Private Health Insurance Exchanges

Early Evidence and Implications for the Future

by Christine Buttorff, Sarah A. Nowak, James Syme, Christine Eibner

This Article

RAND Health Quarterly, 2016; 6(2):2

Abstract

Private health insurance exchanges offer employer health insurance, combining online shopping, increased plan choice, benefit administration, and cost-containment strategies. This article examines how private exchanges function, how they may affect employers and employees, and the possible implications for the Affordable Care Act's (ACA's) Small Business Health Options Program (SHOP) Marketplaces. The authors found that private exchanges could encourage employees to select less-generous plans. This could expose employees to higher out-of-pocket costs, but premium contributions would drop substantially, so net spending would decrease. On the other hand, employee spending may increase if, in moving to private exchanges, employers decrease their health insurance contributions. Most employers can avoid the ACA's "Cadillac tax" by reducing the generosity of the plans they offer, regardless of whether they move to a private exchange. There is not yet enough evidence to determine whether the private exchanges will become prominent in the insurance market and how they will affect employers and their employees.

For more information, see RAND RR-1109-DHHS at https://www.rand.org/pubs/research_reports/RR1109.html

Full Text

Overview

Private health insurance exchanges are relatively new mechanisms available for businesses to provide health insurance coverage to employees. Typically, businesses using a private exchange will offer employees a credit that can be applied toward the purchase of a health plan. Employees can then access a variety of health plans through an online portal and can chose and enroll in plans that meet their needs. While similar in structure to the Affordable Care Act's (ACA's) Small Business Health Options Program (SHOP) Marketplaces, private exchanges are run by insurance carriers or consultancies, rather than the states or the federal government. Plans offered on private exchange are regulated as group coverage, and employees shopping on these exchanges are not eligible for the ACA's tax credits or cost-sharing subsidies. Most employers currently using private exchanges are large; therefore, most private exchange plans are regulated as large group coverage and are not part of the ACA's single risk pool. However, to the extent that smaller employers participate in private exchanges, they are subject to the ACA's small-group rating regulations and risk-pool requirements.

One of the main features of private exchanges is that they enable employees to comparison shop among multiple health insurance plans. This represents a significant difference from typical employer insurance, in which one-half of all employees have only one plan option, and the vast majority have fewer than two options (Kaiser Family Foundation/Health Research and Educational Trust, 2014). Employers offering coverage through private exchanges may also be more likely than other employers to use a “defined contribution” or “reference pricing” approach to set their contribution level. Under the defined contribution approach, the employer sets a fixed dollar contribution amount and lets the contribution increase annually at a predetermined rate of inflation (e.g., based on the Consumer Price Index). With reference pricing, the employer contributes a percentage of a low-cost plan. Under both approaches, employees pay proportionately more toward premiums if they enroll in higher-cost health plans. Private exchanges also frequently combine benefit administration functions, online shopping for health insurance, and decision-support tools for selecting plans (e.g., out-of-pocket cost calculators, sorting and filtering options) into a single package.

Recent tallies suggest that enrollment in private exchanges is currently low, but many analysts have predicted that enrollment could grow significantly over time. To date, we have little empirical evidence on the types of plans offered in private exchanges, the effects of private exchanges on workers, and the effects of private exchange on overall health care cost growth. In this study, we provide a literature review of existing evidence on private exchanges and summarize discussions with key experts on the implications of private exchanges for workers and employers. Our discussions with experts also considered whether the growth of private exchanges could have implications for the ACA's SHOP exchanges. In addition to our literature review and discussion with experts, we conducted a modeling analysis with RAND's Comprehensive Assessment of Reform Efforts (COMPARE) microsimulation model to assess potential implications for consumer spending if private exchanges encourage enrollment in low–actuarial value (AV) health plans.

Landscape of Private Exchanges

Comprehensive data on the magnitude of the private exchange market are limited, and the landscape is constantly changing because of mergers, acquisitions, and new entrants. As of 2014, there were approximately ten major private exchange operators (excluding small, regional operators) and roughly 2.5 million enrollees in private exchanges, including both active employee and retiree populations. Surveys of employers have revealed wide variation in the share of employers reporting that they might consider moving to a private exchange model in the future, with some surveys reporting that nearly one-half of all employers are considering such a move, and other surveys reporting that fewer than 15 percent of employers are considering private exchanges. To date, much of the interest in private exchanges has focused on large employers, with some exchange operators focusing exclusively on the large-employer market. However, despite the heavier focus on large employers, it is also possible for small employers to use private exchanges.

