Assuming the Affordable Care Act (ACA) stays on track through the aftermath of the election, it will offer numerous new benefits, such as guaranteed coverage for all adults starting in 2014. Some companies may want to stop providing health coverage and instead give workers money to buy their own. One of the more popular ideas being discussed is to give workers a lump sum, a voucher or defined contribution, and then let them use that money to buy their own individual health plan through the state health insurance exchange. One upshot is that workers could shop for plans that best suit their needs in terms of doctors and benefits, rather than relying on what their employers pick. They also get to take their policies with them if they leave their jobs. This model “gets a boost now”, said David Lansky, chief executive of the Pacific Business Group on Health.

The defined-contribution model is like a 401(k) plan in which employers put a fixed amount of tax-deferred dollars into employees’ retirement accounts and leave it to the workers to manage the money. In the case of health benefits, employers gain more control over their spending and avoid the hassle of picking plans for their workforce.

Small business employers should be eager for a new way of doing things as medical costs and insurance premiums keep climbing. Businesses with less than 50 employees have nothing to loose - no penalties or “taxes” - for not maintaining a group health plan. Some smaller firms, especially in technology, may want to keep benefits in-house to compete for the best talent. But companies in retail, hospitality and other service sectors with lots of lower-wage workers will be at the front of the line to sign-up for defined contribution plans.

Larger companies tend to be fairly conservative are unlikely to give up their paternal healthcare role in the near term, but faced with escalating healthcare costs, some employers will look at unconventional options. Extend Health, a California-based company, has already helped 40 companies in the Fortune 500 make this switch on retiree health plans, and it said many of those clients are interested in doing the same for current workers. Aon Hewitt, a major benefits consultant, is launching a private health exchange this fall aimed at employers with more than 5,000 workers.

With the Supreme Court decision finalized, federal and state agencies are rushing to create State Health Benefit Exchanges for individuals and possibly a SHOP Exchange for small-businesses by January 2014.

State-Based Exchanges

California and Maryland were early out of the gate and are well on their way to creating state based exchanges. Others moving forward with state-based exchanges include New York, Connecticut, Vermont, Massachusetts, D.C., West Virginia, Hawaii, Washington, Oregon, Nevada, Utah and Colorado. Some of these less-populous states will probably opt for a federal partnership.

Federally-Facilitated Exchanges

States that have opted not to create a state health benefit Exchange at all will most likely end up with a federally-facilitated Exchange. These states still can maintain some control their Exchanges, including primary responsibility for the plan management function. States do appear to have the option to use agents. Among the states that will probably have a federally-facilitated Exchange include: Texas, Florida, New Jersey, Michigan, South Carolina, Louisiana, Wisconsin, New Hampshire, Ohio, Maine, and Alaska.

Working On It

Illinois, Pennsylvania and Rhode Island have pending Exchange legislation that could result in state-run exchanges, but at this late date it is more likely they will ask for a federally-facilitated exchange, at least initially.

What About Funding?

Lurking in the wings HHS has yet to address how federally-facilitated Exchanges will be funded. The ACA does not include a way to fund this type of Exchange. More to follow…**

Many states will not be ready to establish their own state health insurance exchange program. Only, 15 states have passed legislation or issued executive orders to create exchanges. HHS is launching a series of regional meetings to encourage reluctant states to move forward. Time is running out for states to begin setting up the health insurance exchanges.

Seven states have decided to allow the federal government to establish and run their exchanges and many of the remaining 28 states are waiting. Under the law, states will have to decide later this year wether or not they will create their own exchanges.

The feds would have no trouble setting up and running the exchange infrastructure in multiple states, but they must get co-operation from the states to manage issues like selecting insurers and qualified health plans, determining eligibility and providing customer service and support. That cooperation may vary with state politics.

In an effort to reduce the number of federal exchanges, the Obama administration has been flexible with states, allowing them to set their own benchmarks for essential health benefits and offering states the option of partnering with the federal government to share operations,

A Milliman study, published March 15, 2012, says the average annual health care costs for a family of four with an employer-sponsored PPO plan increased by 6.9% from 2011 to 2012, to $20,728.

Employee Cost-Sharing Increases

The study found that employees will pay an average of 41%, or $8,584, of the total cost through premium contributions and out-of-pocket expenses, while employers will cover the remainder.

Slower Rate of Growth

According to Milliman, the 6.9% increase was the smallest annual growth rate recorded by the consulting firm in 12 years, but the $1,335 increase was the largest jump in dollars. Lorraine Mayne, a Milliman actuary, said the study “helps illustrate the challenge of controlling health care costs,” noting that since “the total cost is already so high, even a slower rate of growth has a serious impact on family budgets” .

Today’s employer-sponsored health insurance market is dominated by defined benefit plans, under which employers determine a set of health insurance benefits that are provided for employees. These will gradually be replaced by defined contribution plans, under which employers pay a fixed amount, and employees use the money to buy or help pay for insurance they choose themselves.

