September 2012

Private Exchanges: You Have Questions, We Have Answers

5 min

What is a Private Exchange?

Private health insurance exchanges or “private exchanges” have been a hot topic of discussion over the past year.  But what is a private exchange?  At its core, a private exchange is a private business – typically operated by brokers, benefits consultants, or insurers – that sells health insurance (both fully-insured and self-insured) to consumers through an online product.

What Makes Private Exchanges an Attractive Option for Employers Offering Health Care Coverage to Active Employees?

Defined Contribution – In the case of an employer funding all or a portion of an active employee’s health care coverage, utilizing a “defined contribution” payment system is an option that works particularly well in a private exchange setting.  Here, the employer decides how much it wants to spend on health insurance each year, and it sets aside these amounts in a health reimbursement arrangement (“HRA”) for each employee.  The employer may then determine the rate at which the fixed contribution would increase each year (e.g., based on increases in the Consumer Price Index (“CPI”) as opposed to increases in premium costs).  In general, the only role of the employer is contributing funds toward the purchase of health insurance coverage.

Expanded Choice – A private exchange may offer as many as 10 to 20 different major medical health plans, ranging from high-cost sharing plans down to low- or no-cost-sharing plans.  In this case, the difference in cost between the plan designs may be as great as 60%.  Offering this “inventory” promotes choice and consumerism, which has been proven to reduce health care spending, thereby saving money for the employee and employer.  Private exchanges also offer a menu of supplemental insurance products, enabling the employee to aggregate insurance coverage – usually at a lower cost – instead of purchasing a more expensive plan that may offer benefits and services the employee does not want or need.

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

Comprehensive Customer Service – A private exchange also provides customer service that seamlessly facilitates the purchase of health insurance, and customer support from the time the consumer enters the private exchange, all the way through to the actual purchase of a health plan and/or supplemental insurance product(s).  In addition to these services, a private exchange company will often serve as a benefits administrator or as a resource to health care consumers with questions about the inventory of health plans offered, or questions about the health coverage they have elected through the private exchange.

What Private Exchange Strategies Are Employers Currently Exploring For Active Employees?

In general, there are three private exchange strategies that employers are currently exploring:

Single-Employer, Single-Carrier – Under this strategy, a single-employer could work with a private exchange and offer a wide-variety of fully-insured or self-insured group health plans to their employees through a single insurance carrier or third party administrator funded through an HRA.

Multiple Employers, Multiple Carriers – Under this approach, multiple employers band together, effectively increasing the employers’ risk pool, and fund – through an HRA – the purchase of fully-insured group health plans made available by multiple insurance carriers through a private exchange.

Individual Market Plans and HRAs – Finally, employers are examining a model where – through a private exchange – the employer allows its employees to purchase a health plan in the fully-insured individual health insurance market, funded through an HRA.  This model generally will not be viable until 2014 (because of the HIPAA nondiscrimination rules).

What Do Employers Interested In Adopting a Private Exchange For Active Employees Need to Know?

There are a number of legal issues that a defined contribution private exchange for active employees presents.  For example, the Patient Protection and Affordable Care Act (“PPACA”) enacted a number of new rules that may adversely affect the use of HRAs as a funding mechanism for the purchase of a health plan – namely the restriction on annual limits on the dollar value of “essential health benefits” and the “shared responsibility” requirement (otherwise known as the “employer mandate”).  In addition, employers adopting a private exchange strategy must ensure that their health plans do not discriminate in favor of “highly compensated individuals,” regardless of whether the arrangement is self-insured or fully-insured (but enforcement in the fully-insured context won’t occur until additional guidance is issued).  Moreover, compliance with the new requirements under PPACA and the existing rules applicable to group health plans under the Internal Revenue Code, and in most cases, the Employee Retirement Income Security Act is required.

How Can Venable Help?

At Venable, we currently provide counsel to private exchange companies so we know how private exchanges work.  We also provide legal assistance to employers working with these companies.  Based on our experience, we can answer your questions about private exchanges, and discuss whether a private exchange is right for your employees.  We can also advocate for policy changes and a resolution of any legal uncertainties to ensure that private exchange strategies can be viable and successful.

Please contact any of the attorneys in our HealthcareTax and Wealth Planning and Employee Benefits and Executive Compensation groups if you have any questions regarding this alert.