Private Health Insurance Exchanges: Look Before You Leap

October 25, 2012

Authored by: benefitsbclp

Update December 12, 2012: See today’s post on this issue that provides additional insight.

In the wake of the Affordable Care Act’s public exchanges, large private employers and benefit consultants have been working on establishing private health insurance exchanges, which would permit employees of participating employers to purchase health insurance from a broader array of alternatives than are available under a single employer plan.  Generally, private exchanges are being marketed to large employers, many of whom self-insure, as a way to manage their health care costs through a defined contribution-style health program.  It is expected that the private exchange will have multiple levels of individual health insurance coverage provided by several different insurers, in contrast to employer plans, where there may be only one or two levels of coverage.

An employer who provides health coverage through a private exchange gives each employee sum of money, through a health reimbursement account, pre-tax through cafeteria plan, or post-tax, to pay the employee’s share of the premium.  Each employee selects health coverage from the options available through the exchange.  The employer’s expectation is that providing health insurance through a private exchange will limit the employer’s cost and give the employees more choice and more control over their health insurance and care.  Aon Hewitt has set up a private exchange and it has been reported that Sears and Darden Restaurants  expect to provide their employees with health insurance through a private exchange for the 2013 plan year.  However, before an employer implements a private exchange, there are several issues that should be considered, including some legal rules that need further clarification.

  • ERISA:  There will be enough employer involvement that the exchange would most likely be treated as an employer plan subject to ERISA, including the SPD and 5500 requirements.  Benefit booklets prepared by insurers often do not include all of the provisions required by ERISA to qualify as an SPD.  Where the employer has a less direct relationship with the insurer, it may be more difficult to supplement the benefit booklet.  In addition, the plan document may have to describe all of the insurers and options from which the employees can choose.  Similarly, the employer may be required to attach a Schedule A to its Form 5500 for each individual policy purchased through the private exchange.
  • COBRA and HIPAA:  As an employer plan, the alternatives available will be subject to the COBRA continuation rules as well as the HIPAA requirements, such as nondiscrimination, creditable coverage, privacy, and wellness standards, which will require coordination with many providers.  For example, who is responsible for giving COBRA notices and notices of creditable coverage?  Additionally, an employer that has historically been “hands on” with HIPAA protected health information may consider adopting a more “hands off” approach to PHI.  If so, the employer will need to change its policies and procedures, as well as amend its plan documents to be clearer about the types of PHI it can (or cannot) receive.
  • HRA, §105(h) and §125 requirements:  The employer’s contribution provided through an HRA may raise nondiscrimination issues, particularly if there are higher benefits for the highly compensated.  Alternatively, if an employer provides a flat contribution for all employees, but allows the rest of the cost to be paid pre-tax through a cafeteria plan, then the cafeteria plan my not satisfy the 125 nondiscrimination rules, which would make cafeteria plan contributions taxable instead of pre-tax.  Additionally, it is unclear how a private exchange will be tested for nondiscrimination under the PPACA rules for insured plans, once those are issued.
  • Administration:  Many employers assist their employees with benefit claims.  It may be more difficult to provide assistance with multiple insurers.
  • Health care reform “play or pay” requirements:  It is not clear whether participating in a private exchange will be treated as providing coverage that satisfies the requirement that the coverage be affordable and that it provide minimum essential benefits.
  • Multi-state requirements:  Multi-state employers may be faced with a myriad of policies with different benefits, due to state mandates and different definitions of “essential health benefits” under health reform.  State insurance commissioners would be concerned that the coverage offered to individuals in their states satisfies the state insurance laws and is offered by an insurer licensed to do business in the state.

The issues outlined above do not necessarily mean a private exchange is impossible.  However, an employer considering participating in a private exchange should consider these issues in addition to any possible cost savings the employer anticipates.  And, it may make sense to wait for guidance from the Department of Labor and the IRS before signing on to a private exchange.

Disclaimer/IRS Circular 230 Notice