The fundamental driver of this shift is the effort by American businesses to reduce their exposure to healthcare costs. The natural next step will be for employers to strictly limit their health-insurance contributions to a set amount of money that workers could use to buy insurance. Companies will thus eliminate their exposure to unexpectedly high health-care costs.

Health Care Reform Accelerates the Shift

The Affordable Care Act (ACA), or Obamacare if you must, will accelerate the shift to defined contribution plans. Indeed, the legislation may have a larger impact on the type of health insurance plan that employers offer than on their decision about whether to drop healthcare benefits altogether. A survey by McKinsey & Co. has suggested the potential for huge declines in employer-based health insurance. Such estimates are highly uncertain, and what actually happens will probably depend on herd behavior. Employer surveys indicate that most companies will consider dropping their health plans only if other firms do.

If most employers do retain their health plans, the state Health Insurance Exchanges created under the new federal health-care law will make the basic idea of a defined-contribution health plan more prevalent, and thus speed its adoption. The regulations written to carry out the new law will determine how things play out. If defined contribution plans that are sufficiently generous count as employer-based coverage, as is generally expected, the trend toward such plans will probably accelerate.

In any case, the bottom line is that a shift toward defined contribution plans seems likely. I’d be willing to bet that most large U.S. employer healthcare offerings in 2020 will be defined-contribution plans.

Some of the biggest health insurers - Aetna and United Healthcare - recently had to to admit their utter incompetence at keeping a lid on healthcare costs. The are suing a network of surgical centers - Bay Area Medical & Surgical (BASM) - for $60 million for overcharging. That should be a concern to policyholders because it is the insurers' job to monitor medical claims and stamp it out if it's unnecessary or overpriced, or both. Judging from the Aetna and United lawsuits, those companies have finally gotten around to taking that task seriously, which is good. But it still leaves the question: What took them so long. The insurers don't have a good explanation for why they didn't catch this alleged fraud and put a stop to it long ago -- or why they paid what they now say were manifestly inflated claims.

Among the claims cited in the lawsuits is an outpatient bunion operation for which a BASM clinic claimed $66,100. Aetna says the average payment to its in-network clinics for this operation is $3,677, but it paid BASM $52,880 on the claim anyway. United says BASM submitted a claim for $128,813 for a kidney stone operation in 2010. United blithely paid $97,051, even though its usual in-network payment was $6,851.

Indeed, United says that's what happened. Its processing volume of 1 million claims a day is so burdensome that it's "not in a position to specifically investigate the veracity of each claim." BASM exploited that loophole, United argues. This is the part that should make you go, "Say what?" The whole point is that the industry supposedly has the expertise to identify and eliminate unnecessary healthcare and excessive billing.

BASM and its physician partners aren't angels in this affair. The trend toward physicians owning shares in surgical clinics has raised the hackles of state and federal regulators for more than a decade. Numerous studies have shown that doctors with a direct financial interest in surgical or diagnostic facilities tend to overutilize those facilities by prescribing unnecessary surgeries or tests -- if you've invested in a CT scanner, after all, your incentive is to cover your nut by scheduling lots of CT scans.

The unfortunate thing is that this is an aspect of rising healthcare costs that's least affected by the new reform act, which doesn't impose any direct control on private provider charges. That's going to be in the hands of the insurers. Judging from this affair, that's not reason for optimism. If the insurers continue to perform this badly, who will pay the price? As taxpayers and policyholders, you will

Our friends at ChamberofCommerce.com created this infographic to raise awareness of an issue important to us and millions of other small businesses. We are a small business ourselves and we serve small businesses. So, for us, it only made sense to bring light to an issue, which not only places a major burden on small business owners, but also rarely receives the attention it deserves.

The business owners we hear from are in the trenches competing, devote their life savings to developing innovative products and services, hiring more staff, and otherwise growing a business for the benefit of family, employees, and community.

As health care consumers, we should be able to see what a service costs in advance of the treatment. We should have access to quality information scored by objective measures and an independent source who maintains the integrity of such information so we can weigh the cost with overall value. Just like everything else we buy.

The Big Secret

When providers and health plans negotiate contracts, they agree on discounted fees for a particular service. Providers bill one fee (higher) and accept a lower negotiated fee, writing off the contractual allowance. What is so frustrating is that there’s considerable variation in cost for the same service between health insurance companies with no discernable difference in quality. Doubly frustrating s the fact that it’s such a big secret. It seems that the payers and the providers all have a vested interest in hiding what the actual costs of services.

Demand Transparency

So what can consumers, all of us, do? Demand transparency and support consumerism, health and wellness. Encourage health insurers to start small by making the top 25 coded services visible to their members. Ask them to create tools and resources to help people become smarter, more informed healthcare shoppers.

Can you imagine if we we had enough information to behave like consumers with our health care resources? A world where we could make decisions to avoid unnecessary care, tools that help us understand that expensive care is not necessarily care and that support us in making better choices where we have the ability.

Mike Sarafolean, CEO of Orion Corp. of Minnesota, said he had a limited number of insurance choices to offer his 70 workers: “I had to buy a plan that would make sense and fit for most people. Now they make choices that fit for them.” For the past few years, his company faced “double-digit premium increases every renewal.” A little more than a year ago, Orion received a 40 percent renewal increase, prompting him to move to Minneapolis-based Bloom Health, which set up private exchanges in Michigan, Minneapolis and Indiana.

