United States: Private Health Insurance Exchanges: Alternative Strategies For Employers

For the past two decades, it has been increasingly difficult for employers to provide health insurance coverage to their employees. This is due in large part to the skyrocketing costs of healthcare. In response, employers have adopted a number of strategies intended to control costs, including self-insuring their employees' health risks, implementing wellness programs and shifting more and more costs onto their employees. In the wake of the enactment of the Patient Protection and Affordable Care Act, employers are examining a number of new strategies, all intended to reduce the cost of providing healthcare coverage.

Defined-Contribution Private Exchange Strategies

The following describes alternative strategies that are grounded in the concept of a health insurance exchange or some type of retail marketplace intended to facilitate the purchase of health insurance. Specifically, these new strategies leverage the private marketplace through a "private" health insurance exchange operated by a broker, benefits consultant or insurer, and adopt a defined-contribution strategy to fund the purchase of a health plan.

• Single Employer, Single Carrier—Under this strategy, a single employer could work with a private exchange and offer a wide variety of fully insured or self-insured group health plans to its employees through a single insurance carrier or third-party administrator funded through a Health Reimbursement Arrangement.
• Multiple Employers, Multiple Carriers—Under this approach, multiple employers band together, effectively increasing the employers' risk pool, and fund—through an HRA—the purchase of fully insured group health plans made available by multiple insurance carriers through a private exchange.
• Individual Market Plans and HRAs—Finally, employers are examining a model where—through a private exchange—the employer allows its employees to purchase a health plan in the fully insured individual health insurance market, funded through an HRA. This model generally will not be viable until 2014 because of the HIPAA nondiscrimination rules.

Features That Make a Private Exchange Attractive

While there are varying defined-contribution private exchange strategies that employers may adopt, there are certain features that will make the private exchange attractive to employers and employees:

Defined-Contribution Payment System:A defined-contribution payment system works particularly well in a private exchange setting. Here, the employer decides how much it will spend on health insurance each year, and the employer gives its employees a fixed contribution amount to purchase a health plan through an HRA. The employer may then determine the rate at which the fixed contribution amount would increase each year (e.g., based on increases in the Consumer Price Index as opposed to increases in premium costs). In general, the only role of the employer is contributing funds toward the purchase of health insurance coverage.

Inventory of Major Medical Health Plans:What makes a private exchange unique is its ability to enable employees to shop from among a wide variety of insurance products with varying plan designs. Unlike the traditional distribution model where an employer may offer, at most, five major medical plan options, a private exchange offers up to 10 to 20 different major medical plans, ranging from high-cost sharing plans down to low- or no-cost-sharing plans. Here, the difference in cost between the plan designs may be as great as 60%. Offering this broad "inventory" promotes choice and consumerism, which has been proven to reduce healthcare spending, thereby saving money for both the employee and employer.

Menu of Supplemental Products and Wellness Programs:Another way a private exchange can be distinguished from the traditional model is through its ability to offer a wide menu of supplemental insurance products (e.g., stand-alone dental plans, hospitalization insurance, disability insurance and specified disease coverage), along with the inventory of major medical health plans. Offering supplemental products alongside major medical health plans affords a consumer the opportunity to purchase a low-cost health plan and to add specified coverage to insure against, for example, catastrophic health events. This enables the employee to aggregate insurance coverage—usually at a lower cost— instead of purchasing a more expensive plan that may offer benefits and services the employee does not want or need. In addition, a private exchange may allow an employee to enroll in various wellness programs such as smoking cessation, weight-management programs or meeting with a wellness coach.

Decision Support:A key ingredient to a private exchange is providing decision support to help employees determine which major medical health plan or health insurance package (e.g., a major medical plan, coupled with a supplemental policy or policies) is best for them to purchase. One of the more sophisticated forms is referred to as "recommendation technology." Here, the employee is asked a series of questions relating to, among other things, the employee's expectations of care utilization (such as pregnancy or prescription drug use), along with the employee's risk tolerance, financial position and the amount of the employer's subsidy. The recommendation technology aligns the answers to these questions—along with any available claims data—with the major medical plans and supplemental insurance products offered through the private exchange, and it recommends a plan or insurance package that best fits the employee's needs.

