Just when we thought we'd gotten the health insurance exchange part of the Affordable Care Act (ACA) down, along comes a curve ball: private exchanges.
We knew about public exchanges (or marketplaces): 14 run by states and the District of Columbia, 36 run by the federal government alone or in partnership with states. We knew they aim to provide opportunities for uninsured and individually insured Americans to get coverage under Medicaid or through private insurance policies. And we knew that eligible consumers (with incomes under 400 percent of the federal poverty level [FPL] but above 138 percent of FPL) can receive federal subsidies for the purchase of private health plans on public exchanges.
We also knew about public exchanges that are just for small employers (fewer than 50 employees), so-called Small Business Health Option Programs (SHOPs). (These aren’t ready electronically everywhere yet, but they will be by November 2014.) If they work as planned, they could offer employees of small businesses a wider range of health plan choices than many have had before.
That’s a lot of exchange stuff to get under our belts, without even considering private exchanges. So what are these other exchanges? How, if at all, do they relate to the ACA? What should we make of them?
Here are some basics.
What is a private exchange? Simply put, a private exchange is a private business that sells health insurance online to employers. However, if you’ve seen one private exchange, you’ve seen one private exchange. Their offerings can vary: an exchange run by a single private insurer might offer only its own products, while a benefits consultant might offer plans from dozens of insurers. Private exchanges can also differ in their administrative efficiency, charges, and service, such as the quality of the support they offer customers in picking insurance plans.
The current penetration of private exchanges is difficult to assess. It’s estimated that about a million customers will enroll in them this year, mostly through their employers or former employers. But a recent study by Accenture, a consulting company with an interest in promoting private exchanges that was recently awarded the contract to finish fixes on HealthCare.gov, also projects growth to as many as 40 million users over the next five years.
How are private exchanges related to the ACA? Only indirectly. Some private exchanges predate the ACA and served as models for the public exchanges. Many of these original private exchanges were nonprofits encouraged by state governments to provide more options for small businesses buying coverage for their employees.
However, a new crop of for-profit private exchanges has arisen recently as a defense against the ACA and to capitalize on the buzz that now surrounds the “e-word.” Public exchanges could threaten the business of insurance brokers, benefit consultants, and some private insurers whose customers can now bypass them and go directly to public exchanges. This could become a bigger issue in 2017 when the ACA will permit all employers, not just small ones, to purchase health insurance in public exchanges. For brokers, consultants, and insurers, private exchanges can provide a way to hold onto existing clients by offering a private product that looks a lot like what the public exchanges are offering.
The exchange buzz has also created some new business opportunities for would-be operators of private exchanges. Some are offering to help employers outsource the management of employee health insurance. Private exchanges also sometimes offer employers assistance with switching from defined benefit to defined contribution approaches to funding health insurance benefits, arguing this will save companies money. According to one consultant survey, 2 percent of employers currently use the defined contribution approach, but as many as 28 percent may switch in the next two to five years. Private exchanges can also start to market an array of potentially profitable ancillary products: life insurance, disability insurance, and more.
What should we make of the private exchange phenomenon? The future of private exchanges remains unclear. Their ability to spread beyond their current narrow foothold in the health insurance marketplace will depend on a number of imponderables: whether they will compete effectively on cost and service; whether employers really want to get out of managing the health insurance of their employees; whether employees really want all those choices that exchanges offer; and whether private exchanges can find practical ways to preserve for employers the advantages of self-insurance and the favorable tax treatment of employer-sponsored health insurance.
Some observers are concerned that if private exchanges proliferate, they will further fragment the risk pool for small groups, putting the viability of the SHOP marketplaces in jeopardy. Perhaps the only thing certain about private exchanges is that they demonstrate once again that the private sector is endlessly ingenious at turning new public programs into business opportunities.