From Inside Health Insurance Exchanges

Competition From Private Exchanges, Teeny Tax Credit Keep Businesses From SHOP-ing

INSIDE HEALTH INSURANCE EXCHANGES provides news and strategic insights on the development and operation of public and private exchanges.

By ,
April 2015Volume 5Issue 4

Since the beginning of the year, HHS has offered regular enrollment updates for federally facilitated exchanges (FFEs). The agency, however, has been noticeably mum when it comes to participation in the federal Small Business Health Options Program (SHOP). The newness of the model has kept many employers on the fence when it comes to both private and public exchanges. But some industry observers contacted by HEX wonder if the SHOP program will ever attract substantial interest from small employers.

“The underlying market isn’t so broken that employers are crying out for a solution. What they want is dramatically lower premiums, and that’s not what SHOP offers,” says Rosemarie Day, president of Day Health Strategies and former chief operating officer of the Massachusetts exchange. “I think SHOP is a tough sell.” Moreover, she notes that HHS hasn’t focused much attention on promoting SHOP to small businesses. Some state-based exchanges have worked hard to promote them, but haven’t yet seen significant results.

SHOP Faces Four Barriers

There are four key barriers that could limit SHOP enrollment:

(1) The small-business tax credit: Although there is a financial incentive, the tax credit for small businesses is widely viewed as too rigid and too small to attract many employers. To qualify, businesses must have no more than the equivalent of 25 full-time workers, pay average annual wages below $50,000, and cover at least 50% of the cost of health care coverage for their workers. The maximum credit goes to employers with 10 or fewer full-time equivalent employees with average annual wages of $25,000 or less (HEX 10/12, p. 1). And without meaningful financial incentives, private insurance exchanges appear to be a better option for small employers that want to increase choice and/or move to a defined-contribution model.

“Qualifying for the tax credits is a complex process and in many cases the amount of the credit is not very significant and thus many employers don’t see the benefit of shifting all of their employees to a SHOP,” says Dan Schuyler, a director at Leavitt Partners, LLC in Salt Lake City.

(2) Employee choice: Employee choice gives workers the ability to choose any health plan from any participating carrier. In 14 FFE states, SHOP offers employee choice to small businesses. The other 18, however, have no choice component, due largely to calls for a delay from state regulators who worried that a poorly functioning employee choice program would lead to delayed payments to carriers, misinformation, consumer confusion and adverse selection (HEX 6/19/14, p. 1). In 2016, all SHOPs will have to offer employee choice. But states will be able to limit employee choice in a way that restricts employees, for example, to one metal tier. “When we were developing SHOP in 2008, we wanted employee choice for a multi-carrier small-group exchange. Carriers lobbied against it because they were worried about adverse selection,” recalls Chris Condeluci, a principal at CC Law & Policy in Washington, D.C., who worked for the Senate Finance Committee during the crafting of the health reform law. “Congress didn’t listen.” He refers to SHOP as “clunky” and “glitch-riddled.”

(3) Grandfathered plans: Small employers that have a grandfathered, non-ACA-compliant plan can’t retain those plans if they move to SHOP. Once employers are no longer able to keep grandfathered plans, enrollment on SHOP is likely to increase slightly. But the majority of employers will use a broker to find ACA-compliant options, move to a private exchange or drop coverage entirely.

(4) Competition from private exchanges: For most small businesses searching for an exchange-based model, private exchanges are a better option due to decision-support systems, education tools and end-to-end transactional services, says Condeluci. Along with full employee choice for medical coverage, private exchanges often also offer ancillary products and services such as vision, dental, life, financial and payroll. This gives many private exchanges an advantage over SHOPs. Private exchanges are not permitted to provide the employer tax credit, but such tax credits are limited.

Case in point: Six million people now have health coverage through a private insurance exchange — double the number a year ago, according to an April 7 report from Accenture Plc, a management consulting and technology firm. Much of the increase came from mid-sized employers, which the company defines as having between 100 and 2,500 employees.

Based on its research, Accenture predicts private-exchange enrollment will grow to 12 million in 2016 and 22 million in 2017. The company stands by an earlier prediction of 40 million private exchange enrollees by 2018. In the March issue of HEX, however, several industry observers suggested that the prediction is overly ambitious (HEX 3/15, p. 1).

Condeluci worries that more tax dollars will be funneled into the SHOP program “until we come to the realization that we spent billions of dollars on SHOP, which was a failing exercise.”

Utah Exchange Touts 612 Businesses

Among state-based exchanges, Utah’s Avenue H has been among the most successful. As of March 1, Avenue H had 612 small businesses, 4,921 employees and 12,879 covered lives. The SHOP charges carriers $12 per employee per month for medical coverage and $2 per employee per month for stand-alone dental plans. The carriers include the fee in their “market index” when filing fees for the qualified health plan (QHP), says Executive Director Patty Conner (see story, p. 5). The fee for the SHOP marketplace gets spread across the commercial market. In Utah, the individual exchange is federally run while the state operates SHOP.

Avenue H offers both full employee choice and defined contribution. Employers provide their employees with a defined dollar amount each month, and the employees can use that to pay their premiums and bank the remainder in a health savings account. Defined contribution gives employees much greater control over their health spending, says Schuyler. His company, a small employer, offers coverage to its employees through Avenue H.

As of Feb. 1, Covered California’s SHOP had 2,311 participating employers representing 15,671 members. About 85% of those employers moved to SHOP with the help of an agent. New Mexico’s SHOP has 147 employer groups and 877 covered lives, and Idaho has 55 participating employers.

Beginning next January, employers with 51 to 99 employees will be able to buy coverage through federal and state-run SHOPs, which is now available only to businesses with 50 or fewer workers But the larger employers are unlikely to shop on SHOP for the same reasons their smaller counterparts haven’t flocked there.

Moreover, the expanded definition of “small group” could translate to higher premiums and increased conversions to self-funding. The larger small groups will have to adhere to provisions such as essential health benefits and metal-tiering plan classifications that previously were reserved for the 1- to 50-employee segment, likely pushing plenty of the 51- to 100-worker firms to self-insure, according to an issue brief released last month by the American Academy of Actuaries (AAA).

While self-insured business poses less risk for carriers, it also is less profitable. ASO plans are fee-based, so there is a smaller portion of total revenue compared to risk-based plans, and that does impact the top line to an extent.

“The big thing for employers and employees that are in the 51-100 group is that they are going to see some changes to their plans as a result of them now being considered small groups,” Cori Uccello, senior fellow at the AAA, recently told HEX sister publication Health Plan Week. “They will face more restrictive rating rules, as well as additional benefit and cost-sharing requirements. As a result, some of these newly defined small employers may face an increased incentive to self-insure. And if they do that it could increase the average cost of those remaining being fully insured. And that in turn, it could actually result in an increased cost for the 1-50 groups because they are now going to be pooled together [with the 51-100s] when determining small-group rates.”

The issue brief, “Potential Implications of the Small Group Definition Expanding to Employers with 51-100 Employees,” estimates that the change could affect over 150,000 establishments with more than 3 million workers.

Read the brief at

© 2015 by Atlantic Information Services, Inc. All Rights Reserved.

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