The Rise of State Exchanges and the Evolution of Private Exchanges

Gallagher Benefit Services, Inc.

July 2012

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Table of Contents

Introduction ................................................................................................................................... 3 The Rise of State Exchanges ....................................................................................................... 4 The Deadline for Constructing a State Exchange is Looming ...................................................... 5 Federal Funding for State Exchanges .......................................................................................... 5 Core Functions of the State Exchanges ....................................................................................... 7 Consumer Information and Assistance ......................................................................................... 9 Current Status of State Exchanges ............................................................................................. 10 State Exchange Decision Points ................................................................................................. 12 Employer Sponsored Health Insurance ...................................................................................... 13 The Evolution of Private Exchanges ........................................................................................... 14 State and Private Exchanges Coexisting .................................................................................... 14 Core Functions of Private Exchanges ......................................................................................... 15 Shop and Compare ................................................................................................................. 15 Administration.......................................................................................................................... 16 Defined Contribution ................................................................................................................ 16 Exchanges in all shapes and sizes ......................................................................................... 17 Impact of Private Exchanges in the Marketplace ........................................................................ 18 Key Considerations for Employers Using Private Exchanges .................................................... 19 The Future of Private Exchanges ............................................................................................... 20 Conclusion .................................................................................................................................. 20

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The Rise of State Exchanges and the Evolution of Private Exchanges

Introduction On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (PPACA) into law. One of PPACAs mandates requires each state to establish an American Health Benefit Exchange, commonly referred to as a State Exchange, which will be an electronic marketplace offering a variety of health insurance options to consumers. Hours after the legislation was signed, the State of Florida and twelve other states challenged the constitutionality of PPACAs Individual Mandate, which requires virtually all individuals to purchase health insurance. The deadline established for states to demonstrate the viability of their State Exchange is January 1, 2013 and is fast approaching. Until recently, some states adopted a wait-and-see approach towards the implementation of their State Exchange, awaiting the Supreme Courts decision on PPACAs validity. The much anticipated ruling was announced on June 28, upholding the Individual Mandate. Now that the Supreme Courts opinion has brought clarity to the legal question of PPACAs constitutionality, the stage is set for states to move forward with the implementation of their State Exchanges in addition to the other requirements of the healthcare reform law. A renewed focus has also developed around the private sector counterparts of the State Exchanges, Private Exchanges. Given the importance of these electronic marketplaces, Gallagher Benefit Services has developed this white paper as a resource for our clients to gain a better understanding of these exchanges. We begin our discussion with an analysis of the rise of State Exchanges and the timeframe the states are expected to adhere to as they construct their respective exchanges. The paper then analyzes the federal grants that are expected to shoulder much of the cost burden for building the State Exchanges. We will then outline and discuss the numerous core functions that these exchanges are expected to perform. We will conclude our discussion on State Exchanges by providing you with a market-scan of the current status of each state with respect to building an exchange and by looking at the wide range of approaches that the states are taking. The discussion of State Exchanges is followed by a study of the evolution of Private Exchanges and how they will coexist with State Exchanges. Thereafter, we will look at the expected functionality of the Private Exchanges and introduce the defined contribution methodology that many employers are considering. We will continue by presenting a case study that illustrates the impact of Private Exchanges in the marketplace, as well as their value proposition. Finally, the
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paper concludes by discussing some of the key factors employers should consider when contemplating using a Private Exchange, as well as their future evolution. The Rise of State Exchanges On January 1, 2014, nearly every person in the United States will be required to maintain minimum essential health coverage for themselves and their dependents, or pay a penalty for each month they fail to do so. Minimum essential coverage can be obtained through various sources including, but not limited to, employer provided coverage, individual market policies, Medicare and Medicaid. To further expand the availability of minimum essential coverage, especially for those individuals that are currently uninsured, PPACA requires each state to establish at least one public exchange that would facilitate the purchase of minimum essential coverage. Specifically, under PPACA, states are required to establish state-based American Health Benefit Exchanges and Small Health Options Program (SHOP) Exchanges. The American Health Benefit Exchanges are meant to provide a new way for qualified individuals to purchase health insurance, while the SHOP Exchanges will cater to qualified employers. A SHOP Exchange will be required to perform almost all of the same functions as the individual market exchange with several modifications that recognize the unique characteristics of the two markets. For the purpose of this paper, we will refer to both of these public exchanges as State Exchanges. A state may establish a single State Exchange that would provide services to both qualified individuals and qualified small employers; or, a state may choose to establish two separate State Exchanges, one for individuals, and one for small employers. If a state desires, it may create subsidiary exchanges that would cover different regions within the state, so long as each subsidiary exchange covers at least one county and all regions of the state are covered by an exchange. If the state chooses to operate subsidiary exchanges, it must do so for both the individual and small group markets. Finally, states may work together to create regional exchanges. If a state chooses not to build a State Exchange, it can enter into a partnership with the federal government to jointly operate an exchange. If a state has not made sufficient progress in building a State Exchange by January 1, 2013, and does not engage the federal government in a partnership to operate an exchange, the Department of Health and Human Services (HHS) may choose to operate a Federally-facilitated Exchange (FFE) in that state. FFEs will be required to perform the same general functions that a State Exchange is required to perform. Qualified individuals and qualified small employers will be able to purchase health insurance coverage from State Exchanges in the fall of 2013 for coverage periods beginning on January 1, 2014. To be eligible to purchase coverage from a State Exchange as an individual, the person must be a U.S. citizen or national, or an alien lawfully present in the U.S. and residing in the state that established the relevant State Exchange. Individuals, who are in prison other than those whose incarceration is pending the disposition of charges, are not eligible to purchase health insurance through a State Exchange. A qualified small employer is defined as an employer with no more than 100 employees including part-time and seasonal employees. Part-time employees are counted the same as fullP:\Graphics\GBS\Healthcare\Healthcare Reform Template.doc