Customer Services:A private exchange will provide customer service and support from the time the employee enters the private exchange all the way through to the actual purchase of a health plan and/or supplemental insurance product(s). In other words, the exchange provides services at the front end of the purchasing process, and the necessary services to ensure the consumer gets healthcare coverage on the back end. Such end-to-end transactional services begin with a website where employees can view the inventory of plans and shop for their coverage. Once the employees select a plan or insurance package (usually with the assistance of recommendation technology), the private exchange will collect their enrollment information electronically and transmit this information to the carrier providing the coverage, or the employer or TPA in the case of a self-insured arrangement. The private exchange could also offer benefits-related services—typically handled by human resources—allowing the employer to streamline benefits administration. Alternatively, the employer could retain most, if not all, of the traditional benefits administration services.

Legal Issues Associated with Defined- Contribution Private Exchanges

There are a number of legal issues that a defined-contribution private exchange presents. For example, PPACA enacted a number of new rules that may adversely affect the use of HRAs as a funding mechanism for the purchase of a health plan. In addition, employers adopting a private exchange strategy must ensure that their health plans do not discriminate in favor of "highly compensated individuals", regardless of whether the arrangement is self-insured or fully insured (but enforcement in the fully insured context won't occur until additional guidance is issued). Moreover, compliance with the new requirements under PPACA and the existing rules applicable to group health plans under the Internal Revenue Code and, in most cases, the Employee Retirement Income Security Act is required.

Here is a look at the legal issues associated with defined- contribution private exchanges in more detail:

Tax Treatment of Employer and Employee Contributions:Under a defined-contribution private exchange, employer and employee contributions used to purchase health insurance would not be taxable to the employee for income and FICA tax purposes. This favorable tax treatment is still available even if an employer is giving its employees fixed-contribution amounts through an HRA for the purchase of an individual market health plan. It is important to note that unused amounts in an HRA can never be cashed out, but these amounts may be carried over from year to year. The employer may deduct these contribution amounts as an "ordinary and necessary" business expense.

ERISA Compliance and "Grandfather" Rules under PPACA:Where an employer is offering fully insured or self-insured group health plans, the plans would be considered group health insurance coverage, therefore the plan and the employer (as plan sponsor) would be subject to the Employee Retirement Income Security Act (e.g., ERISA's claims procedures, reporting and disclosure rules and fiduciary requirements). In addition, these plans would be subject to all of the new requirements enacted under PPACA that are applicable to group health plans (i.e., the grandfathered rules). In most, if not all, cases, an employer adopting a defined-contribution model would have to give up any grandfathered status of health plans previously offered, and offer an inventory of non-grandfathered plans.

In the case of an individual market plan funded through an HRA, the underlying individually underwritten plan would likely be considered a group health plan. Treasury regulations, HHS guidance and even some state insurance laws indicate that where an employer contributes funds for the purchase of an individually underwritten health insurance plan by an employee, the individual plan would be considered a group health plan. Informal conversations with Treasury officials confirm this position. As a result, the individual plan would likely be subject to ERISA. The grandfathered rules would also apply. There is question, however, whether the minimum standards otherwise applicable to an individual market plan (e.g., the essential health benefits and adjusted community rating rules) would apply to an individual plan purchased by employees of a large employer.

Employer Mandate:In the case of an employer offering fully insured or self-insured group health plans, the employer would be found to be "offering" healthcare coverage to its employees, thus satisfying the first prong of the employer mandate. However, in order to satisfy the second prong of the employer mandate, the employer must make sure that the lowest-cost plan that is offered is "affordable" (i.e., the required employee contribution does not exceed 9.5% of an employee's W-2 income) and provides "minimum value" (i.e., the employer coverage pays for at least 60% of the benefits provided under the plan).

If an employer gives its employees fixed-contribution amounts through an HRA that is integrated with the underlying group health plan (i.e., where HRA is considered part of the underlying health plan), the employer contributions would likely be counted toward meeting the affordability and minimum-value tests. As a result, in this case, it is likely that the employer would satisfy the second prong of the employer mandate.

However, if an employer establishes a stand-alone HRA (an HRA that is not considered part of the health plan, but rather a funding source to pay premiums), it is unclear whether the employer contributions would be counted toward meeting the affordability and minimum-value tests. Treasury guidance has indicated that HRA contributions that are used to pay for premiums only may be counted for purposes of meeting the affordability test, but we have yet to see final regulations confirming this treatment. Treasury remains silent on whether stand-alone HRA contributions for premiums only may be counted for purposes of the minimum-value test.

