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Small Business Health Insurance Exchanges: Potential And Pitfalls



February 9th, 2012

The Affordable Care Act’s state health insurance exchanges for small businesses present a host of opportunities for states now creating them, but they also present design and regulatory challenges that could make or break the success of the program, according to a cluster of articles in the February issue of Health Affairs, released yesterday.

The articles examine the exchanges’ potential to provide affordable insurance options for small employers who now face high premiums and administrative costs when they insure their employees. Under the Affordable Care Act’s Small Business Health Options Program, or SHOP, the exchanges—along with exchanges for individuals—are expected to be open for business on January 1, 2014.

Key issues for states reflected in the articles include:
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  • Creating efficient, affordable exchanges that offer choice. Exchanges won’t succeed unless they meet goals of providing small businesses with affordable coverage, contain administrative costs and create efficiencies for small businesses, attract and promote high-value, lower-cost health plans that are not typically available to employees of small firms, and provide small-business employees a wider choice of plans as opposed to the traditional offer of one plan.
  • Guarding against adverse selection. Adverse selection is a key issue that could affect the integrity of the exchanges. Indications of this would include insurers’ attempts to attract healthier enrollees into their plans; small businesses self-insuring with the aid of stop-loss coverage, while their employees are healthy and switching to the small business exchanges when employee health degrades; and consumers opting to purchase coverage outside of the exchanges.
  • Making design choices that could affect enrollment. The reform law grants states considerable flexibility in designing their exchanges. These design choices could affect enrollment. Choices include allowing states to combine their small-business and individual exchanges, limiting enrollment to companies with 50 or fewer employees or opening the exchanges to firms of up to 100 employees through 2015, or reducing the ability of insurers in the exchange to charge premiums on the basis of age beyond what the law allows.

Many of the articles in the issue focusing on the small-business exchanges were produced with the support of the Commonwealth Fund.

In an overview of the cluster of articles, Timothy Jost at Washington and Lee University School of Law asserts there is a real need for the SHOP exchanges. Small businesses struggle to afford and manage health insurance for their employees, and they have much less bargaining power with insurers than larger businesses. Jost concludes that to be successful, the SHOP exchanges will have to provide small employers with a more attractive alternative to the options currently available; keep costs affordable; limit the burden posed by the insurance process; perform administrative functions; manage enrollment periods; and perhaps most important, protect against adverse selection, which would lead to a disproportionate number of sicker individuals in the exchanges.

THE BUSINESS CASE

Author Jon Kingsdale, founding director of the Massachusetts Health Connector exchange, draws on his experience and examples from Utah’s already functioning exchange for small businesses to lay out a business case for the SHOP exchanges. He contends that to attract and retain small employers, while also fulfilling the goals of health reform, the SHOP exchanges must:
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  • Be affordable, contain administrative costs, and create efficiencies for small businesses.
  • Attract and promote a broad range of health plans, including high-value, select-network plans that are not typically available to employees of small firms.
  • Provide small business employees a wider choice of plans as opposed to the traditional offer of one plan.

Terry Gardiner, vice president for policy and strategy with the Small Business Majority and former Alaska state legislator, observes that often-overwhelmed small-business owners need an exchange that will fulfill many of the functions served by the human resources departments of larger businesses. Exchanges should assist small employers with other health insurance-related functions, such as wellness programs, Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage, and flexible spending accounts.

RISKS TO EXCHANGES

An issue for states is the possibility that many small businesses will elect to self-insure, which means that they would directly pay health expenses of workers rather than helping to purchase insurance that covers those expenses. If so, the effect might be to draw small businesses away from the SHOP exchanges and cause higher costs in the exchanges by taking healthier participants out of the risk pool. The potential consequences are addressed in two separate articles.

Christine Eibner and colleagues at the RAND Corporation find that although self-insuring and purchasing additional stop-loss insurance to protect against very high expenditures would allow small businesses to avoid new rating regulations set forth in the Affordable Care Act, the incentives to self-insure after the act takes full effect are not strong enough to substantially affect small-businesses’ decisions. The authors conclude that allowing small businesses to continue to self-insure would have little to no effect on premiums in the SHOP exchanges and would likely increase the number of small business employees with health insurance. Mark Hall at Wake Forest University School of Law addresses what measures states might take if the trend toward self-insurance does lead to adverse selection against regulated markets.

According to Jonathan Weiner and colleagues at Johns Hopkins Bloomberg School of Public Health, adverse selection has the potential to create health insurance plans within the exchanges that have a disproportionate number of healthy or sick individuals, setting up the potential that plans with a larger number of healthy enrollees could be overpaid, while those with sicker enrollees could be underpaid. When modeling how adverse selection could play out under the law, they found that risk adjustment based on patients’ diagnoses will likely be more accurate than ratings based on age and other factors. The article’s comprehensive review of Affordable Care Act provisions intended to curb adverse selection also finds that states have many options available as they design their exchanges. Although curbing adverse selection is feasible, it could prove challenging, Weiner and colleagues write.

WILL LARGE EMPLOYERS COME ON BOARD?

Beginning in 2017, states can choose to open their exchanges to large employers. William Kramer, executive director for national health policy for the Pacific Business Group on Health, investigates the likelihood of larger employers joining the exchanges if they become open to them. He concludes that in the short term (2014-2016), large employers may rely on the individual exchanges to provide coverage for their pre-Medicare retirees and part-time employees. However, large employer participation in the SHOP exchanges will depend on how viable the exchange marketplaces become, whether the Affordable Care Act survives mostly intact, and whether the labor market becomes competitive again.

REPORT FROM THE FIELD: HOW COLORADO CREATED A HEALTH INSURANCE EXCHANGE

In this month’s Report From The Field, journalist T.R. Goldman gives an account of how Colorado managed to pass a law to set up a health care exchange despite the bill being nearly torpedoed by the local Tea Party and the state attorney general’s participation in the multistate lawsuit to overturn the Affordable Care Act. Several factors led to its successful passage, including support from the state’s GOP-leaning business community and efforts among the exchanges’ creators to provide an open and transparent process, says Goldman. Now members of its exchange board—made up of insurers, small-business owners, health care providers, and others—must work together to make decisions about everything from which plans to include in the exchange to governance and information technology, he says. Yet a special Colorado legislative committee still retains some control.

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1 Response to “Small Business Health Insurance Exchanges: Potential And Pitfalls”

  1. StefanM Says:

    Chris,
    this is wonderful reporting. Many people aren’t aware that the state’s power to affect the changes can actually hurt the enrollment process by removing people with a lower risk. I think that the administrative costs are going to be through the roof , because states have different exchanges. It seems it would be wise to use one set of rules and one administration for all, and keep the costs low for the people it is helping. I am myself actively working toward a solution, and it may be years before my solution can affect change. Your work now is actively helping by informing, and with any luck this article will be whispered into the right ears.

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