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Why Health Insurers are Leery of Playing in SHOP or Small Group Private Exchanges

(And Why Employer Demands Might Change Their Minds)

By Elena Merino, President/CEO, The Meridian Group and Director, Atlanta Association of Health Underwriters (AAHU) & Tony Roehl, Of Counsel, Morris, Manning & Martin, LLP

While most health insurers are flocking to the large group private exchanges, many of these same carriers have been hesitant (to put it kindly) to participate in government subsidized exchanges, individual and small group. Why – if there are a large number of new customers where the government is paying a large percentage of the premiums – wouldn’t all major insurers want to participate? 

Didn’t all the major cellular providers jump to participate in the government subsidized Lifeline program?i Like the Lifeline program, funded by the Universal Service Fundii fee added to the bill of paying wireless customers, a risk corridor is being applied to carriers in and outside of the government exchangesiii to offset the possible adverse risk selection in government exchanges. However, unlike the Lifeline program, insurers have to provide “unlimited minutes” to all consumers at a predetermined cost. Not knowing if only those who will use unlimited minutes are going to sign up, insurers are justifiably concerned.

According to a white paper by the NAIC on adverse selection and health insurance exchanges, there are several areas of concern for insurers participating in public exchanges, such as permitted variation between the plans offered in versus outside of the public exchanges and ability of an individual to choose a lower benefit plan when healthy but move to a higher level benefit plan when sickiv. Even though there are mechanisms to minimize the risk of adverse selection between the small group public subsidized market and the private market, one fear is that the public exchange market may become “the equivalent of a state high risk pool.”

But many of these concerns do not apply to the small group private exchange market. Insureds in private group exchanges are not eligible for tax credits, so there is minimal risk of adverse selection from subsidized individuals selecting the richest plan because they have little “skin in the game.” Further, unlike, their government counterparts, private market small exchanges do not have to offer the richer Silver and Gold plans (70 percent and 80 percent actuarial value respectively) nor do they have to offer employee choice within a tier. Finally, small group private exchanges, unlike their large group counterparts, can still impose certain participation and contribution requirements.

Large groups have a reduced risk of adverse selection. However, with the full implementation of ACA, small group insurers must now consider all small groups to be member of a single risk pool.v The single risk pool requirement, along with the factors noted above, will spread the risk and minimize adverse selection in the small group market. So why aren’t insurers willing to join small group private exchanges? Aren’t small groups in a community rating environment a de facto large group? As such, why aren’t insurers willing to offer their small group plans, along side with other insurers, to any willing private exchange?

Now that the option to provide pre-tax dollars for individual insurance through an HRA, Section 125 plan or PRA has been closed, employers have little option but to consider employer-sponsored coverage. Further, because small employers are not subject to a penalty for failing to provide “affordable” coverage, employers can set the minimum contribution required by the carrier to the lowest cost Bronze plan, allowing employees whose income may qualify them for subsidies, based on the Silver plan, to obtain coverage through government exchanges, while providing employees pre-tax dollars for other qualified benefits. This is a win-win for small employers if managed correctly: tax-free income for employees for premiums for those that do not qualify for government subsidies and an opportunity for employers to set the contribution to allow employees that qualify to still obtain subsidies. Insurers will gain by keeping insureds while avoiding government exchanges.

Administration and compliance help are the missing link for small businesses moving to a defined contribution model. While many of these employers see the benefit of continuing coverage, they are desperately looking for a solution to provide coverage while minimizing their involvement and the increased administrative and compliance burdens. Hence the intrinsic value of a private exchange – a “place” for small employers to outsource not just “a defined contribution” but plan selection, notices, enrollments, administration and government compliance.

Will private exchanges step up to the plate to help small employers by offering multi-carrier exchanges where employees select the carrier and plan that works best for them? In spite of the single risk pool and commoditization of products in the small group market, the answer right now seems to be “not yet” – but shifts in employer demands may soon change their mind.

i The Lifeline program provides qualified low-income Americans with a prepaid wireless service plan. See http://www.fcc.gov/lifeline
ii http://www.usac.org/about/default.aspx
iii http://www.rwjf.org/content/dam/farm/reports/issue_briefs/2012/rwjf72568
iv  http://www.naic.org/store/free/ASE-OP.pdf
v http://www.ofr.gov/OFRUpload/OFRData/2013-25326_PI.pdf

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