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time; seasonal are counted proportionately to the number of days they work in a year. States may limit qualified small employers to no more than 50 employees until 2016. Moreover, beginning in 2017, each state may permit large employers to purchase coverage through their State Exchange. The Deadline for Constructing a State Exchange is Looming In the summer of 2011, HHS issued the first set of regulations providing states with a general framework of what a State Exchange will be required to do. Rather than dictating to the states how to construct a State Exchange, the initial regulations, as well as those that followed, set forth the minimum federal standards that states are required to follow and gave the states considerable flexibility to create State Exchanges that reflect each states unique health insurance market needs. The regulations gave states the flexibility to determine whether to structure their State Exchange as a non-profit, as an independent public agency, or as part of an existing state agency. The federal government stated that the regulations that it has issued to date demonstrate a desire by HHS to be flexible and allow the states a large degree of control over the development of their State Exchange. Many however have argued that the lack of certainty that is inherent in the federal governments approach has made it more difficult for states to construct a State Exchange because of the lack of a definitive blueprint to follow. PPACA requires HHS to approve a states plan to operate a State Exchange no later than January 1, 2013. Regulations issued by HHS in March of 2012 however, allow for conditional approval if a state is advanced in its preparation but cannot show complete readiness by January 1, 2013. While this provides for some additional flexibility, some states are unlikely to hit even this more flexible target. Federal regulations allow any state that is not ready on January 1, 2014 to operate a State Exchange for 2015, or any subsequent year. New funding for the establishment of a State Exchange however, will not be awarded after December 31, 2014. Federal Funding for State Exchanges In furtherance of the states efforts to construct public exchanges before the aforementioned deadlines, the federal government has made federal funding available. Specifically, the Obama Administration has offered states access to funding through three programs: Planning, Establishment, and Early Innovator grant programs. On September 30, 2010, HHS awarded $49 million to 48 states and the District of Columbia to conduct planning activities (Minnesota was later awarded a Planning grant). These grants, up to $1 million each, were intended to provide the recipients with resources to conduct the research and planning needed to build a State Exchange. In general, the funds were intended to: determine the statutory and administrative changes necessary to build a State Exchange; assess the current information technology systems and infrastructure and determine new requirements; plan for consumer call centers; and, hire key staff. Some states that received Planning grants subsequently returned the funds to HHS. On February 16, 2011, HHS awarded Early Innovator grants to 6 states and one multi-state consortium to begin construction of their State Exchanges. These funds were meant to assist recipient states in developing the right information technology to power the State Exchanges, particularly with respect to eligibility and enrollment systems. To leverage these funds, the
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recipients committed to developing information technology that is reusable and transferable to other states. Three of the states that received these grants, Kansas, Oklahoma and Wisconsin, later returned the funds to the federal government. On a quarterly basis, HHS also awards Establishment grants to further support the construction of State Exchanges. There are two distinct levels of Establishment grants. The first level provides states with up to one year of funding to help establish their own State Exchange. Once a state has made sufficient progress in establishing a State Exchange, it becomes eligible for the second level of Establishment grants which it can use for a number of key activities including conducting background research, consulting with stakeholders, making legislative and regulatory changes, governing the exchange, establishing information technology systems, conducting financial management and performing oversight and ensuring program integrity. Through July 23, 2012, 33 States and the District of Columbia have received Establishment grants totaling approximately $843 million.
State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida 1 Georgia Hawaii Idaho Illinois Indiana Iowa Kansas 2 Kentucky Louisiana 3 Maine 4 Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska
1 2

Exchange Planning Grants $1,000,000 $999,670 $1,000,000 $1,000,000 $999,987 $996,850 $1,000,000 $1,000,000 $0 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $0 $1,000,000 $999,227 $1,000,000 $999,772 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000

Exchange Establishment Grants $8,592,139 $29,877,427 $7,665,483 $39,421,383 $17,951,000 $6,687,933 $3,400,096 $8,200,716

