Health exchanges are coming and employers are gearing up for it. With the likes of Walgreen entering the Health Exchange fray, there is absolutely no doubt that Health Exchanges are here to stay (Source: McKinsey Quarterly Report, June 2011).
But there is a lot of concern and curiosity around the concept of Health Exchanges that has emerged as a result of Obamacare. We, at hCentive have delved deep into the nuances of the PPACA and have tried to simplify the concepts that the new reforms introduce. This is the first in a series of blog entries in which we will attempt to unravel the different aspects of Health Exchanges.
To start off, there are 2 possible variations of an exchange – a. A private Exchange and b. A State or Federally operated Exchange.
Let’s look at Private Exchanges in this post. We know of group health benefit plans and Private Exchanges are at a conceptual level, simply an alternative. We are well aware of a few major parts of the exchange. In fact, a ‘defined benefit’ plan that is pitched as a major benefit of private exchanges has always been a part of HRAs.
A defined benefit plan allows an employer to provide a fixed or ‘defined’ amount to each of their workers and allows them to choose their own health plan as opposed to the traditional way of paying all or part of an employee’s premium.
Now, let’s break down how a private exchange actually functions:
1. Let’s assume that an employer decides that they can afford to pay no more than $1,000 towards an employee’s health benefit every month. At this point, the employer has the option to simply give the $1,000 to the employee and let him choose his/her plan from the individual market. This has 2 benefits:
a. An employee gets to choose a plan that best suits him/her as opposed to being stuck with an employer-sponsored plan.
b. The employer, instead of having to pay all or part of the employee’s premium can give out a fixed amount every month to each of his employees and save on expensive group health benefit plans.
2. The employer can also choose to deposit the $1000 into an account that the employee can access. The condition is that the employee can go to a third party that provides a limited set of plans to the employee to choose from. This too, is much better than the traditional ‘one plan fits all’ offering.
The analogy here is a Walmart or large supermarket offering pretty much everything under the sun and a boutique store offering a limited range of options.
It is also important to note that with the new reforms, underwriting will go away. This means that premiums will not be dependent on an individual’s medical condition, thus making it easier for insurance seekers to buy in the Individual market without breaking the bank. As part of the PPACA, there is already a provision in place for individuals in the high-risk pools to obtain insurance through the Pre-existing Condition Insurance Plan (PCIP).
So, who would want to opt for the Exchange model? Our bet is on the following groups:
• Small sized businesses that do not currently offer health benefits to their employees
• Businesses that are averse to increasing year-on-year premium payments
Surveys show that 88% of employers agree that the cost of group health plans will increase as a result of the mandated benefits in the health care reforms. This is a definitive pointer to the growth of the private exchanges and the individual market.
As is evident, private exchanges are win-win scenarios for smaller businesses, as it allows them to take advantage of tax-credits without providing full-blown health benefits to their employees. Employees have the choice of health plans that best suit their financial, familial and physiological requirements.
Look out for the next in this series where we dig deeper into the workings of exchanges and how they will affect the end-consumer, brokers, and insurers.