Definition of Private Exchanges

In both our literature review and our discussions with experts, we found a lack of consensus on the precise definition of a private exchange. Broadly, private exchanges are online portals for obtaining employer insurance that include multiple plan choices. Frequently, private exchanges are coupled with ancillary services, such as benefit administration, decision support, and assistance with ACA compliance issues. But there is no consensus on the number and type of plans that must be included for a health insurance portal to be considered a private exchange, and no standardized suite of ancillary services must be included. While employer contributions in private exchanges are often set using defined contribution or reference pricing approaches, this is not a requirement or defining characteristic of private exchanges. In fact, defined contribution and reference pricing can be used outside private exchanges.

In discussions with experts, two specific areas arose in which there was disagreement on how private exchanges should be defined. First, one multicarrier exchange operator felt strongly that having multiple issuers participate in exchanges is critical to the business model because of a perception that competition across issuers and a wide diversity of plan choices is necessary to achieve the goals of the exchanges. However, this view is not shared by all, and single insurance companies, or carriers, can and do offer private exchanges. Second, one multicarrier exchange argued that only fully insured health plans should be offered on private exchanges because they allow employers to reduce their exposure to high claims. Not all respondents agreed, however, that minimizing risk was necessarily a goal of private exchanges, and a high percentage of employers report that the ability to offer self-insured plans in private exchanges would be a critical factor if they were to move in this direction.

Employer Motivation for Joining Private Exchanges

Employers have cited opportunities for cost containment and hence the potential to avoid the ACA's “Cadillac tax” (a 40-percent excise tax on high-premium plans that takes effect in 2018) as motivators for joining private exchanges. However, as described below, it is unclear whether private exchanges offer unique opportunities to reduce costs. These exchanges simply provide a convenient platform for implementing existing cost-containment strategies or a new way to market insurance products. Employers may also be motivated by the possibility that private exchanges combine several attractive services, including benefit administration, online shopping, decision support, and assistance with regulatory compliance, into a single package. Another potential benefit of the exchanges is that they may make it easier for employers to offer multiple insurance plans to employees.

Much of the literature and several discussion respondents argued that a central goal of private exchanges, and hence motivation, is to reduce employers' health insurance spending. Both experts and the literature indicate that, in some cases, savings may occur because employees migrate to lower-cost plans on private exchanges. Moving to low-cost plans might be particularly likely if employers use a defined contribution or reference pricing approach, in which employees must pay the full marginal cost associated with enrolling in a more-expensive plan. However, employers could offer low-cost plans or change their contribution approaches without moving to a private exchange. Some have also argued that private exchanges may reduce costs by encouraging competition across insurance carriers, increasing employers' negotiating power in dealing with insurance companies (e.g., if a private exchange negotiates with insurance carriers on behalf of several participating employers), or providing economies of scale in benefit administration. However, these reports are largely anecdotal and have not yet been confirmed with empirical analyses.

Potential Consequences for Employees if Employers Move to Private Exchanges

From the employees' perspective, it is likely that the biggest benefit associated with private exchanges is the ability to select from multiple plan options. Under the traditional model of employer coverage, relatively few employees have access to more than one or two plans. The ability to choose among multiple plans offered in private exchanges may enable employees to select plans that better suit their individual health needs. At the same time, there is growing recognition that increased plan choice may be confusing and will not necessarily lead to better outcomes if enrollees have trouble understanding the strengths and weaknesses of the available options. Most private exchanges include decision support tools designed to help employees comparison shop and make better choices. However, few data are available to determine how well these tools work.

Some discussion participants raised the concern that, if employees select low-AV plans on private exchanges, they could end up with unexpectedly high out-of-pocket costs because of these plans' high cost-sharing requirements. Further, if employers move to a defined contribution approach or otherwise cut their contribution level when they move to private exchanges, employees could face higher premium contributions. However, reductions in the generosity of employer coverage could occur with or without private exchanges. In fact, existing data suggest that employer premium contributions have been gradually declining for years, particularly for family coverage.

Implications of Private Exchanges for ACA's SHOP Marketplaces

In general, discussion respondents believed that private exchange enrollment was unlikely to have a substantial effect on SHOP premiums. Some small employers might view private exchanges as an alternative to SHOP Marketplaces. However, all fully insured small-group plans are regulated as part of a single risk pool regardless of whether they are offered through SHOP Marketplaces, private exchanges, or traditional employer insurance. As result, premiums in the small-group market should be largely unaffected by employers' choice of how to offer coverage.