Exchange Early Innovator Grants

Total Exchange Grants $9,592,139 $30,877,097 $8,665,483 $40,421,383 $18,950,987 $7,684,783 $4,400,096 $9,200,716 $0 $1,000,000 $15,440,144 $21,376,556 $38,917,831 $7,895,126 $8,753,662 $1,000,000 $66,567,613 $0 $1,000,000 $34,413,430 $48,256,271 $10,849,077 $31,317,000 $21,143,618 $21,865,716 $1,000,000 $6,481,838

$14,440,144 $20,376,556 $37,917,831 $6,895,126 $7,753,662 $0 $65,567,613 $0 $27,186,749 $11,644,938 $9,849,305 $30,317,000 $20,143,618 $20,865,716 $5,481,838

$6,227,454 $35,591,333

Florida has returned exchange planning grant money. Kansas has returned exchange early innovator grant money. 3 Louisiana has returned exchange planning grant money. 4 Maine has returned exchange establishment grant money.
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Nevada New Hampshire 5 New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma 6 Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas 7 Utah Vermont Virginia Washington West Virginia Wisconsin 8 Wyoming Total

$1,000,000 $0 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $100,000 $1,000,000 $1,000,000 $1,000,000 $996,285 $1,000,000 $999,873 $800,000 $45,891,664

$23,738,273 $7,674,130 $34,279,483 $59,249,717 $12,396,019

$27,431,432

$15,652,301 $33,832,212 $63,756,539 $5,879,569 $8,110,165

$0 $48,096,307

$18,090,369 $150,794,727 $9,667,694 $0

$24,738,273 $0 $8,674,130 $35,279,483 $87,681,149 $13,396,019 $1,000,000 $1,000,000 $1,000,000 $64,748,608 $34,832,212 $64,756,539 $1,000,000 $6,879,569 $9,110,165 $100,000 $1,000,000 $19,090,369 $1,000,000 $151,791,012 $10,667,694 $999,873 $800,000 $1,006,595,661

$843,357,471

$117,346,526

Core Functions of the State Exchanges Even though the regulations issued to date provide states with a great deal of flexibility in constructing a State Exchange, each such exchange, once constructed, will be required to perform a number of mandatory functions. The core functions that each must be able to perform include: Implementing procedures for the certification, recertification, and decertification of qualified health plans (QHPs); Maintaining an internet portal through which enrollees and prospective enrollees of QHPs may obtain standardized comparative information on health plans; Providing a toll-free telephone hotline to respond to assistance requests; Determining a consumers eligibility to purchase a QHP; Determining a consumers eligibility for federal subsidies, such as a premium tax credit or cost sharing reductions to assist in the purchase of a QHP;

5 6

New Hampshire has returned exchange planning grant money. Oklahoma has returned exchange planning and early innovator grant money. 7 Texas has returned $900,000 of the exchange planning grant money. 8 Wisconsin has returned exchange early innovator grant money.
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Informing individuals of eligibility requirements for other insurance affordability programs, such as Medicaid, Childrens Health Insurance Program (CHIP), or any applicable state or local public program; Operating a toll-free hotline for consumer support, providing grant funding to Navigators which are required to help consumers through the purchase process, and conducting outreach and education about the State Exchange; and, Helping consumers enroll in a QHP.

QHPs are the main product that State Exchanges will offer consumers. PPACA describes QHPs as a type of health plan that is subject to a specific list of requirements related to marketing, choice providers, plan networks, essential health benefits, and other features. These plans are intended to satisfy the minimum essential coverage requirement that PPACA will mandate of nearly all individuals beginning on January 1, 2014. QHPs will generally provide coverage at one of the following metallic levels: bronze, silver, gold, or platinum. Each coverage level is based on a specific share of the full actuarial value of the essential health benefits that the QHP will provide.

