California Health Benefit Exchange

The California Health Benefit Exchange Board will work to implement the exchange by 2014 in accordance with Federal Health Reform policy.  The California Health Benefit Exchange will be a market for individuals and small groups to purchase health insurance at a competitive price with appropriate coverage. The Exchange organizes the private insurance market and includes a more stable risk pool, greater purchasing power for the individual or small group, more competition, and more detailed information to the consumer regarding price, quality, and services. Premiums for plans in the Exchange will be based on income with higher incomes paying more for coverage.

While 99% of California firms with over 200 employees offer health insurance, only 61% of California businesses with 3-9 employees and 75% of those with 10-49 employees do. 5-7 million Californians lack health insurance coverage. Approximately 1/3 of those, about 2 million Californians, without health insurance live in a household headed by someone who works in a small business with fewer than 50 employees. (Pacific Community Ventures, October 2011)

The Patient Protection and Affordable Care Act (PPACA) is a United Stated federal statute signed into law by President Barack Obama on March 23, 2010. Expanding health coverage to workers in small firms is vital through this legislated PPACA. PPACA’s main goals are to lower costs, expand coverage by changing and simplifying access to some elements of the small business health insurance market, and allow individuals and small groups to purchase health insurance at a competitive price with appropriate coverage. In order for this to occur, it offers two notable strategies to make the goals effective.

In 1992, California created the nation’s pre-eminent small employer purchasing pool, the Health Insurance Plan of California (HIPC). During the first 6 years, the HIPC was directed by a state agency, the Managed Risk Medical Insurance Board. The initial plan of HIPC was to enroll 250,000 individuals within its first two years however, after 5 years only 150,000 had enrolled representing less than 1% of the small group market.

In 1998, the Pacific Business Group on Health (PBGH), won the competitive bid to administer the HIPC and renamed it PacAdvantage. Through PacAdvantage, small businesses were able to get affordable health, dental and vision coverage by buying insurance as one big group. However, even though several beneficial changes has been made, PacAdvantage ceased operations in 2006 due to concerns about adverse selection inside and outside the Exchange market.

The participation in Small Business Health Options Program Exchange, also known as SHOP Exchange, will be voluntary but there will be strong financial inducements for purchasing insurance through this market during its start up phase. After 2014, the SHOP Exchanges will be the only place that permits small groups to access federal tax credits for the purchase of health insurance on behalf of their employees.

One is health insurance “exchanges”  is where small businesses can pool together to purchase insurance that meets certain benefits and cost standards for their employees.  States will set up Exchanges and Small Business Health Options Program (SHOP) for easy-to-use formats on web portals, where private insurance companies can sell their plans. California, being the first to establish the SHOP Exchange amongst the states, has a potential to expand coverage to thousands who are uninsured. Several exchange models already exist, some publicly and others privately run. As different approaches are used for each exchange, analysis and research will be conducted to see how they have met varying degrees of success and what their enrollment strategies were in order to make the PPACA’s health exchange successful when it launches in 2014.

Another strategy is using a tax credit program for particular small businesses who provide health insurance coverage to their employees. According to a study conducted by Pacific Community Ventures in Fall 2010, these credits can cover about 35% of health care costs for qualifying businesses through 2013 and almost up to 50% in 2014.

In the state of California, 80% of small businesses will qualify for some relief under this provision and 24% of small businesses will be eligible for the full credit which will be available for only 2 years (PBGH Issue Brief).

Educating small business owners about the SHOP Exchange is crucial and enrollment is critical for its success. Also, the importance of ensuring premium stability for plans and enrollees in the Exchage is essential, especially during the launch of this program. Overall, the Exchange will allow individuals to have options in terms of picking health insurance coverage but also recertify and manage their eligibility information online efficiently and effectively.

5 Factors from California’s Experience with Small Group Exchanges (PBGH Issue Brief)

1. The main factor of the SHOP Exchange is meaningful consumer choice.

The SHOP Exchanges goals are to deliver affordability, access to preferred doctors and hospitals and also a choice of insurance plans. The profile of SHOP Exchange enrollees will be influenced by the provision of temporary tax credits to certain small, low-wage businesses and non-profits; this will likely result in a more balanced pool than in the past exchanges.