Some respondents raised the possibility that low enrollment on the SHOP Marketplaces could make it difficult for states and the federal government to recoup the fixed operating costs associated with running these marketplaces. Potentially, private exchanges could contribute to this problem if they siphoned enrollment among employers that might have otherwise used SHOP. However, while SHOP enrollment has been low to date, it is not clear that private exchanges are the cause. Private exchanges represent only a small fraction of the employer health insurance market, and—anecdotally—uptake of private exchanges has been concentrated among large rather than small employers. Discussion respondents noted that SHOP faced many challenges in its first year, including a limited number of plan options and substantial technical difficulties. However, despite these limitations, the SHOP Marketplaces launched on HealthCare.gov on November, 15, 2014, as expected. Brokers play a large role in helping small businesses choose coverage and may have steered small businesses away from the SHOP Marketplaces, especially if commissions in other segments of the market were higher than commissions available through SHOP.1 It is likely that these challenges had a larger influence on SHOP enrollment than competition from private exchanges.

Microsimulation Analysis

We used RAND's COMPARE microsimulation model, a computer program that estimates how individuals and employers will respond to health policy changes, to analyze how employees' total spending might change if employers moved to private exchanges. We considered two scenarios in which employers implemented private exchanges and simultaneously moved to a defined contribution approach. In the first scenario, the defined contribution amount was based on employers' current contribution levels; in the second scenario, the defined contribution amount was pegged to the price of a low-AV plan (and represented a reduction in generosity relative to current levels). We also considered a scenario in which employees and employers used private exchanges as a mechanism for avoiding the Cadillac tax, by selecting the most generous plan available that had a premium under the Cadillac tax threshold ($10,200 for single plans in 2018, $27,500 for family plans in 2018).

Our results suggest that moving to low-AV plans on private exchanges does not necessarily lead to higher total spending for the average worker. When employees chose low-AV plans, spending on out-of-pocket costs increases, but spending on premiums falls. On balance, we estimate that the typical employee spends less on a low-AV plan. However, if employers cut contributions significantly when moving to private exchanges, employees' total spending will likely increase, regardless of plan AV.

Our analysis also suggests that cutting contributions significantly when moving to private exchanges may be a problematic strategy for some employers, given the ACA's minimum premium contribution requirements. These requirements can lead to penalties if workers must contribute more than 9.5 percent of income to enroll in a minimally generous (60-percent AV) employer plan.2 If employers set defined contribution amounts based on a percentage of a 60-percent AV plan in 2014 and index this amount to general inflation, more than 20 percent of single workers and approximately 5 percent of family workers would be required to pay more than 9.5 percent of income to enroll by 2024. In turn, employers could be penalized by more than $3,000 per worker.3

We also considered the implications for workers if the Cadillac tax causes a reduction in plan generosity, for example, if employers (or workers themselves) switch to lower-AV plans to avoid the tax, potentially through the use of a private exchange. Our analysis suggests that most employers can avoid the Cadillac tax by switching to a lower-AV plan. While more than 20 percent of employers would hit the Cadillac tax in 2024 if they offered plans with a 90-percent AV, fewer than 1 percent of employers would hit the Cadillac tax in this time frame if they offered a 60-percent AV plan.

Given current benefit generosity levels, we estimate that, by 2020, 4 to 7 percent of employees would have to migrate to less-generous plans to avoid the tax. For an average worker at a firm that may be affected by the Cadillac tax, we estimate that total spending will fall if the worker switches to a lower-AV plan. While out-of-pocket spending increases with a lower-AV plan, this increase in spending is more than offset by the drop in premium associated with moving to a lower-AV plan. This drop in spending occurs even relative to a baseline scenario in which the Cadillac tax is not implemented, suggesting that some individuals in high-premium plans may be overinsured.4 However, an important caveat with this result is that we considered the effects only for the average and median worker. The ACA mandated limits on annual and lifetime maximum out-of-pocket spending, so people with the very highest spending are protected from excessive variation in out-of-pocket costs regardless of which plans they enroll in. However, workers with specific health spending patterns—such as those who have spending levels close to the deductible—will likely spend more on total health care costs if they enroll in plans with lower AVs.

Conclusion

Private exchanges, typically online portals for buying and selling employer-sponsored health insurance, are a new and evolving concept in the employer insurance landscape. Although uptake to date has been modest, some have argued that private exchanges could represent a significant share of the employer insurance market in future years. Private exchanges typically combine increased plan choice, online shopping, benefit administration, and decision support into a single package. However, there is no general consensus on what constitutes a private exchange. Discussion respondents had differences of opinion about whether single carriers can offer an exchange and whether self-insured plans can or should be included in the private-exchange model.