As stated above, PPACA requires a State Exchange to certify health plans that wish to be made available to consumers through the State Exchange as QHPs. In so doing, the State Exchange must make a determination that making such health plans available through the State Exchange is in the interest of qualified individuals and qualified employers in the state in which the exchange operates. When an individual attempts to purchase a QHP on a State Exchange, the exchange will need to make certain that the enrollment process is efficient and seamless. The State Exchange will need to assess the individuals eligibility to purchase coverage through the State Exchange and will have to verify a persons eligibility through numerous electronic data sources including the Social Security Administration and the Department of Homeland Security. At the time that the State Exchange determines the individuals eligibility to purchase a QHP, it must also determine, unless the individual opts out, whether the person is eligible for other government assistance programs such as Medicaid, CHIP and federal subsidies for the purchase of a QHP. To do so, the State Exchanges coordinate with HHS, which will in turn coordinate with the Treasury Department, as well as state agencies and may also require some
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form of attestation from the consumer and potentially his or her employer. This coordination is required by PPACA, which explicitly states that the enrollment and renewal process for State Exchange subsidies, Medicaid and CHIP must be fully integrated to create a no wrong door process. This type of coordination will require a strong information technology infrastructure and will require a high level of coordination between numerous federal and state entities. Pursuant to guidance issued in March of 2012, State Exchanges have the flexibility to allow agents and brokers, as well as web-based entities like Private Exchanges, to enroll qualified individuals in a QHP. While these entities cannot perform eligibility determinations as part of enrollment in a QHP, the rules specify that a consumer can be enrolled in a QHP through the State Exchange with the assistance of an agent, broker or a Private Exchange so long as they ensure that the individual receives an eligibility determination through the State Exchange. The new guidance also requires these agents, brokers and Private Exchanges to meet standards set by the State Exchange for privacy, security and the protection of personal identifiable information. However, eligibility determinations for federal subsidies must be made through the State Exchange because those determinations involve personal tax information. Consumer Information and Assistance To achieve its goals, State Exchanges will be required to assist consumers in a number of ways, such as providing information on QHPs in a standardized format, creating an electronic calculator, providing a toll-free number for assistance, and developing a website that contains up-to-date standardized comparative information on each available QHP including: Premium and cost-sharing; Summary of benefits and coverage; Identification of whether the QHP is a bronze, silver, gold or platinum level plan; Results of enrollee satisfaction surveys; Quality ratings assigned by the State Exchange; Medical loss ratio information; The provider directory for each plan; and Contact information for Navigators and other consumer assistance organizations such as a state insurance department ombudsman.

The Navigator program is intended to inform individuals and small employers about the availability of QHPs within the State Exchanges and facilitate the enrollment of qualified individuals in QHPs. In general, Navigators are expected to maintain expertise in eligibility, enrollment, and program specifications and conduct public education activities to raise awareness about the Public Exchange. In addition, Navigators are also expected to: Provide information and services in a fair, accurate and impartial manner;

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Provide referrals to any applicable office of health insurance consumer assistance or health insurance ombudsman or other appropriate state agency for any enrollee with a complaint or question about their health plan or coverage; and Provide information in a manner that is culturally and linguistically appropriate to the needs of the population being served by the exchange.

Entities eligible to serve as Navigators include trade, industry, and professional associations, community and consumer-focused non-profit groups, chambers of commerce and unions. PPACA also includes licensed insurance agents and brokers as entities that may serve as Navigators. Furthermore, as states design their Navigator programs, many are considering the role that brokers will play in the context of their State Exchange. A good number of states have a long history with insurance brokers. Because of their typical client base (businesses), brokers often have a keen knowledge of laws regulating private insurance and may serve as a human resource provider for those businesses that may not have appropriate HR personnel. As such, many believe that licensed insurance agents and brokers can readily fulfill the PPACA enumerated duties expected of Navigators. Current Status of State Exchanges As of July 23, 2012, 15 states and the District of Columbia have begun the construction of a State Exchange. Of the aforementioned jurisdictions, many established their State Exchanges in 2011 and have continued making progress to further define their respective exchanges in 2012. While most of these jurisdictions have based the construction of their State Exchange upon legislation, in Rhode Island, the Governor issued an Executive Order to establish an exchange after the legislature failed to pass establishment legislation in 2011. Likewise, in New York, Governor Cuomo signed an Executive Order on April 12, 2012, to establish the New York State Exchange after the legislature failed to pass establishment legislation. In Kentucky, Governor Beshear issued an Executive Order to establish a State Exchange within weeks of the Supreme Courts ruling that found the Individual Mandate to be constitutional. Five states are now in the planning stages to establish an exchange. In 2011, the Governor of Illinois signed a bill into law declaring the states intention to establish an exchange. Thereafter, in 2012, the Illinois legislature introduced a bill that would establish a State Exchange. As of July 2012, the bill had not yet passed. In Mississippi, the Commissioner of Insurance announced that the state would establish a State Exchange that would be operated by an existing non-profit risk pool association. Mississippi found that the association has legal statutory authority to operate an exchange. In Virginia, the Governor signed a bill into law declaring the states intent to establish a health insurance exchange. In North Carolina, the Governor signed into law a bill which indicated the General Assemblys intent to establish and operate a state based health insurance exchange; however, as of July 2012, all bills that would authorize a State Exchange are still pending. Lastly, in Arkansas, the Governor announced the states intent to partner with the federal government to jointly operate an exchange. Currently, 14 states are only studying their options. These states are making use of federal exchange Planning and Establishment funds, and several have created planning and advisory committees developing recommendations on whether and how the state should construct its exchange. As part of this process, many of these states have conducted analyses of their
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uninsured populations, and insurance markets and have held stakeholder meetings. Presumably, after the states finish studying their options, and if they decide to build a State Exchange, they will then have to introduce legislation or issue an Executive Order before beginning the actual construction of an exchange. Nine states have made minimal progress towards establishing a State Exchange. Many of these states cited the uncertainty created by the legal challenges and the Supreme Court hearing as the main reason for their adoption of a wait-and-see approach. Given that the Supreme Court has recently issued its ruling, coupled with the fast approaching deadline to build a State Exchange, one would suspect that these states will revisit this issue in the very near term. Seven states, Alaska, Florida, Louisiana, Maine, New Hampshire, South Carolina and Texas have declared that they have no intention of creating a State Exchange in accordance with PPACA. In reviewing the breakdown of the states, it is important to remember that the information is a snap shot as of July 2012. Now that the Supreme Court has issued its ruling on PPACA and as we move closer to the fall legislative sessions for states, it is reasonable to presume that the activity level for a number of states will increase (and, presumably more states may decide to forego the construction of a State Exchange) which will obviously impact the breakdown discussed above.