Defined Contribution Model

Now, his company makes a defined contributions ranging $125 a month for younger workers to $350 for older ones to special health reimbursement accounts (HRA), which workers then use to buy an insurance policy. By making the change to a flat contribution and a private exchange, the company is saving 10 percent over its previous year’s cost of insurance, he says. Many of his workers also spend less, he says.

This “defined contribution” model in health care compares the to one that gained speed in the early 1990s - employers abandoning pensions in favor of offering workers 401(k) plans for retirement savings. But just as 401(k) plans transferred the risk of market downturns to workers, the flat-payment model would shift risk to workers if rapidly rising health costs outpace increases in employer contributions.

Rejection For Preexisting Health Conditions

Unlike most of the private exchanges, the Bloom Health model, which serves about 25,000 people, sends workers to buy their own policies on the individual market, rather than through a group health policy. However, insurers selling individual policies in most states can reject applicants with medical problems, a practice that will end in 2014 under rules in the health care law.

Bloom CEO Abir Sen says his company offers its services only in states where rejected applicants can qualify for special state-run, high-risk insurance programs, which generally cost at least 25 percent more.

Gabrielle Smith, a 16-year employee of Orion who has an auto-immune disease, worried that under Bloom she would be unable to get insurance “or it would be so in excess of what I could afford.” Smith, 48, did get coverage - through Minnesota’s high-risk pool - and she now pays $45 a month for her premium on top of her employers contribution. “I haven’t heard anyone who is unhappy with the current insurance because it was all individualized,” says Smith. “Some of the younger employees with no medical conditions (found low-cost plans that) don’t require any money out of their paychecks.”

Other Private Exchange Models

Other private exchanges, including Buffalo-N.Y.-based Liazon, which serves about 25,000 employees in 23 states, and the new Aon Hewitt model send workers to group policies, which cannot reject applicants with health problems. The exchanges vary in other ways, too: While Bloom and Aon Hewitt offer a variety of insurers, for example, Liazon contracts primarily with one main health insurer in each region..

It’s unclear how the advent of state-based exchanges will affect programs such as Bloom, Liazon and Aon Hewitt, or whether there will still be a demand for their services by small businesses.

Insurer filings to the National Association of Insurance Commissioners (NAIC) are a standardized source of information on health plan premiums and expenditures in the aggregate at the state level. The data - compiled by Mark Farrah Associates - shows how average premiums in the individual insurance market varied across the country for 2010.

Nationwide, the average monthly premium per person in the individual market in 2010 was $215, but the state-by-state range was substantial. Vermont and Massachusetts both had average per member per month premiums over $400 per month. The average premium revenues in Rhode Island, New York, and New Jersey were also relatively high, ranging from about $344 to $364 per month. Alabama ($136), California1 ($157), Arkansas ($163), Idaho ($167), and Delaware ($169) had the lowest average monthly premiums in the country. (Note that these figures represent average premium revenue per member per month. This represents an average across adults and children, so will be lower than a typical premium charged to a single adult.)

Why the Variation?

There are a variety of reasons why premiums might vary, including: the cost of living, health care costs, state demographics (e.g., the age distribution of the population), plans' effectiveness at controlling costs, the benefits offered by plans, and the patient cost-sharing required. Though premiums are lower in some states, the people enrolled in these plans may have to pay higher deductibles or copayments that offset the savings in premiums. Thus, the map above does not take into account the relative protection offered by the plans. Also, states that have instituted reforms in their insurance markets to make coverage more accessible - such as Massachusetts, Vermont, New York, and New Jersey - may have higher average premiums because people with pre-existing health conditions are able to enroll. Conversely, states that permit medical underwriting may have average premiums that are low because the risk pools include a healthier than average population.

Health Care Reform Will Narrow the Variation Among States

Starting in 2014, the health reform law (ACA) will require insurers to cover a standard essential benefit package in all states and to use defined tiers of cost-sharing. The minimum cost-sharing tier will require that all newly-purchased insurance in the non-group market have an actuarial value of at least 60%, meaning that the plan pays for at least 60% of the cost of covered benefits in the aggregate for a typical population. In addition, tax credits will be available to make coverage more affordable for people with incomes up to 400% of the poverty level ($43,560 for a single individual and $89,400 for a family of four in 2011 dollars). These changes should all help to narrow the variation in the insurance people buy in different areas of the country. But, a wide range of insurance policies will still be available (ranging from Bronze coverage at an actuarial value of 60% to Platinum coverage at an actuarial value of 90%), so patterns of purchase may still vary substantially across the country. The health reform law will also require all insurers in the individual (non-group) market to accept everyone regardless of health status and prohibit premium surcharges for people with pre-existing health conditions. These rules should narrow the variation in how much people pay for insurance in different parts of the country, but premiums will likely continue to vary considerably due to differences in the cost of living in general and health care, in particular.