November 2013
Q1. What are private exchanges?
A. A private exchange is an on-line portal used to sell insurance products directly to employees. Employees are allowed to become consumers and shop from among a wide variety of major medical health plans and supplemental insurance products (e.g., hospitalization, disease, disability, and dental coverage). A private exchange reduces the role the employer plays in the selection of insurance coverage for its employees. Today, employers typically shop annually for insurance plans on behalf of their employees, make selections from a carrier, and then make those insurance offerings available to their employees. For example, working with a broker, an employer might decide to work with Aetna to provide group health insurance. As part of that decision making process, the employer might decide to offer a POS plan and an HDHP to its employees. In a “closed” private exchange model, the employer still selects the carrier, but the carrier then makes a variety of group health insurance products available, through an on-line portal, to the employer’s employees. Instead of offering just a POS and an HDHP, through the private exchange portal Aetna might offer a variety of different types of arrangements—HMO, PPO, POS, HDHP, Indemnity plans—to the employees of an employer. The employees are then able to select the insurance that works best for them.
Note: The closed private exchange described above is the most typical private exchange, particularly for mid-sized employers. In a closed private exchange, an employer contracts with one carrier and that carrier offers a variety of different products to the employer’s employees. By contrast, in an open exchange, an employer contracts with a number of different carriers to provide a variety of different products. Most carriers, particularly when working with small- to mid-sized employers, will not be interested in an open exchange because of the increased risk of adverse selection.
Q2. Who pays for private exchange insurance?
A. Premium payments may be made just as they are made in a traditional insurance program. The employer may elect to pay some portion of the premium, leaving the employee to pay the rest.
Q3. What portion of the premium do employers typically pay?
A. The premium contribution varies in the private exchange model, just as it does outside the private exchange model. However, some employers have used or are considering using a “defined contribution” model, which seems to work well with the private exchange approach. Under this model, the employer simply establishes a dollar amount that it is going to make available to pay for insurance purchased on the private exchange. This can be a cost-savings approach, as the employer pays the same amount irrespective of whether the employee selects the most expensive or least expensive coverage.
Q4. That sounds an awful lot like the original cafeteria plan concept, doesn’t it?
A. Yes, it is exactly the same concept. Employees are allocated a certain amount of dollars and a variety of products from which to choose. In that sense, this concept has been around for about 20 years. What makes a private exchange different, however, is the variety of products that can be offered and the electronic platform on which they are offered. They are the same in that communication and encouraging consumerism are the keys to a successful program. They are also the same concept in that an employer could, if it chose, offer a number of different welfare arrangements through a private exchange (e.g., health, dental, vision, life, etc.) and could then establish an account with a total dollar value. The employees could then use the dollars allocated to buy certain arrangements but not buy others.
Q5. The federal regulators have effectively banned the use of HRA’s, premium reimbursement plans, HSA’s and flexible benefit plans from paying for insurance purchased on the public exchanges on a tax-preferred basis. Does that ban apply in the private exchange space?
A. No, the employer continues to sponsor the group health plans that are offered through the private exchange. As long as those products meet the applicable requirements of the Affordable Care Act (“ACA”), such as the annual and lifetime limit prohibitions and the preventive services requirements, and the tax-preferred vehicle is sufficiently “linked” to the employer-sponsored group health arrangements offered through the private exchange, then it is permissible to pay premium through a tax-preferred vehicle.
Q6. Are the federal subsidies available under ACA in the public exchange also available in a private exchange?
A. No, the ACA and the regulations and guidance released under the ACA make it clear that federal subsidies are not available in private exchanges.
Q7. Does insurance offered through the private exchange meet the “minimum essential coverage” (“MEC”) requirements for insurance under ACA which insulates employees buying the insurance from the “individual mandate” penalty under the ACA?
A. Yes. Under federal law, group health insurance offered by an employer to its employees meets the MEC requirements under ACA. As noted in the Q&A’s above, this is still employer-sponsored group health insurance and so by definition it will meet the MEC requirements.
Q8. How does the employer show that it is meeting the “affordability” requirements under the ACA when it offers insurance through a private exchange?
A. Group health insurance is “affordable” under the ACA if it is offered to full-time employees and their children up to the age of 26, reimburses claims at no less than 60% actuarial value (a “Bronze Plan”) and the cost of individual coverage for the lowest priced Bronze Plan does not exceed 9.5% of the employee’s “household income.” (Household income can be determined using one of three safe harbors, which include W-2 (box 1) income and the employee’s “rate of pay.”) An employer offering group health coverage through a private exchange must make sure that at least one of the arrangements offered to all full-time employees and their children up to the age of 26 is a Bronze Plan and the cost of individual coverage for that Bronze Plan does not exceed 9.5% of household income (which may be determined using a safe harbor). In other words, if an employer provides group health coverage through a private exchange, it need only ensure that one of the offerings meets the affordability requirements (just like any other employer offering coverage in the more typical way).
Q9. Are there any risks with respect to the affordability measurement or any other ACA requirements?
A. Like any other employer, the employer offering insurance through a private exchange will need to ensure that it can prove to the government that affordable coverage was offered. It will also have to demonstrate that coverage was (or was not) affordable with respect to each full-time employee. In other words, the same recordkeeping requirements apply. The only difference is that the employer will have more group health arrangements with respect to which it will need to keep records. So, for example, it will need to keep records demonstrating that in each of the various arrangements offered through the private exchange eligible employees were offered coverage within the first 90 days. Also, employers will have to report MEC coverage and presumably will have to report on the various plans offered.
Q10. Are there any other compliance issues to consider?
A. Employers need to remember that this is their employer-sponsored group health plan; in other words, all of the arrangements being offered are part of the employer’s group health plans covered by the Employee Retirement Income Security Act (“ERISA”). That means, among many other things, that a summary plan description must capture all of the different arrangements and meet all requirements of ERISA and other applicable law. COBRA must be offered for each arrangement. Also, all of ERISA’s reporting requirements must be met with respect to all of the offered arrangements. We have seen demonstrations by private exchange vendors who sweepingly say that all notices and other participant information requirements can be met through the on-line portal. We do not believe that statement is accurate. In all cases, ERISA’s electronic delivery reporting requirements must be met. There are frankly some employees where it is impossible to meet those standards for all of the employees (e.g., retail, manufacturing, trucking). Also, special electronic delivery rules apply to COBRA participants and retirees or anyone receiving benefits who is not an active employee. Employers considering private exchanges should not rely on representations of vendors with respect to compliance. Rather, they should work with competent ERISA counsel when considering a private exchange.
In addition, all other compliance rules must be observed, including, for example, the non-discrimination rules (that will be applicable to fully insured non-grandfathered plans once regulations are released and are applicable to self-insured plans already). So, for example, an employer could not discriminate in favor of its highly compensated employees in terms of eligibility for the various arrangements.
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