ACA Checkup

Like any major piece of legislation or new institution, the Affordable Care Act (ACA) has led to and will continue to lead to countless unintended consequences. Successful advisers will endeavor to be a step ahead of their competition, which requires preparing for emerging trends.

Nothing in the text of the law or its implementing regulations envisions or foreshadows it, but the changed nature of the health insurance market will lead to three major trends: an increase in self-funded plans, including among smaller companies; a continued rise in the popularity of consumer-driven health plans; and an increase in private exchanges among very large employers.

The Rise of the Self-Funded Plan

Large employers already tend to fund their own health benefit plans, rather than purchasing group coverage through a carrier. Health insurance organizations are overwhelmingly planning for an increase in self-insurance as the post-reform era begins. This will include medium-sized and small businesses.

Self-insurance poses a greater financial risk for business organizations and requires greater administrative overhead on the part of the employer, but the exemption from certain ACA provisions may be enough to encourage self-insurance among a wider pool. Generally, self-funded plans are not stand-alone in nature; rather, they are paired with stop-loss insurance to cover the most catastrophic claims that would otherwise seriously threaten to bankrupt a company. The employer who self-insures is paying directly for claims and therefore assumes all risk. Thus, if an employee—or several—were to be diagnosed with cancer or another serious, expensive medical condition, the employer is responsible for covering those costs, which can be staggering. Stop-loss insurance, quite simply, prevents such a financial loss.

Increased self-funding is good news for advisers. Employers of any size—but particularly smaller employers—cannot administer benefits without the assistance of a broker. Sending employees onto the exchange, on the other hand, can easily be done without a broker. There are numerous benefits to employers that self-insure and a health insurance adviser can explain these benefits. By self-funding a plan, the employer enjoys the flexibility to tailor health care benefits to meet employees’ needs. There are also significant financial benefits: self-funded plans generally cost less than commercial insurance and give employers more control over health care expenditures; employers pay for the cost of their employees’ care and not a set amount to an insurer; they are generally exempt from state premium taxes; and when health care costs are reduced, the employer collects the savings, rather than the insurer.

Self-funded plans are exempt from any medical loss ratio requirements, can continue to medically underwrite and need neither provide a package of essential health benefits nor guarantee issue or renewability. Those benefits may be enough to encourage smaller firms to consider self-funding—and employee benefit advisers should accordingly be prepared to capture that market.

Consumer-Driven Options Expand

Consumer-driven health plans (CDHPs), including products now familiar to many such as health savings accounts (HSAs) and flexible spending accounts (FSAs), have been surging in popularity for well over the past decade. As employers will continue to face rising premiums due to high cost of health care coupled with new, often costly requirements of the ACA, these consumer-driven health plans will be a favorite choice of both employers and employees looking to save money. As the “Cadillac tax” approaches in 2018, imposing a 40% surcharge on insurance plans with higher costs, many employers will likely shift benefits to the less-regulated and more tax-advantaged CDHPs. Employees favor CDHPs for the freedom to spend as they choose and the ability to control costs oneself. These plans are also noticeably less expensive: The average cost of family coverage through a CDHP is $1,500 less annually than coverage for a family through a preferred provider organization (PPO).

Usage of CDHPs is also likely to increase as a direct result of the ACA. The reform law creates the SIMPLE Cafeteria Plan (an acronym for “Savings Incentive Match Plan for Employees”), which allows smaller employers (those with an average of 100 or fewer employees in either of the previous two years) to establish an employer-sponsored plan through which employees may choose traditional health plans, consumer-driven plans, fringe benefits, cash or a combination thereof. In addition to the tax savings provided to both the employer and employee, the Simple Cafeteria Plan is exempt from IRS nondiscrimination rules, meaning that employers may offer a more generous benefits package to highly compensated employees. As Simple Cafeteria Plans are designed to include products like HSAs and FSAs, the expansion of cafeteria plans to smaller employers will likely lead to an increase in consumer-driven health plans.

Private Exchanges Pick Up Steam

A 2013 study by the consulting firm Accenture estimated that one million people would enroll in health plans through private exchanges that year, but predicted that 40 million would enroll in 2018. Private exchanges operate as online marketplaces (separate from those found through healthcare.gov) for a single large employer or a group of large employers that offer a range of health plans from different carriers, administered through a private facilitator. One such private entity is Aon Hewitt, which in 2014 covers 600,000 lives through a private exchange that it operates for 18 companies. Aon Hewitt built the exchange from the ground up, starting only in April 2013.

While the ACA neither directly creates nor explicitly envisions private exchanges, their growth is yet another unintended consequence of the changing health insurance market. In addition to the changing marketplace, a handful of reforms stemming from the ACA make private exchanges more attractive. The ACA standardizes health insurance as a product, allows for comparison-shopping and opens the pool of potential enrollees by millions. With plans rated using the metallic system of platinum through bronze, coupled with the availability of easy-to-read summaries of benefits and coverage, consumers are better able to compare plans. The prohibition on exclusions based on pre-existing conditions now in effect means that consumers no longer have uncertainty as to whether they can actually enroll in a plan if they choose to apply for one through an exchange, private or otherwise.

Not all private exchanges are created equal, and advisers should look for certain features of a successful private exchange. Included among those are the facilitation of payment. A private exchange must offer an efficient, user-friendly means of purchasing health coverage, whether it is employer-subsidized coverage or a plan on the individual market. A successful private exchange will integrate features such as online payments through credit or debit cards or automatic bank transfers that allow for both the employer and employee to pay on time with ease.

Private exchanges can also lead the way in making defined contribution accounts for health benefits an increasingly attractive option for employers. A private exchange with a simplified and integrated payment system can effectively take nearly all involvement, oversight and responsibility for health benefits out of the hands of employers and place it with consumers and advisers.

Despite the technical issues when healthcare.gov was launched, the concept of being able to compare plans online and shop around for the best value is highly appealing to both consumers and employers. Private exchanges can fulfill that concept while keeping control and flexibility in the hands of the employer—and keeping agents and brokers in business. In fact, private exchanges present a tremendous growth opportunity for agents and brokers, who play the key role in educating employers about private exchanges, selling the supplemental benefit products not available on the public exchange and helping consumers navigate a wider range of health plans than what most are accustomed to. They are a viable product for the next generation of consumers, and skilled agents, brokers and benefit consultants will likely profit from having a large number of prospective clients and customers to whom they can sell a variety of insurance products.

Adam Beck is an assistant professor of health insurance at The American College. This story was excerpted from his Big “I”-commissioned white paper, “The Affordable Care Act: Challenges and Opportunities for Employers and Advisers.”

SIDEBAR: SHOP: Not a Threat

The ACA creates a program designed to increase the number of small employers (fewer than 100 employees, unless the state sets a lower threshold) that can afford to offer health insurance to their employees. The Small Business Health Options Program (SHOP) is intended to be an online exchange, much like the individual exchange accessible through healthcare.gov that would allow small business owners to browse, compare and easily purchase plans.

But while it is well-intentioned, the SHOP exchange is likely to fail. The plans will not be available on the Web for the 36 states that use the federal exchange until late 2014. Many of the plans that are available, including in those states with an active small business exchange site, have been more expensive than those available on the individual exchange—and the premiums are not subsidized. Interest among businesses in states operating their own exchanges has been disappointing. —A.B.