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State Exchange Decision Points When deciding to construct a State Exchange, a state has to consider the following critical issues: Organizational Form. States have the option of establishing their State Exchange as a governmental agency or non-profit entity. Within the governmental agency category, the State Exchange could be housed within an existing state office, or it could be an independent public authority. Regardless of its organizational form, the State Exchange must be publicly accountable, transparent, and have technically competent leadership with the capacity and authority to meet federal standards, including the discretion to determine whether health plans offered through the State Exchange are in the interests of qualified individuals and qualified employers. State Exchanges also must have security procedures and privacy standards necessary for receiving tax data and other information needed for enrollment. Operating Model. States have the option to operate their State Exchange from an active purchaser model, in which the State Exchange operates as large employers often do in using market leverage and the tools of managed competition to negotiate product offerings with insurers, to an open marketplace model, in which the exchange operates as a clearinghouse open to all qualified insurers and relies on market forces to generate product offerings. States must provide comparison shopping tools that promote choice based on price and quality enabling consumers to narrow plan options based on their preferences. At this moment, the states that have established a State Exchange have chosen the following organizational and operating models. State California Colorado Connecticut District of Columbia Hawaii Kentucky Maryland Massachusetts New York Nevada Oregon Rhode Island Utah Vermont Washington West Virginia Organizational Form Quasi-governmental Quasi-governmental Quasi-governmental Quasi-governmental Non-profit Operated by state agency Quasi-governmental Quasi-governmental Operated by state agency Quasi-governmental Quasi-governmental Operated by state agency Operated by state agency Operated by state agency Quasi-governmental Operated by state agency Operating Model Active Purchaser Clearinghouse Active Purchaser Active Purchaser Clearinghouse To be decided Clearinghouse 9 Active Purchaser To be decided To be decided Active Purchaser Active Purchaser Clearinghouse Active Purchaser Active Purchaser 10 Clearinghouse

Clearinghouse model for first two years of operation, Exchange can revisit approach beginning in 2016. Although not a textbook active purchaser exchange, Washington States exchange leans towards an active purchaser model more than a clearinghouse model.
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Governance. States that establish a State Exchange as a non-profit or as an independent public agency must also put in place a Board of Directors that will govern the exchanges operations. Based on the already established State Exchanges, in general, the Boards of Directors range in size from 5 to 15 members. Moreover, these Boards of Directors are comprised of both stakeholders, such as consumers, small employers, insurers and brokers, as well as experts, such as economists, actuaries and health care providers. Funding. As stated above, the states establishing a State Exchange will be eligible for federal grants to offset the costs associated with the construction and operation of the exchanges. The federal funding will be offered through the end of 2014. Starting on January 1, 2015, each state must be able to fully finance the operations of its State Exchange. The states can finance their State Exchanges operations in any number of ways, including through state tax revenue, fees from insurers that sell QHPs through the State Exchange, or any other public or private funding source. Employer Sponsored Health Insurance In 2011, there was a great deal of media attention focused upon a McKinsey & Company study indicating that 30 percent of employers will definitely or probably stop offering employer sponsored health insurance after 2014. However, the vast majority of studies have concluded that PPACA will not materially reduce the percentage of Americans who are covered by their employers health insurance. Employer sponsored insurance is the most common source of health insurance coverage for non-elderly individuals in the United States. In 2009, approximately 151 million individuals received health insurance coverage from their employer or a spouses employer. PPACA includes a number of provisions that may affect an employers decision on whether to offer coverage to employees after 2014, including the Medicaid expansion, subsidies to purchase coverage through a State Exchange, and the high-cost plan excise tax. However, there are a number of overriding factors supporting an employers decision to continue offering its employees health insurance. Most employees place a high value on benefits, especially health insurance. As such, offering competitive health insurance, as part of an employees total rewards package, will help an employer attract and retain key employees. Furthermore, by providing its employees with health insurance, an employer will benefit by having a healthier and presumably more productive work force. Additionally, the incentives for an employer to provide health insurance to its employees is significant because the employers contribution to health care is a deductible business expense and is not included in the employees taxable income. Lastly, eliminating health coverage as a benefit may breach the long standing employment relationship between employer and employee that in which the employer provides the expected health coverage. While the vast majority of experts agree that PPACA will not bring about the demise of employer sponsored health insurance, it has, through the creation of State Exchanges, brought about one important change in how employers will offer employer sponsored health insurance to their employees. In general, PPACA has accelerated the evolution of Private Exchanges that will compete with State Exchanges and offer employers a new way to provide employer sponsored health insurance.

