Short-term impact of exchanges is certain for individual and small group markets
Health insurance exchanges are here to stay, and the short-term impact likely will be greatest in individual and small group markets.
Public exchanges will be buoyed by the exclusive availability of premium tax credits and cost-sharing subsidies, made available to those Americans whose household income is at or below 400% of the federal poverty level and who cannot access affordable coverage at work.
What is less certain is whether multi-carrier, group-based private exchanges will succeed, and which markets will embrace the concept. Small groups, mid-market groups and large employers will look at exchanges differently, in large part because of differences in how insurance is underwritten and priced.
Small group prices will be set according to a modified community rate. The rates that large employers pay under traditional defined benefit plans will depend on the relative wellness of their own populations, and the same will be true in large group private exchanges.
Any exchange that endeavors to place insurance companies in a head-to-head competition for enrollment at the employee level will inevitably need to deal with risk selection, or the likelihood that one insurer might land higher-risk, higher-cost consumers compared with other insurers. Exchanges such as Aon Hewitt’s, which caters to large employers, are no exception.
Starting in 2014, small groups will benefit from built-in, marketwide risk adjustment mechanisms called for in the Patient Protection and Affordable Care Act. Large groups will not qualify for the program. As a result, any large group exchange will need agreement from insurers to participate in risk-sharing, unless the product offerings are very similar in benefit design and network, which is unlikely. Obtaining agreement from multiple carriers about risk-sharing will be a tall order satisfied only when high employee volumes can be aggregated into a single exchange.
Ironically, small group markets may have an easier time than mid-market groups in achieving the “scale” needed for multi-carrier exchanges. Due to market reforms, small groups will be placed into a common risk pool. For pricing and risk adjustment, they will be treated like one large group, thereby instantly achieving scale.
It’s likely that the availability of multi-carrier private exchanges for small groups will hinge largely on whether the public Small Business Health Options Program (SHOP) exchange embraces the idea of “employee choice.” Insurers are not initially enthusiastic about competing at the consumer level in group insurance environments, but if an insurer accepts this model for small groups in the public SHOP exchange, the private small group market may follow.
Mid-market employers will be challenged to achieve the scale needed to attract insurers to a multi-carrier, employee-choice private exchange. The more likely short-term “exchange play” for mid-market groups will be the single-carrier approach, in which the employer offers a defined contribution and gives the employee access to a variety of products offered from one carrier.
Whether an employer is on one of the bookends of the market or somewhere in the middle, the technology to administer a new way of thinking about benefits will include defined contribution, intelligent decision support, and access to a variety of products, including ancillary and voluntary benefit offerings.
Don Garlitz is executive director of bswift Exchange Solutions (www.bswift.com ), which offers software and services that streamline the administration of health care and benefits