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5 Questions Answered About Private Exchanges

Posted by Monaghan, Christian at Tuesday, 11/20/2012 12:38 pm
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Read the full post on the SharedHR blog.

Thanks to John Nielsen, Vice President of USI's San Francisco office, for penning this extremely informative article on Private Exchanges. We are seeing this topic come up more and more since the election, and we're very excited to be offering great content around these disruptive topics. John will join SharedHR in hosting a webinar on the Employer Impact of Health Care Reform on Wednesday December 5th from 10am-11am PDT. You can sign up here. Thanks, John!

By January 1, 2014, each state must establish an Exchange. An Exchange is basically a new health insurance marketplace where policies meeting specific eligibility and benefit requirements are available to individuals and small employers. There has been much discussion and press recently regarding the creation of private exchanges.

The following questions and answers are intended to provide a high level explanation of what private exchanges are and how they relate to health care reform’s Exchanges and other requirements.


A 1: To create a private exchange, a company such as a consultant or insurance carrier establishes a benefit package available to employees of its participating employers and handles the associated administration (e.g., enrollment and communications).

In addition, an employer establishes a defined contribution plan under which it contributes to each eligible employee a specified amount of money through a health reimbursement arrangement (“HRA”) or cafeteria plan for the employee to use to pay his share of the premium toward coverage. These cafeteria plans failed in the 1980s due to minimal enrollment caused by failed communication, complex administration, and adverse selection.


A 2: Private exchanges are intended to:
1) Offer more choices- A private exchange offers various benefit options to the employees of all its participating employers. Some private exchanges offer as many as 20 coverage options which is more than the traditional group insurance benefit model offers.
2) Reduce costs- These benefits may be more affordable because the private exchange has a larger pool of employees than with respect to a single employer with which to spread risk.
3) Reduce administrative burden- New digital decision support tools and streamlined online enrollment may help make private exchange plan selection and enrollment easier for employers than handling their existing program.
4) Reduce employer penalty exposure- Some believe that an employer’s contribution of a defined amount of money available to employees can address health care reform’s employer penalty provisions. As background, beginning in 2014, employers with 50 or more employees pay a penalty when they do not offer coverage to their full-time employees (and their dependents) or, with respect to their full-time employees, they offer employee-only coverage that is expensive or insufficient and a full-time employee within 100-400% of the Federal Poverty Level (“FPL”) receives government assistance to enroll in the Exchange.

The idea of using a private exchange as a vehicle to address this penalty is that, as long as the employer offers one or more health plans of a minimum value under the private exchange and contributes at least 9.5% of each FTE’s W-2 wages to an HRA or cafeteria plan on the FTE’s behalf, it will be deemed to provide an “affordable” plan. Thus, the employer will not be subject to any penalty. Whether this will, in fact, work is dubious. In an American Bar Association conference earlier this month, IRS representatives expressed concerns about giving employees an HRA and sending them to an exchange (private or public) and commented that this may not constitute an offer of coverage. Guidance is needed.

Read the full post on the SharedHR blog.