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The Evolution of Private Exchanges While PPACA formally mandates government sponsored, or State Exchanges, non-government sponsored exchanges, Private Exchanges have been around since the 1980s, although new models are evolving as the industry shifts its attention to empower consumers to make the best use of their investment in health insurance. Examples of Private Exchanges in the market today include post-65 Medicare supplement exchanges, individual coverage exchanges for millennials that are no longer covered under their parents health insurance, individuals past their COBRA timeline, and small business exchanges. Interest and investment in Private Exchanges has accelerated and will continue to do so. A number of existing and new industry players are putting together Private Exchanges in anticipation of significant new demand driven by the Individual Mandate, as well as, to compete with State Exchanges. Private Exchanges are being sponsored by insurance brokers and consultants, insurance carriers and health plans, affinity groups, and nontraditional participants, e.g., large retailers who provide health care services such as pharmacies. Moreover, unlike the State Exchanges, Private Exchanges are generally focused on serving individuals that are not eligible for government subsidies. However, as stated above, State Exchanges have the flexibility to allow consumers to purchase coverage through outside, web-based entities, which includes Private Exchanges, if the Private Exchange meets standards set by the State Exchange for privacy, security and the protection of personal identifiable information. Even if a State Exchange allows consumers to buy coverage through a Private Exchange, the eligibility determinations for federal subsidies must be made through the State Exchange because those determinations involve personal tax information. At a high level, Private Exchanges look a lot like State Exchanges. At their core, Private Exchanges attempt to offer consumers a user-friendly way to purchase health insurance by employing uniform, standardized descriptions on a wide range of insurance products with respect to cost, product design, benefits and network participation. Like State Exchanges, Private Exchanges typically offer insurance products through a website which includes interactive technology that allows a consumer to make an informed decision. Moreover, as with State Exchanges, Private Exchanges customarily offer a service center staffed by knowledgeable representatives assisting consumers reviewing and analyzing their options. State and Private Exchanges Coexisting Private Exchanges will coexist with State Exchanges, providing a viable option to employers either on a standalone basis or in combination with the State Exchanges. Employers looking to balance maximizing the government subsidy for their lower paid employees while preserving the tax advantages for their more highly paid employees can do so by utilizing both types of exchanges. Specifically, rather than steering employees into a State Exchange, some employers may want to continue providing benefit options for their employees who would not qualify for subsidies and want to continue to contribute to benefits on a pre-tax basis. On the other end of the salary spectrum, it may prove to be more advantageous for both employees and employers to convert low wage employees to part-time status so they are not under the employer mandate and are then able to maximize their subsidy through a State Exchange.

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Core Functions of Private Exchanges While Private Exchanges generally offer and perform many of the core functions of State Exchanges, Private Exchanges are not governed by the same set of rules and restrictions that govern State Exchanges and therefore can compete freely based on market conditions. Private Exchanges are generally viewed as having four core functions: Offering a significant level of decision support to help employees shop and compare products; Providing administration of eligibility assessment, enrollment, and premium collection and payment; Offering a managed funding approach that moves employee benefits towards a defined contribution model; and, Offering a wide choice of products and providers to employees.

Shop and Compare Like State Exchanges, Private Exchanges offer a variety of tools to help consumers shop, compare, and choose the best plans based on the individuals specific needs and circumstances. These tools are necessary to support a consumerism model predicated on a wide choice of plan options. Some web-based tools, such as out-of-pocket cost modeling calculators, have been around awhile, but there are a number of innovative tools that are new to the market or are evolving in response to increased market opportunity and competition. These tools include recommendation engines based on psychographic elements to guide individuals in the plan selection process; tools that enable financial profiling encompassing products from outside the exchange, e.g., individual disability insurance; and risk tolerance tools that help a consumer identify their risk tolerance. Such tools empower consumers to make more informed health care choices. Different exchanges have different levels of integration with key data components, such as medical plan history or retirement plan balances. The higher the level of integration, the easier and more complete the user experience. Key to the effectiveness of Private Exchanges, however, is consumer engagementgetting the employee to participate in the shop-and-compare process. Information is becoming more personalized through targeted messaging and video, as well as graphical representation of the user through avatars. Consumers are further being engaged through the use of social media and gamification, a growing trend within the industry that uses game design techniques and game mechanics to help in the decision-making process. Harking back to the pre-Internet consumer market, some carriers are even starting to offer a brick and mortar extension of their online exchange whereby individuals can sit down and speak with a representative face-to-face to discuss benefit plan options. At this time, the brick and mortar option is typically designed to service the individual market as opposed to the employer market.

