Private Insurance Exchanges – Confusion Galore

 [written by Mark Holloway, JD]

If you’re familiar with the health reform law, you have heard of the health insurance exchanges.  These are vehicles to be established in each state that will allow individuals and small businesses to shop for health insurance coverage beginning in 2014.  These exchanges are often referred to as “public exchanges” because they will allow individuals to purchase health coverage, often with a generous government subsidy to help offset premium costs and cost-sharing.  

Lately there has been talk in some corners about “private exchanges.” What exactly is a “private exchange”?  A recent article from American Medical  News correctly states that a private exchange could be an alternative way for an employer to help employees obtain health insurance coverage.  Under a private exchange the employer provides a fixed subsidy to help its employees purchase coverage, not under a group plan sponsored by the employer, but through an intermediary, such as a broker/consultant or other third party (including an insurer).  However, the AMA article contains some misstatements: 

• The private exchange is an example of a “defined contribution” approach to healthcare, not a “defined benefit” approach as stated in the article.  Under a defined contribution approach, the employer decides how much it will subsidize coverage and provides this amount to the employee to help defray the employee’s cost of individual coverage. 
• In 2014, employers with 50 or more full-time equivalent employees will be penalized if they do not offer qualifying and affordable coverage to their full-time employees (generally, employees who work at least 30 hours per week after a waiting period that cannot exceed 90 days).  This requirement is often referred to as the employer’s “play or pay” or “shared responsibility” requirement. Federal regulators have not addressed whether a defined contribution from an employer, to help an employee buy individual coverage, will satisfy this requirement.  A “defined contribution” towards employer-sponsored group coverage should be permissible—in fact, employers who sponsor group insurance today essentially use a “defined contribution” approach in that they define their (and the employee’s) specific contributions toward the cost of coverage—provided the underlying group coverage is qualifying and affordable to the employee.  However, I believe it is very unlikely that an employer’s “defined contribution” towards an individual plan purchased from a public exchange will satisfy the employer’s “play or pay” obligation.  We’ll know more after we get formal guidance from the regulators.