Private exchanges may offer several benefits to employers, including assistance with administrative functions, assistance with ACA regulatory compliance, and potential cost savings. Cost-reduction strategies could include reference pricing (setting employer contributions as a percentage of one plan benefit level and requiring employees to pay the difference), defined contributions (setting a fixed dollar amount), or including high-deductible plans. Some respondents also argued that private exchanges could increase competition among insurers or lead to economies of scale in benefit administration. To date, the empirical evidence on the extent to which private exchanges reduce employer spending is limited. However, most respondents believed that cost savings typically came from employees gravitating toward lower-cost plans in the exchanges.

For employees, potential benefits of private exchanges include increased plan choice, decision aids to assist with plan comparisons, and an improved shopping experience. While we did not evaluate how well these decision tools work, some respondents noted that the decision process likely remains difficult for many enrollees. A drawback from the employees' perspective is that, to the extent that employers are moving to defined contribution approaches or otherwise incentivizing less-generous plans, private exchanges may be associated with increased out-of-pocket spending. However, from our simulation analysis, it is not clear that switching to a lower-AV plan will necessarily increase total spending (out-of-pocket spending plus premium contributions). In fact, we estimate that total spending on health care could fall for many workers in lower-AV plans. Although out-of-pocket spending in low-AV plans is typically higher than in more-generous plans, the increase in out-of-pocket spending is more than offset by the reduction in premium contributions. An important caveat to this conclusion is that we did not consider the potential effects for workers with very high spending. Moreover, workers' spending may increase if employers reduce their contribution amounts when they move to private exchanges, regardless of the AV of available plans.

A final theme that emerged in our discussions is that many of the changes that are occurring in private exchanges reflect more-general trends in the health insurance landscape and might occur with or without these exchanges. For example, employers might consider defined contribution approaches or increased use of high-deductible health plans without using a private exchange. Nearly all respondents mentioned that concern over the Cadillac tax could motivate employers to consider private exchanges, but the methods for keeping premiums low enough to avoid incurring the tax can be done outside the private exchanges as well. Our modeling analysis suggested that both the Cadillac tax and the ACA's requirement that employees should not have to contribute more than 9.5 percent of their income toward a health insurance plan create incentives for employers to reduce the generosity of benefits offered. Lower-AV plans are less likely to hit the Cadillac tax over time, and—because lower-AV plans may require smaller worker premium contributions—shifting to these plans reduces the chance that a worker will spend more than 9.5 percent of income on premiums.

The idea of introducing more price competition and requiring employees to pay more to access higher-premium health plans has been around for decades. Private exchanges in their current form seem to be taking advantage of the current attention focused on delivering health benefits through online shopping portals, possibly catalyzed by the ACA's introduction of exchanges for the individual and small-group markets. Private exchanges are gaining interest by conveniently packaging the exchange platform with online shopping technology, decision support, and benefit administration services. But, to date, enrollment in private exchanges is low, and there is a lack of systematic evidence to determine whether these exchanges will become prominent in the insurance market and how they will affect employers and their employees.

Reference

Kaiser Family Foundation and the Health Research and Educational Trust, “2014 Employer Health Benefits Survey,” 2014. As of July 29, 2015:
http://kff.org/health-costs/report/2014-employer-health-benefits-survey/

Notes

1 Centers for Medicare and Medicaid Services regulations stipulate that issuers offering plans through the federally facilitated marketplaces must provide the same compensation to brokers whether for enrollment in qualified health plans through the marketplaces and enrollment in similar, nonmarketplace plans. However, commissions could be different for issuers that are not selling insurance through the marketplaces or for enrollment in plans that are dissimilar to marketplace plans.

2 This percentage increases over time and was 9.56 percent as of June 2015 (26 CFR 601.105).

3 In 2015, the penalty was $3,126 per year for each full-time worker receiving a marketplace tax credit, up to a maximum of $2,084 per year, times the number of full-time employees minus 80. The penalty amounts increase over time.

4 Overinsurance refers to a situation in which an individual has a more-generous health insurance policy than would appear to be warranted given his or her expected spending patterns and risk of catastrophic expenditure.

The research described in this article was sponsored by the Office of the Assistant Secretary for Planning and Evaluation (ASPE) and conducted by RAND Health.

RAND Health Quarterly is produced by the RAND Corporation. ISSN 2162-8254.