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Administration Private Exchanges also provide some level of administration with respect to managing eligibility, enrollment, and premium collection and disbursement. The level of support provided is directly influenced by the type of exchange and the type of purchaser involved. For example, a plan sponsor may elect to provide funding through a Section 125 Plan (commonly referred to as a Cafeteria Plan) for employees to purchase individual coverage through a Private Exchange. In this scenario, the employee may pay the carrier directly for coverage and use their receipt of payment for reimbursement from their employer. Conversely, a plan sponsor may utilize an exchange that serves a wide employee constituency, encompassing group and individual coverage for a variety of products from multiple carriers utilizing various funding mechanisms including payroll deduction, employer contributions, retirement funds, and spending accounts. In this scenario, the Private Exchange may perform the record keeping for the spending accounts, direct billing or automatic clearinghouse transactions for the retirement and COBRA participants, all the while collecting the total premium from the employer and allocating the relevant amount to each carrier. Defined Contribution One of the most important functions of Private Exchanges is to offer a managed funding approach that moves employee benefits towards a defined contribution model. Moving employee benefits to a defined contribution model is not new. Most employers successfully negotiated the movement from defined benefit retirement programs (pensions) to defined contribution programs (401(k)s) starting in the late 1980s. Much like the need to manage the long-term unfunded liability associated with retiree pensions that brought about the migration to 401(k)s, employers are now concerned with long-term cost containment and personal accountability for health and welfare benefits for active employees. Moreover, employees who receive health care benefits from their employers typically do not fully understand the actual cost of that health care until faced with a COBRA event. In a defined contribution model, employers decide how much they want to spend to provide benefits and set aside these amounts in a funding vehicle, such as a Section 125 Plan. The employee would use these employer contributed funds, plus any additional amount required, to purchase the employees desired level of benefits that best suit the employees needs, given the employees specific circumstances. Using a defined contribution approach for health and welfare programs tied to a Private Exchange offers the following benefits: Employees are much more likely to understand their benefits (and the associated cost) well enough to make informed decisions that better match their needs with their available funds. Employers no longer bear the burden of trying to choose a limited number of plan options to meet the needs of a diverse employee population. Employers can confidently budget for health and welfare expenses on an annual basis and potentially tie it to strategic business objectives such as a percentage of revenue.
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Defined contributions provide an alternative to the actuarially determined obligation for retiree health care. Typically, both the employer and employees save money without sacrificing quality of benefit offerings.

Moving from a defined benefit to a defined contribution methodology requires careful strategic planning. Considerations include: Building a total compensation strategy that is directly linked to a business strategy. Defining the calculation and index for the defined contribution amount. For example, it could be tied to the external health care cost trend, employer profitability, or a blend of both or other factors. Communicating with and educating employees. Benefit programs often have an emotional component for employees that can complicate communication and deter the acceptance of typical benefit plan changes.

Exchanges in all shapes and sizes By its very nature, the Private Exchange model has flexibility to afford sponsors a great deal of choice when constructing an exchange. Following are Private Exchange models that currently exist in the marketplace or are emerging. Within each general category, there are risk models that support individual products, group underwritten products, and self-insured products. In some circumstances, Private Exchanges may mirror the metallic level plan designs contemplated by the State Exchanges. a. Single product-single carrier exchanges: Carriers establish and/or participate in an exchange that provides a single line of coverage, such as medical insurance, with a wide array of choices potentially based on network scope, varying degrees of total out-of-pocket cost, and other plan design variations that take into account factors such as alternative medicine coverage. b. Single product-multiple carrier exchanges: Exchange sponsors establish a single line of coverage, such as medical insurance, for an exchange that includes offerings from multiple carriers. These types of exchanges exist today in the individual health insurance market and the post-65 Medicare supplement market. In the group insurance market, unless there is a clear distinction between the carrier populations, e.g. regional carriers or networks that support only employees within a given region, these entities will need to carefully consider their risk adjustment methodologies to encourage carriers to participate. If carriers are competing within the same population, there may be factors that would influence more costly risk to one carrier, leaving that carrier exposed to greater losses. Evaluation of risk factors, such as claim history or prescription drug records of the enrolled population, may lead to an adjustment in the allocation of the total risk premium among those carriers, without affecting employer or individual cost.