The primary value encountered by employers who have participated in exchanges provides two options. The first is an “employer choice” model where business owners choose among a number of health plans, even selecting different options for different employees. The second is an “employee choice” model, in which small employers provide a certain level of premium support and allow their employees to shop for insurance among different offerings. This model is how the conception of SHOP Exchanges in PPACA began. Employee choice is the main distinction which will make the SHOP Exchange successful in comparison to PacAdvantage.

The availability of choice through the SHOP Exchange is extremely vital along with the importance that the choices are meaningful and that employees have access to information in order to make informed decisions. Through the Exchange, employees will have information related to the key choice dimensions which include: premium, out of pocket costs, provider network, quality of providers, and much more. The PPACA also contains several provisions that will improve the consumer choice of health insurance plans including standardize plan offerings and consumer decision support tools. Those states which are designing SHOP Exchanges must focus intently on providing both of these main provisions to enable employees and individuals to make meaningful choices.

2. One main concern regarding the post-PPACA will be “adverse selection”

Adverse selection will remain a significant issue for the SHOP Exchanges but PPACA has several provisions designed to reduce the impact of adverse selection. This includes small group tax credits which may attract a large core population with relatively younger enrollees to the SHOP Exchanges. Also, insurers are required to set premiums based on their entire risk pools for each market and participate in risk adjustment and reinsurance mechanisms which will span the market inside and outside of the exchange.

Businesses with less than 50 employees are not required to provide insurance, and there are in some cases in which it will be more advantageous for their employees to receive subsidies to purchase insurance through the individual exchange. Also, there is an increasing trend for small groups low at risk to self-insure using stop-loss insurance. However, as self-insured small businesses will be exempt from market-wide risk adjustment, it could negatively affect fully-insured businesses and exchanges by creating worse risk pools.

3. Policymakers need to be flexible and vigilant in preventing risk selection against SHOP Exchanges

SHOP Exchanges need to develop a way to match the underwriting guidelines of the rest of the market and be vigilant towards risk policy. If this is successful, exchanges will be able to largely mitigate concerns about risk. Also, the exchanges will need to effectively manage risk across the small and mid-sized group markets (51-100 employees). States must take action to standardize rules across these markets, especially if the mid-market groups are added to the exchanges with small groups before 2016. After 2016, all states with SHOP Exchanges are required to combine these group sizes. Having access to a broader group of businesses should be a significant advantage for the exchanges in comparison to their predecessors.

 4. Participation within the SHOP Exchange must be attractive for health plans

SHOP Exchanges will need to take steps in order to protect the integrity of the overall exchange pool in order to keep the exchanges successful. One tool which will be effective to mitigate adverse selection problems is risk adjustment. The PPACA mandates a system of risk adjustment in which insurers will make payments to each other based on the relative risk of their entire pool of enrollees in each market segment.

It will also be beneficial and necessary to work closely with insurers to maintain the stability of the exchange and the marketplace. If this is done correctly, the exchanges can work closely with insurers to make sure that they do not price their products so low that it will destabilize the exchange market. Those states that choose not to pursue an active purchaser model for the SHOP Exchange will need to provide their exchanges with adequate capacity to work closely with insurers to make sure that they are offering an appealing and stable set of choices for exchange enrollees.

 5. Building partnerships is what will make the SHOP Exchange successful

The SHOP Exchanges will have to evaluate a set of delivery channels for small group health insurance products. Small group purchasing pools have evolved in terms of their relations with insurance brokers due to this. Also, to promote affordability, it’s important for the exchange to examine the value that each channel brings and use market tools to help price each channel accordingly. The HIPC had found that it was more expensive to sell insurance directly than it was to pay broker commissions.

A policy change that has had the biggest impact on compensation for brokers is the inclusion of commissions in the administrative costs of insurers that are subject to medical loss ratio (MLR) requirements. MLR along with the use of online technologies may dramatically rework the delivery channels for insurance products.

Overall, the reputation that the exchange builds will be extremely important in the early stages and will also depend heavily on the consumer service experience that exchange enrollees have at the health plans and healthcare providers they are able to access through exchange coverage.

An online version of this information can be found at: http://www.pbgh.org/storage/documents/PBGH_SHOP_05.pdf