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A New Way to Offer Employer-Sponsored Healthcare

Private health exchanges may offer lower health insurance costs for employers and more benefit choices for employees. This makes them an enticing option for many companies.

For years, it was common practice for an employer to work with an insurance carrier to offer a standard set of health benefits to the company’s employees. The employer would cover the major portion of the health insurance premiums and employees would pay the rest.

In contrast, a private exchange gives an employer the opportunity to choose a variety of health insurance plans and related products from competing insurers and offer them to the company’s employees. The employer makes a defined contribution to a savings account employees can use to purchase the insurance coverage of their choice. The employee pays the difference between the company contribution and the total premium cost. The employer’s contribution does not vary based on the plan selected.

The benefits of private exchanges for both employer and employees include

  • Lower costs for employers By setting a defined contribution, an employer can cap employee healthcare costs — controlling expenses and limiting future liabilities. There also is the possibility that as private exchanges become more popular, competition between insurance carriers will keep prices down and a larger pool of members will spread the financial burden for covering medical costs. Overall medical costs may drop if plan designs encourage employees to be more involved with their coverage choices and make more cost-effective care decisions.
  • More health insurance choices for employees Private exchanges are flexible, because the employer can choose plans and create benefit tiers targeted to the medical and financial needs of its employees. A private exchange also can offer related products that allow employees to create their own customized plans. These products can include a wide range of benefits including dental, vision, life, disability, critical illness, wellness, legal plans, pet insurance and telemedicine. Some large companies have been able to offer choices of up to 30 plans instead of only one or two.
  • Possibility of avoiding the Cadillac Tax The Cadillac Tax will take effect in 2020 and will be levied against “rich” health insurance plans that offer a lot of coverage. The hope is that this tax will discourage employers from offering too much tax-deferred employer-provided healthcare. By using a defined contribution, employers may be able to stay under the Cadillac Tax threshold and avoid fines.

Opinions vary as to whether interest in private exchanges will grow. Concerns about the future of private exchanges include:

  • Lack of employer education Many employers do not fully understand the cost benefits of private exchanges.
  • Tax implications Employer sponsorship of health insurance has two advantages. Employer contributions to premiums are not taxed as income to the employees and employers can deduct their contributions to employer-sponsored group insurance as a business expense. However, this might not apply to private health exchanges because the premiums are used to purchase individual insurance.
  • Regulations Growth of private exchanges may lead to new scrutiny and regulations. Plus, these new changes may cause challenges for the employer. On the flip side, current regulations may hinder market development.
  • Inflation Although there is no evidence of this trend, opponents are concerned that employers might not set fixed contributions to levels that keep up with medical cost inflation.

Opinions vary as to whether interest in private exchanges will grow. Concerns about the future of private exchanges include:

The Future

While some employers are sold on the concept, private exchanges are growing slower than was projected, according to a report by Mark Hall of Wake Forest University in the October 2015 article “Private Health Insurance Exchanges for Employers: Issues for Regulators and Public Policy.”

Concerns range from the potential imposition of more government regulations to employers using private exchanges as a way to train and guide employees to use the government marketplace instead of employer-sponsored coverage.

Still, the report indicates that a quarter to half of larger employers are considering using private exchanges or moving to a defined contribution program in the near future — a model similar to one used for years with 401(k) retirement plans.

The bottom line is that the lure of lower costs for employers and more choices for employees is making private exchanges an enticing option.

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