MMA Blog

Private Exchanges - A Good or Bad Thing?

It seems almost every day there is another email, article or sales pitch on a private exchange. And while the volume is consistent, the message on whether private exchanges are good for employers is not.

As we begin, let us define what we are talking about.

A private exchange is not part of the federal or state public exchange program, which suffered all the negative publicity late in 2013.  These public exchanges are designed for the individual or family who does not have access to an employer plan and offers additional incentive, via premium subsidies, for qualifying individuals to join the program.  An interesting wrinkle for the public exchanges is the new SHOP program for small employers that may provide a tax credit to the employer based on the average wages of the employees.  We will address this program in a future blog.

A private exchange is a group health plan offered through an employer.  At a high level, a private exchange feels very familiar to employers.  Think cafeteria plan + a sophisticated benefit administration platform. 

For large employers, there is no simple answer on whether moving to a private exchange is a good or bad idea.  The details matter and will drive the answer.  Each individual employer will need the support of qualified benefit counsel to determine the right direction. 

In general, the reason there is not any consensus on private exchanges is that many larger employers already have a robust cafeteria plan, can afford a quality benefit administration system, and are able to offer their employees multiple plans to meet different needs.  In addition, while private exchanges provide a better mechanism for larger employers to move towards defined contribution, since they are still subject to the penalty provisions of the Affordable Care Act (ACA), true defined contribution is not possible.  

For smaller employers with less than 50 employees, private exchanges may be the best answer yet on how they can get closer to purchasing insurance like a large company.   In addition, these employers have new found opportunities in the form of:

  • More benefit offerings - A private exchange allows them to offer four, five or even more medical options, giving each employee the ability to pick a plan that best meets their needs and budget. 
  • Streamlined administration - private exchanges provide small employers access to quality ben admin systems at a reasonable price. These systems allow employees and the employer to make benefit and eligibility changes in one place and then these changes are automatically updated in all the carrier's systems and payroll. A small employer usually could not afford such a system, yet given that these employers many times do not have dedicated benefits staff they are the ones who may need it most.
  • Shift to Defined Contribution - because small employers are not subject to the eligibility and affordability penalties of the ACA, they can move to a true defined contribution model, allowing them to set a given amount per month provided to each employee.
    • Let's look at an example: an employer could provide each employee $400 per month and then each employee would pick the best medical plan option and ancillary benefits they wanted to purchase. The employee would fund any excess cost from their choices with pre-tax or post-tax (depending on the item) payroll deductions. The following year if medical costs went up 10%, the employer could independently set what they would contribute for each employee without concern of any affordability penalty.

Unfortunately, despite the potential advantages for smaller employers, most private exchanges are geared only to the large employer market.  As these become available for small employers later in 2014, it would be wise to consider them seriously.

Posted February 13, 2014

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