Attention all shoppers

Employers nationwide - big and small, retail and high-tech - are watching and waiting keenly to see whether the public state exchanges created under health care reform will succeed when they open for business in 2014. Small employers and those with low-paid or part-time employees are especially interested in finding out whether funneling their employees into, or finding coverage for them through, an exchange would be beneficial.

But the roadmap toward 2014 is a sketchy one. The status of the public state exchanges is "all over the place," says Mike Thompson, a principal at PricewaterhouseCoopers. "There are states that are moving forward with money allocated by the federal government to help them start planning for the exchanges, and some have already started to do their initial planning studies. At the same time, there is clearly some resistance from some states moving forward, and some states may choose to backseat implementation on this until the courts determine its constitutionality. It's really a tale of two cities at this point."

There is huge potential for variation in implementation, as seen in the two current models: the hands-off approach in Utah and the active role in Massachusetts. When states take a more active role, they may define what benefit provisions will be, as well as play a more active role in negotiations on how the rates would actually be set. According to Thompson, it currently looks like variation will be the rule, not the exception.

Bryce Williams, CEO of Extend Health, Inc., believes that Republican governors who may oppose the Patient Protection and Affordable Care Act are mostly proceeding with caution, because if the law is found constitutional and they have not progressed far enough, the federal government would run the state exchange.

Extend Health, which represents 135 major employers and has 70 carriers and 3,500 plans in the private Medicare exchange, has partnered with Microsoft to bring the exchange platforms to all the states that want it.

With this partnership, Extend Health is allowing states to adopt the framework for, and eligibility interfaces with, Medicaid and stand-up call centers. They are, in effect, licensing the underlying technology for an exchange that will give them a jump-start on building them. However, "an exchange is not just a website; an exchange is a human-driven change ecosystem, like what we've been doing with Medicare," says Williams.

An exchange requires technology, communicating and connecting with participants, because this is a significant change, having licensed benefit advisers on the phone to answer questions, and electronic enrollment and communications with carriers on the exchange.

Because of the low cost and maturity of the Extend Health/Microsoft technology platform, many Republican- and Democratic-controlled states are finding the model attractive, Williams believes.

"It's a way for states to own and maintain their own exchange and not get stuck a year from now, if the entire health care reform law does stand up in the Supreme Court, having to turn over control of the exchange to the federal government, which is what happens if they don't meet the deadlines," Williams says.


Two separate paths

The license to the platform is essentially free for 12 months, and the company is currently in talks with 10 states. In conversations with clients, Extend Health is hearing two conceived paths forward regarding health care reform.

The first is that businesses can maintain employer-based coverage, using health care reform as a catalyst for change within the plan design for employees, retirees, and/or dependents. This is an option that is most realistic to large employers, for whom "keeping up with the Joneses" is important to retain and attract talent.

The second direction is toward a wholesale shift in offering. Small and midsized businesses may find this more attractive initially, and they may be early business-adopters of the public exchanges.

Williams predicts that 10 million to 20 million companies may have to change their strategy and will be compelled to access a public exchange. The decision not only rests on company size, but an employer's industry as well. For example, wholesale and retail companies may opt for the second option.

"The more low-wage areas of the economy are going to be more incentivized" to drop coverage and funnel their employees into the exchange, says Williams.

In 2014, employee contributions toward premiums will be capped at 9.5% of household income. Once capped, employers can't pass on a percentage of rate increases to employees; they will have to make plan design changes.

"At some point the cost of that employee is going to cross what the employer is paying, and it's going to become untenable for even more complex, sophisticated employers to offer coverage," Williams continues.

Small employers in particular "are having trouble affording health care for their employees. [Also,] those that have a lower-wage employee base and are passing on costs [to their employees] are chomping at the bit to get to 2014, when the state exchanges become effective," notes Rob Combi, managing director, Bridge Street Consulting, a Wells Fargo Insurance Services Company.

