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,

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.

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.

Private and State Exchanges

Being competitive in the new health reform environment will require a new view of customers. Jeffrey Troutman, Executive Vice President of PNC Healthcare, a division of PNC Bank, N.A., sees a fundamental shift: “The industry is moving from wholesale to retail, and the need to make every interaction simple and user-friendly will drive much of the success for health insurers,” he said. The direct-to-consumer sales process changes the customer mix insurers are used to. Small employers will also be joining the exchange, making up nearly 4 million of the total exchange membership of 2014.

Affordability More Important than Ever

Of those currently uninsured, 76% say they can’t afford it. Affordability is expected to change for this population in 2014 when the government takes two steps: establishes a national floor for Medicaid eligibility and provides government premium subsidies for middle-income Americans. Previously, states set their own standards for Medicaid eligibility; some states were stingy so as to limit spending, and others were generous. But in 2014, Americans whose incomes fall below 138% of Federal Poverty Level (FPL) will qualify for Medicaid. Americans with incomes of 138% to 400% of FPL will be eligible for premium subsidies to buy private insurance in the exchanges. Incidentally, 400% FPL for a family of four is about $90,000.

Customized Products Needed

With this shift toward a retail focus, it will be more important than ever for insurers to know who their customers are so they can meet their needs and build lasting relationships. Their preferences vary based on their backgrounds, demographics, and genders. consumers who are younger and healthier are more open to purchasing health insurance from nontraditional sources, such as a retail store. This is also the group that is less likely to consider price as most important. Younger consumers, consumers with higher incomes, consumers in very good health are the most familiar with the individual mandate. Most consumers would be loyal to a health insurance company that offers incentives for healthy behaviors—except for the young and those in the poorest health. Younger consumers (aged 18 to 34 years) are three times as likely as consumers over 45 to be willing to give up their choice of doctor for a lower insurance costs.

More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014

A paper published in Health Affairs today, uses data supplied by health insurance companies to determine the financial protection they provided in 2010 in the individual and small- and large-group markets, and then compares that protection against the new 2014 standards.

The Affordable Care Act (ACA) creates state-based health insurance exchanges (HIX) that will begin acting as a marketplace for health insurance plans and consumers in 2014. More than half of Americans who had individual insurance in 2010 were enrolled in plans that would not qualify as providing essential coverage under ACA rules for the exchanges in 2014. These people were enrolled in plans with an actuarial value below 60 percent, which means that the plans covered less than that proportion of the enrollees’ health expenses.

Many of today’s individual health plans are below the “bronze” level, the lowest level of plan that can be sold through exchanges. In contrast, most group plans in 2010 had an actuarial benefit of 80-89 percent and would qualify as highly rated “gold” plans in the exchanges. To sell to ten million new buyers on the exchanges, insurers will need to redesign benefit packages. Combined with a ban on medical underwriting, the individual insurance market in a post-health reform world will sharply contrast with the market of past decades.

Key Findings

• The average actuarial value of group plans in 2010 was 83 percent, compared with an average of 60 percent for individual plans.
• Most people (65%) enrolled in group plans were in either the gold or platinum tier; about 28 percent were in the silver tier and 6 percent were in the bronze tier. Fewer than 1 percent were in plans with an actuarial value of less than 60 percent—dubbed “tin” plans by the authors.
• In the individual market, 51 percent of enrollment was in tin plans. Another third of enrollees were in bronze plans, 14 percent were in silver plans, and 2 percent were in gold plans. In the individual market, there were no platinum plans.
• Average out-of-pocket spending per household in the group plans was $1,765. In the individual plans, average household out-of-pocket spending was $4,127. The highest spenders in tin-tier individual insurance plans—including very sick people who incur huge medical bills—had more than $27,000 in annual out-of-pocket spending.