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c. Single carrier-multiple product exchanges: Carriers establish an exchange that provides multiple lines of coverage, e.g., medical, dental, vision, and life, as well as products that complement the medical plan, such as critical illness. These carriers may minimize their risk for the total coverage package by bringing in specialty carriers under their umbrella for specific lines of coverage, such as dental insurance. In such cases the carrier will serve as the exchange sponsor. d. Multiple carrier-multiple product exchanges: Exchange sponsors, such as broker consultants and other third parties, establish exchange to encompass multiple products from multiple carriers. Some of these exchanges will limit the carrier selection to one line of coverage, e.g., medical or dental, but will offer different carriers for different products to mimic what is generally in place with employers today. That is, best in class products from best in class carriers, but with more choice. e. Standard and custom exchanges: Carriers and other exchange sponsors provide exchanges in a standard model whereby the employer has no options regarding what products are offered. Conversely, carriers and other exchange sponsors can provide employers with custom exchanges that can potentially offer a significant level of customization as to the products that the employer will make available to its employees. Given the wide range of exchange types that can be constructed, some employers may choose to provide access to multiple types of exchanges based on their employee population. For example, an employer may provide a single product-multiple carrier Medicare supplement exchange to their post-65 population and a single carrier-multiple product exchange to their active employee population. Impact of Private Exchanges in the Marketplace Although Private Exchanges are in the early stages of market evolution, there is sufficient data available to make some significant observations about the differences between the traditional model of providing employer sponsored benefits being deployed today and the opportunity afforded by an employer utilizing a Private Exchange. Consider this actual case study, which is representative of todays Private Exchange market. A U.S. mid-size company provides a Point of Service (POS) medical plan and dental, vision, life and long-term disability coverages. Upon a shift to a Private Exchange, the employer was able to offer its employees a larger selection of benefits. In fact, employees were able to choose the specific benefits that best satisfied their needs, given their specific circumstances, from among six health plans and a wide variety of other coverage options. All six plans were selected by at least one employee, with the most popular plan attracting 40 percent of the employees. Fortythree percent choose the lowest cost plan available. With the exception of dental coverage, no single ancillary coverage line was selected by all employees (and 50 percent of those choosing dental opted for an enhanced plan).

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The following is a snapshot of the ancillary insurance coverage selected:

With respect to cost, the total amount spent on medical insurance premiums declined by 30 percent, compared with a projected 16 percent increase the employer faced if it had remained with the same options offered the year prior. Both the employee and the employer shared in this cost savings. The employer avoided a 16 percent rate increase and the employees benefited from 20 percent less in payroll deductions. Approximately half of the employee savings were placed into Health Savings Accounts. This representative case study proves what many people have suspected: employees are largely over-insured with a traditional employer-sponsored health plan offering which, at most, likely offers up to three plan options, e.g., HMO, PPO and POS. When given the ability to choose from a wide variety of plans, employees bought 3040 percent less insurance than they had purchased the year prior. This does not mean they lack adequate coverage. Data from the Medical Expenditure Panel Survey indicates that 6070 percent of individuals have claims of $700 or less per year but purchase insurance which would cover several thousand dollars of claims. By offering employees the opportunity to choose exactly the types of coverage that fits their needs, both the employee and the employer will benefit financially while ensuring that employees obtain the coverage that best meets their needs. Key Considerations for Employers Using Private Exchanges There are many factors employers should consider when contemplating using a Private Exchange, including number of employees, demographics of the employee population, employee income levels, health of the population, single state versus multi-state coverage, the benefit strategies of the employers competitors, and even the company culture as it relates to providing benefits -- paternal approach versus a consumerist approach. The dynamics of the employment relationship will change with the evolution of Private Exchanges. Employer contributions to healthcare represent a substantial part of employee compensation. The need for these investments isnt eliminated with the rise of State Exchanges as there are numerous reasons why employers will continue to offer employer sponsored
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healthcare. However, the discussion between employer and employee will need to evolve and employers will have to modify their benefits planning approach from designing health plans, to creating a framework that helps employees navigate the exchange market place and make appropriate decisions for themselves and their families based on their unique life stage and preferences. The Future of Private Exchanges Private Exchanges will continue to develop and evolve to meet market demand and offer alternatives to State Exchanges. Whether the employer is a large or small company, theres no such thing as a one size fits all benefits plan. Private Exchanges currently on the market offer anywhere from 6 to 35 plans, with 10 to 15 plan options being the average. The result is a much wider array of options for employees, helping to ensure that everyone gets what best fits their specific needs. The Private Exchange industry trends indicate that once employees are given the vast array of options available in an average Private Exchange, 85 percent of consumers will buy something different than what they previously bought under a traditional model. More than three-quarters (77%) of consumers will purchase a less expensive plan than they did previously, while only 8 percent will buy a more expensive plan. Moreover, many have surmised that the first State Exchange offerings in 2014 may not be as robust as those in Private Exchanges, because State Exchanges will be governed by complex regulatory requirements. As Private Exchanges do not have to deal with many of the regulatory requirements, they have the ability to be more flexible and therefore more likely to innovate to meet the needs of consumers. Conclusion It is now clear that both State and Private Exchanges will have an impact on the way that individuals obtain health coverage in the very near term. Although the uncertainty associated with this type of change can be quite disconcerting, it is important to keep in mind that change does afford an opportunity to revisit, and rethink, the way health insurance has been provided. Gallagher Benefit Services, Inc. has been proud to assist you during the first two and a half years of Healthcare Reform and looks forward to assisting you as you work through the remaining implementation issues, including but not limited to the impact and opportunities afforded by both State and Private Exchanges.

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