibited transactions and other legal compliance, as well as to ensure that the contract holds the vendor responsible for delivering on service and other expectations created in the sales pitch. In reviewing the contract, special attention should be given to fiduciary allocations, indemnification and standards of performance, business associate or other privacy and data security assurances required to comply with HIPAA and other confidentiality and data security requirements and the like. The contractual commitments from the vendor also should cover expected operational performance and reliability as well as legal compliance and risk management.

The State of the Nation’s Private Employer Exchanges: Crazy!

I’m not talking Patsy Cline’s “Crazy” or even Gnarls Barkley’s “Crazy”—I’m talking Peter-Frampton-re-release-the-same-song-and-get-totally-different-results kind of crazy!  In 1975, Frampton released “Show Me the Way” on his album Frampton, and no one cared.  The song was re-released in 1976 on the album Frampton Comes Alive—and topped the charts in both the U.S. and U.K. In Wayne’s World, the song was described as “required listening for all suburbia.”  It’s all marketing, baby!

What does this have to do with private exchanges? Most are just a re-release of technology that has been part of benefits administration enrollment for years.

The following is a short list of “new” capabilities and requirements that are typical for a private exchange:

  • Defined employer contribution, instead of defined benefit.
  • The ability to connect electronically to insurance carriers.
  • Decision support tools, to help determine employees’ best options.
  • Support for core insurance products such as medical, dental and vision.
  • Support for voluntary insurance products such as life, disability and accident.
  • Support for multiple insurance carriers (although some exchanges are single-carrier).
  • HRA and Section 125 pre-tax support.
  • Premium processing and billing support.
  • Support for insurance plan comparison and other employee shopping tools.

Nearly every function defined as “new” for a private exchange is not new—these functions have been part of group benefits administration systems for over a decade.  As I’ve said, the “new” private exchanges are 95% marketing hype and 5% enhanced decision support.

I have attended dozens of conference breakout sessions, read articles, talked to “private exchange” vendors and seen countless demos. The only word I can use to describe the whole group private exchange world is “crazy” — wonderful, “Show Me the Way” kind of crazy.

Given that we’ve been there and done that with the technology in the private exchanges, I can offer some informed observations about how they will play out as employees use them to select coverage under the rules established as part of Obamacare.

–It would be very difficult to move to an Expedia-type shopping model for employees’ insurance. Insurance carrier requirements for participation and underwriting through private exchanges make the disintermediation of the health insurance broker less likely than the disintermediation of the travel agent.  Few exchanges are even talking about vendor participation. It takes years to develop benefits administration systems simply because of the inherent complexity of insurance. A good technologically and customer service driven health insurance adviser is worth her weight in gold, and will continue to be.

–While Health Sherpa has been described as a somewhat functional equivalent to healthcare.gov, that claim is, well, crazy. Health Sherpa—although a great idea—has no ability to process eligibility, enrollment, carrier connectivity or anything required in a true benefits enrollment or exchange platform.  Health Sherpa is a clean front end for displaying plan options and rates but has no back end to support the followthrough required by the carriers or the federal or state governments.

–Recently, the president invited executives from a few of the nation’s top tech companies to the White House for a highly publicized meeting.  Why?  What do Yahoo and Amazon know about health insurance exchanges, enrollment, eligibility and carrier connectivity?  Exactly nothing!

If the president wanted more than a photo op, why didn’t he call Rich Gallun or Don Garlitz from bSwift or ask my company, benefitsCONNECT, to join the discussion? Between us, we accurately and electronically process many millions of enrollments—completely eliminating the need for paper. Either company could have saved this country hundreds of millions of dollars and produced a public exchange for Obamacare that actually works.

There’s actually one thing that’s new about private exchanges: While benefits administrations systems have become somewhat standardized, if you’ve seen one private exchange—you’ve seen exactly one private exchange. They are all different, from their front-end requirements to their back-end requirements.

As I said, it’s a craaaazy world we live in.

Private Exchanges May Be the Free Market Solution to Cost Control and Healthcare Consumerism

While the Patient Protection and Affordable Care Act (PPACA) is sometimes shortened to the “Affordable Care Act” or ACA, the act has few features that will make insurance more affordable.  Government studies and industry experts have indicated that strict coverage mandates, limited premium classifications, community rating, added benefits, single risk pools, and price compression will raise premiums more rapidly than if the ACA had never been passed.

The development of exchanges, both government and private exchanges, are part of an evolution that will change the way insurance is sold and bought.  It is a new way of connecting products with customers.   Government exchanges are likely to be used mainly by those qualifying for a federal subsidy.  The standards and restrictions on government exchanges are likely to attract poor risks and high cost claimants.  The government exchanges will use government paid “navigators” rather than independent licensed agents.  The government exchanges and navigators are not expected to offer supplemental products, life insurance or other products and services.

Private exchanges may be the free market solution to real cost control and lowering the number of uninsureds.  With 40-50 million uninsureds, the traditional agent distribution system for insurance is not working.   About 60% of the uninsured are under age 35.  Studies conducted in Georgia by the Center for Health Transformation Uninsured Working Group showed that 35% of the uninsured could afford insurance but did not know it.  Another 40% needed lower cost options that were not available to them either because insurers emphasized high premium products, or because existing state laws or legislative mandates increased premiums and favored insurers over consumers.

Many uninsureds work for a small businesses that do not offer insurance. They may be self-employed, part-time, or doing contract work.  In most cases, the need is for individual insurance, not group plans.  Selling single policies can be time consuming with little financial rewards for an agent.  Many potential individual sales are halted at the kitchen table when in the process of completing an application issues arise that could cause a declination.   Information derived by an insurer during the underwriting process is typically fed into an industry association called the Medical Information Bureau.  That information is shared across companies and a declined health application could have ramifications for future applications of life insurance, disability coverage and other forms of insurance. 

Private exchanges are developing that will offer individual and group products that emphasize wellness and treatment compliance for those under medical care.  PPACA requires insurers to “community rate” their products.  That is, individuals or small groups will not get direct credit for healthy activities.  New entities are forming that will likely attract healthy individuals and the less healthy members interested in getting better.  Developing private health cooperatives, captive mutual companies, and new insurers may be unencumbered by an existing unhealthy membership or a current business model that limits attracting customers willing to be engaged in healthy behaviors. 

Healthcare consumerism is more likely to emerge through private exchanges than government exchanges.  Private exchanges will provide a transition from employer-based insurance to individual-centered or consumer-centered insurance.  In theory, both large and small employers will be able to purchase health insurance through the private exchanges, and their employees can choose an individual health plan from those offered by participating insurers.

Time will tell.  We are in the beginning stages of a major market revolution.  We already know that government exchanges as originally promised for small groups have been delayed one year until 2015.  As private exchanges come on line, I believe each will be a little different and offer varying levels of products and services.  For awhile it will be a “wild west” show.  Ultimately, the success and failure of each exchange’s product and distribution model will lead to consolidation and better products, services, convenience, help, and information for the consumer.  In the end, more product competition and price transparency will lead to more citizens being insured and lower insurance costs will prevail.  This is the way free markets create successful products and services that consumers want to buy.