In the case of an HRA funding the purchase of an individual market plan, there is a question whether the employer would by definition violate the first prong of the employer mandate. As stated, to satisfy the first prong of the employer mandate, the employer must be offering a group health plan. If the underlying individual market plan is not considered a group health plan, then presumably the employer would not be offering coverage, for purposes of the employer mandate.

If the underlying individual market plan is considered a group health plan, then the first prong of the employer mandate would be satisfied. However, there is question how the employer would determine whether it satisfies the second prong of the mandate (i.e., whether the plan is affordable and provides minimum value). Would Treasury look to the HRA to determine whether the coverage is affordable? As stated, Treasury has indicated that HRA contributions that are used to pay for premiums only may be counted for purposes of the affordability test. Presumably, Treasury would look through to the underlying individual policy to determine whether the plan is providing minimum value, but would the HRA contributions be counted? These issues have yet to be clarified in federal agency guidance.

Annual Limits under PPACA:Beginning in 2014, PPACA prohibits both individual and group health plans from imposing annual limits on the dollar value of the "essential health benefits."

In the case of an HRA, the federal agencies have indicated that the HRA itself is treated as a group health plan that is subject to the restriction on annual limits. An HRA by definition imposes upper limits on the dollar value of benefits. So a stand-alone HRA (an HRA that is not considered part of the health plan, but rather a funding source to pay premiums) that is paying for health coverage for an employee will likely violate this new restriction. However, interim final regulations indicate that integrated HRAs (HRAs that are considered part of the underlying health plan) will generally satisfy the new annual limit restriction so long as the underlying health plan meets the new requirements. Therefore, absent future guidance indicating otherwise, an employer utilizing an HRA under this strategy must make sure that the HRA is integrated with underlying group health plan. Unfortunately, at this time, we do not have clear guidance on what "integrated" means.

In the case of an employer allowing its employees to purchase an individual market plan through an HRA, the HRA would likely be considered a stand-alone HRA, which means that there is a strong likelihood that this model would not be permissible in 2014, unless federal agency guidance indicates otherwise. As stated, interim final regulations indicate that integrated HRAs will generally satisfy the new annual limit restriction as long as the underlying health plan meets the new requirements. Therefore, in order for the purchase of an individual market plan through an HRA to be viable in 2014, the insurance carrier must integrate the HRA with the underlying individual market plan (although we do not have clear guidance on what "integrated" means).

Nondiscrimination Rules:In the case where the employer offers a fully insured, non-grandfathered group health plan or a self-insured plan, these plans would be subject to certain nondiscrimination rules which, among other things, forbid an employer from giving higher contributions to highly compensated individuals. In addition, if the employer is giving its employees fixed-contribution amounts through an HRA, the HRA itself is treated as a self-insured arrangement, therefore the HRA would also be subject to the nondiscrimination rules.

In the case of an employer allowing its employees to purchase an individual market plan through an HRA, the HRA itself is treated as a self-insured arrangement, therefore the HRA will be subject to the nondiscrimination rules that forbid an employer from, among other things, giving higher contributions to highly compensated individuals. Because the individual market plan that would be purchased by an employee through an HRA would by definition by considered fully insured, it is likely that the employer would also be subject to the new nondiscrimination rules applicable to fully insured plans, as enacted under PPACA.

The Future?

Even if PPACA is modified or halted, private exchanges will play a critical role in the future of healthcare. Why? Because private exchanges provide a consumer-friendly way to purchase health insurance, often at lower costs. Private exchanges offer expanded choice of health plans and insurance packages, which most consumers today want, especially in the group health insurance market. Private exchanges also make it easy to choose a plan that best fits the consumer's needs. PPACA enacted a number of new rules that may adversely affect defined-contribution private exchanges, particularly those private exchanges that use HRAs as a funding mechanism for the purchase of a health plan. Therefore, private exchange companies and employers interested in leveraging the benefits of a defined-contribution private exchange should consider advocating for federal regulations that resolve these legal uncertainties.

Originally published in Health Insurance Underwriter, December 2012

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