He adds that large employers are more concerned about 2012 renewal, making changes in their plan design and increasing contributions. As such, Combi believes large employers generally will keep a steady eye on the small employers' experience in the exchanges, although a small minority of large employers will put their employees in the exchange right away.

Says Thompson: "Until there is a high level of confidence that the safety net for guaranteed issue coverage is in place across the country, I don't think employers will count on that yet."

Combi adds, "I think everybody is going to highly scrutinize these exchanges in 2014."


Other options to consider

In the meantime, employers are considering their options to lower costs while complying with the health care reform law. For example, small employers, especially in the middle market, are already moving toward self-insurance for the same reasons large employers already self-insure. Under the pressure of increasing costs, these employers look for financial savings from premium taxes, risk and profit charges, and mitigating the impact and variation of state regulations.

Another consideration is alternate, or private, exchanges. Currently these exchanges facilitate access for retirees, but there is an emerging and similar need for addressing active employees.

Employers that have employees across the country will have a hard time dealing with multiple exchanges that vary at the state level. Private exchanges could be established nationally to provide a uniform interface to employees while facilitating access to public exchanges across the country, particularly for employees who may be eligible for subsidies from the public exchanges. Further, the overlay between the two types of exchanges (public and private) would facilitate access.

Large and midsized employers are especially looking into an alternate way to provide coverage. Williams believes that using a private exchange sends a signal that they care about their employees, because private exchanges are "walled gardens" where employers can ensure that their employees receive customized service. For example, benefit advisers are trained to work with the employees of a specific employer, rather than just answer calls in the order in which they are received. Large employers like this idea better than transitioning their employers to a public exchange where they are mixed in with everyone else.

Consortium exchanges for industry groups, such as a lawyer association or the National Association of Manufacturers, may round back to association-like coverage (that is, private exchanges) if they can control for adverse selection.

Some employers are considering a defined contribution vehicle, similar to a 401(k), to give their employees access to health care insurance using a health reimbursement account. An employer would give employees money and direct them to an adviser for help. Under this model, the employer only pays for actual medical expenses, not what might happen. The company can give money to employees for their HRA, while keeping workers in an exchange. This would complement a government subsidy for low-income people. It's the "best of a private-public partnership," says Williams.

Already, employers are migrating toward a defined contribution approach, including offering consumer-driven health plans with a health savings account, "in part because it reinforces consumerism and employee engagement in health and health care, but also because it positions them for longer-term downstream impacts of health care reform," says Thompson.


Concern, complexity remains

Specifically, employers are concerned with the free-rider penalties (i.e. whether they will play or pay). If an employer has at least one employee that works an average of 30 hours in a month and is not given access to coverage by that employer, and that employee receives subsidized coverage through a public health exchange, then the employer will need to pay $2,000 times the overall number of full-time employees (even if this only applies to one employee).

Alternatively, if that employer does offer coverage to all full-time employees, but that coverage is not affordable to that employee (defined as costing less than 9.5% of household income), and that employee gets subsidized coverage in the exchange, then the employer will need to pay $3,000 per individual who gets subsidized coverage through the exchanges. If this total is greater than the amount in the first scenario, then the subsidy is capped at the amount in scenario one.

In general, in order to determine whether they will play or pay once the exchanges become effective, employers have a number of economic and noneconomic factors to consider. Economic factors include the cost to provide coverage, tax incentives (the need to stay below the Cadillac tax level), and the cost of free-rider penalties. Noneconomic factors include a perceived moral obligation to offer, the need to attract and retain talent, and PR sensitivity. Because most large employers are self-insured, they are mostly waiting to see how the exchanges perform.

"Most employers, at this point, expect to continue to provide benefits directly to their employees," Combi says. "Certainly, most large employers are not convinced that the economics, or even the employee relations associated with not providing coverage, are in their favor to move toward exchanges. Small employers might be a different story, where the exchanges will become the primary way small employers will get access to coverage in the marketplace."

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